Delta buys Northwest to create biggest airline

By John Crawley

WASHINGTON (Reuters) - Delta Air Lines swallowed rival Northwest Airlines Inc on Wednesday in a $2.6 billion merger that created the world's biggest airline and prompted new speculation about further industry consolidation.

The all-stock transaction, the first domestic airline combination in three years, closed after clearing its biggest and last regulatory hurdle earlier in the day -- U.S. Justice Department antitrust review.

Justice officials cited the likelihood of "substantial and credible efficiencies" without harming consumers or competition.

Government approval was expected. Industry vigorously made the case to regulators earlier this year, when airline finances were rockier than they are now, that consolidation was an important tool for remaining viable with fuel prices high and the economy worsening.

"The airline industry faces a very difficult economic environment around the world and this merger gives Delta increased flexibility to adapt to the economic challenges ahead," said Richard Anderson, the Delta chief executive who will head the combined entity.

The new, larger Delta will be an international powerhouse with unparalleled scheduling and pricing strength with service to 375 cities worldwide, experts said. The company estimates a combined $2 billion in cost savings and revenue enhancements annually.

An ambitious plan is to link the long-established strength of Northwest in Asia with Delta's expanding overseas network, and leverage benefits from the transatlantic SkyTeam alliance that includes AirFrance/KLM.

"There are global corporations but no global airlines. The race to become the first truly global airline has an incredible reward to it," said consultant Darryl Jenkins. "The revenue potential is something that we have not seen yet. That's the synergy that will make this very lucrative."

Jenkins and other experts said the deal's potential may reignite merger fever, which burned this year until fuel prices started their dramatic rise this summer to record heights and prompted sharp airline cost cutting.

Doug Parker, chief executive of US Airways Group and a long-time proponent of consolidation, said last week that he still believes mergers are right for the industry. US Airways failed last year in its bid for Delta.

Calyon Securities analyst Ray Neidl said that economic wild cards could impede consolidation. A credit crunch and fuel price volatility must diminish before airlines can explore mergers, he said.

"Down the road, there will be more consolidation or attempts," Neidl said.

INTEGRATING OPERATIONS

Northwest's history dates to 1926 and its common stock first traded in 1941. But the company now operates as a wholly owned subsidiary of Delta until the two fully integrate their operations. That process is expected to take up to two years and cost no more than $600 million.

Integration can be tricky. For instance, US Airways Group Inc has yet to fully combine its work force after merging with America West in 2005.