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NWA-Delta Deal on Track for 4th Quarter Close

July 24, 2008

By Katherine Yung, Detroit Free Press

Jul. 24–The head of Northwest Airlines predicted Wednesday a smooth integration with Delta Air Lines and said the merger is on track to close in the fourth quarter.

“This is going to set the standard for how airline mergers need to be done,” Douglas Steenland, Northwest’s chief executive and president, told analysts and reporters during a conference call.

The two airlines have already announced a new management team for the combined carrier, which will be the world’s largest. It will use the Delta name.

The airlines have also set up 26 integration planning teams, consisting of leaders from both companies.

Coming up with a single seniority list for the pilots at both carriers remains a key hurdle. But the leaders of the Delta and Northwest pilots unions have already agreed on a process to do that once the merger is completed. Pilots at both airlines have until Aug. 11 to vote on a new joint labor contract.

Steenland’s comments came as Northwest announced that it lost $377 million in the second quarter, compared with a $2.1-billion profit in the year-ago period. But excluding unusual charges, the airline earned $170 million, down 17.1% from $205 million in the second quarter of 2007.

Operating revenues climbed 12.4%, to $3.6 billion.

Steenland warned that the carrier may have to make further reductions in the number of seats it flies if jet fuel costs continue to soar.

“We are going to have to see how things play out in Quarter Four,” he said. “We will be prepared to take additional capacity actions… because ultimately, we need to get in the black.”

Like other airlines, Northwest is doing everything it can to try to offset the surging cost of jet fuel, its biggest expense. Excluding some hedge gains, its fuel bill jumped $637 million in the second quarter from the same period a year ago.

To cope, the carrier is raising average fares by using smaller planes on some routes and eliminating unprofitable flights. It’s also shrinking its workforce by 2,500 jobs through voluntary early-out offers, attrition and other steps. And it’s adding or raising fees on everything from ticket changes and frequent flier tickets to customers’ first checked bags.

Northwest and Delta are betting that their merger will help them weather the tough economic environment.

They now anticipate gaining $2 billion in annual revenue gains and cost savings from the deal, up from $1 billion when the combination was announced in April.

They also have reduced the one-time cost of joining the two carriers, from $1 billion to $600 million.

Northwest shareholders will vote on the stock swap deal at the company’s annual meeting Sept. 25 in New York. Delta shareholders will also vote that day in Atlanta.

Delta reported last week that it earned $137 million in the second quarter, excluding special charges.

Contact KATHERINE YUNG at 313-222-8763 or kyung@freepress.com.

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