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The near-simultaneous bankruptcy filings by Delta Air Lines Inc. and Northwest Airlines Corp. has many in the industry talking about the prospects of a court-assisted merger between the struggling rivals. Delta and Northwest, of Atlanta and Eagan, Minn., respectively, both sought Chapter 11 protection Wednesday at the U.S. Bankruptcy Court for the Southern District of New York, victims of spiraling fuel prices and high operating costs. Each airline has pledged to exit bankruptcy as a stronger independent, but in a highly competitive industry populated by numerous weak companies, talk of consolidation is inevitable. Proponents of a Delta-Northwest marriage cite the companies’ complementary route maps. Combining the airlines would blend Delta’s strengths in the South and East and its trans-Atlantic operations with Northwest’s strong Midwest, Western and Asian routes to create a strong competitor to heavyweights American Airlines Inc. and United Air Lines Inc. Northwest and Delta, along with Continental Airlines Inc., already enjoy limited antitrust approval to operate jointly on certain domestic routes where they have not historically competed. Northwest has also applied to join Delta and foreign airlines, including Air France SA and long-time Northwest partner KLM Royal Dutch Airlines, in the international SkyTeam alliance. While in previous years, a Northwest-Delta combination would have likely faced stiff antitrust hurdles, industry analysts predict the merger could get done in today’s climate. After Sept. 11, the Bush administration signaled openness to airline mergers and is unlikely to change that attitude as the industry struggles with overcapacity and high oil prices. A merger would rid the domestic system of a large competitor and its capacity, advocates say, theoretically easing some of the pricing pressure airlines face. But it would not eliminate all of a company’s jobs, as it would in a liquidation or failure. “A merger is probably the most humane way to drive capacity out of the system,” said an attorney who has worked with the airlines. Yet a Northwest-Delta combination would face stumbling blocks. History has shown that airlines are difficult to merge successfully. Meshing unionized work forces and asset-heavy operations has traditionally proven far more costly than buyers anticipate, wiping out whatever synergies the acquirer hoped to gain. “One thing that has been proven about airline mergers is more likely than not, they will fail,” said Darryl Jenkins, a professor at Embry-Riddle Aeronautical University in Daytona Beach, Fla. “The track record of mergers in this industry is just awful.” However, judging from at least one recent example, past might not be prologue. Take America West Holdings Corp.’s pending deal to buy US Airways Group Inc. out of bankruptcy. US Air used bankruptcy to extract cost reductions from its work groups and creditors, allowing it to be folded into the smaller America West without significantly changing the buyer’s cost structure. Some observers said this transaction could provide a template for how to buy Delta. Should Delta reduce its size and debts in bankruptcy, it, like US Air, could become a more attractive takeover candidate. A revamped Northwest, which is expected to exit Chapter 11 well before its rival, could be in a position to be the acquirer. “We would not be surprised if any of the potential airline bankruptcies borrow a page from the America West/US Airways playbook and emerge from bankruptcy in the form of a merger,” Merrill Lynch & Co. analyst Michael Linenberg wrote in a research note. There remain other difficult hurdles, however. The two airlines have largely incompatible aircraft fleets, with Delta flying Boeing Co. planes and Northwest operating more than 150 jets made by Boeing archrival Airbus SAS. A cost-trimming trend in the industry has been to simplify fleets. Airlines with only a few jet types can limit their training and spare-part inventory costs. A merged Delta and Northwest would need to either replace a substantial number of airplanes — at a sizable expense — or be saddled with the extra costs of operating a diverse fleet. “These are two companies with really no synergies,” said Mike Boyd, an Evergreen, Colo.-based consultant. “Even the aircraft that they share in common have different maintenance schedules.” Others argue that Delta’s routes offer little to a would-be acquirer. Though Northwest or any other potential buyer would covet Delta’s strong Atlanta operation, the airline’s other hubs in Salt Lake City, Cincinnati and New York are viewed as weak and less desirable. “There is very little to Delta outside of Atlanta that you couldn’t simply replicate internally if you wished,” one executive with a rival airline said. The executive believes that should Delta not emerge from bankruptcy, it is more likely to be sold piecemeal than for a single airline to acquire it. Various buyers could acquire the company’s shuttle operation connecting Boston, Washington and New York, its Atlanta hub and its international routes. Copyright �2005 TDD, LLC. All rights reserved.

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