Why Delta Should Buy Northwest

With a new CEO and a clean balance sheet, Delta is pondering expansion. Here's why Northwest is the logical choice

by Justin Bachman

Bill Pugliano/Getty Images

Northwest Airlines (NWA) Chief Executive Doug Steenland calls the U.S. airline industry's consolidation "inevitable." Richard Anderson, the new chief executive at Delta Air Lines (DAL), says his company would do a deal provided Delta is the acquirer and it helps the airline.

If Delta and Northwest executives really are committed to consolidating the field and tackling some of the industry's financial problems, they need look no farther than each other. From route networks and planes to workers and investors, the third- and fifth-biggest U.S. airlines face compelling reasons to merge.

"The strategic combination of Northwest and Delta might make a lot of economic sense, and we'd like to see both companies explore that potential," says Matthew Philo, a senior managing director at MacKay Shields, a private investment firm that holds a 3.1% stake in Northwest and 1.8% of Delta. "It might be a win for all constituents…including labor."

Consensus

Now may be the time. After the two companies filed for bankruptcy in 2005, they scrubbed their balance sheets back to respectability, converting heavy loads of debt to equity before emerging earlier this year. Today, many of the airlines' biggest holders are hedge funds and other strategic investors anxious for a profitable exit. At Northwest, half of the 20 largest institutional shareholders are hedge funds or private equity firms, with a nearly 31% stake in the airline. "The best target out there just sitting around saying, 'Hey, buy me' is Northwest," says Roger King, a senior airline analyst with CreditSights in New York.

Both airlines surprised some analysts in the past two weeks by raising the prospect of consolidation. In an Oct. 29 conference call with analysts, Steenland noted that Northwest and its hub-and-spoke peers were created from earlier mergers. "We believe that this trend will continue and that further consolidation of the industry is inevitable," he said, adding that "six major domestic network carriers are too many."

That's one point airline chief executives agree on (BusinessWeek.com, 12/4/06). It's been made for more than a year by United Airlines' (UAUA) CEO Glenn Tilton and US Airways' (LCC) CEO Doug Parker. "We're encouraged that others seem to be coming around to the conclusions that we made long ago, that this industry still isn't fixed," says Parker, who made a failed bid for Delta earlier this year. "While we're making money, we're not making the kind of money that most other mature businesses make."

Delta declined to comment beyond Anderson's previous statements, and a Northwest spokesman said the company had no immediate comment.