Delta-Northwest merger's future regional effect?

A merger of Delta Air Lines Inc. and Northwest Airlines Corp. is expected to have little immediate effect on Philadelphia International Airport and its dominant carrier, US Airways.

But months or years from now, industry experts say, Philadelphia may become a more marginal international gateway than it already is, as it competes with the world's largest airline networks, even while maintaining ample domestic service.

The proposed combination announced late Monday of Delta and Northwest into the globe's No. 1 airline in revenue faces high hurdles of its own at a time of deep trouble for the industry brought on by record oil prices, analysts said yesterday.

Despite the close scrutiny by the Justice Department's antitrust division, the industry has such deep structural problems that approval may be inevitable, some of the experts believe.

If a Delta-Northwest merger wins government approval, it would force United Airlines and Continental Airlines, now the second- and fourth-largest carriers, to consider a marriage of their own that would create an even larger airline, analysts said.

Delta would be the surviving name in its deal with Northwest, but it's too early to know what to call a United-Continental merger, if it happened.

Either of the possible mergers will face fierce opposition from consumer groups, labor unions and many political leaders concerned that reduced competition would lead to higher fares, fewer jobs and even worse service problems.

The two possible mega-airline systems, made up of carriers that already far outpace US Airways in transatlantic service, could draw international connecting traffic away from Philadelphia to the New York area or Washington, the analysts said.

Still, Philadelphia could retain much of its domestic service - by US Airways; its No. 2, Southwest Airlines; and other carriers - because of its large population base and customer loyalty to individual frequent-flier programs.

"I think it leaves [US Airways] right where they are," said Roger King, an airline credit analyst at CreditSights, in Norwalk, Conn. "Philadelphia is not what you consider a premier transatlantic gateway."

Delta has an average of 22 flights a day from Philadelphia, while Northwest has just 15, almost all of them to the two airlines' hubs. US Airways has more than 400 departures a day and Southwest more than 60.

There was scant talk yesterday of whether US Airways or American Airlines, the remaining large network carriers, would respond to the other big mergers by considering a combination of their own. US Airways tried but failed to buy Delta early last year while it was lumbering through Chapter 11, and Doug Parker, US Airways' chief executive, has said major-carrier mergers would be good for US Airways and the industry.

The biggest challenge to either US Airways or American, if they tried to combine with each other or with another carrier, would be how to integrate their labor forces. That's still a serious problem for US Airways, where pilots are resisting integration three years after its merger with America West Airlines.

"If you really want to turn things on their heads, try another merger at US Airways," said Robert W. Mann, an independent airline consultant in Port Washington, N.Y. "Can you make things worse? Yes, you can."

Equity analysts on Wall Street, who along with senior airline managers have been the leading champions of a Delta-Northwest merger, at first celebrated the announcement as good for stockholders.

But investors soured on the deal during the day, driving down shares of both airlines after they indicated in a conference call that the combination wouldn't raise revenue or lower costs as much as the analysts had expected. Delta closed down nearly 13 percent to $9.16, and Northwest fell 8 percent to $10.28.

Other airline stocks were dragged down as well by the negative reaction.

Credit analysts pointed out how much debt the new Delta would have. Fitch Ratings downgraded Delta's credit from stable to negative and noted that the airline would face higher fuel costs and slow revenue growth in the next year because of recession, whether it pulls off the merger or not.

As tough as completing either a Delta-Northwest or United-Continental deal would be, some antitrust experts think the Justice Department would have to ignore a panoply of industry problems to turn it down.

Evan Stewart, an antitrust lawyer with Zuckerman Spaeder L.L.P., in New York, said the older network airlines were burdened by record oil prices, high labor costs, aging aircraft fleets, and costly hub-and-spoke systems.

"If there were a healthy industry that didn't have tremendous problems, there might be antitrust issues," Stewart said. "But given the other issues, it's very difficult for me to see the government saying no to those."

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