MPR: NWA Merger Would Have Massive Impact

NWA Merger Would Have Massive Impact
By Andrew Haeg
June 2, 2000

American Airlines, the nation's second-largest air carrier, is reportedly considering a buyout of Northwest Airlines, the fourth largest. Officials from both airlines aren't talking. But analysts say American's parent company, the AMR Corporation, is trying to keep pace with United Airlines, which last week announced plans to buy US Airways. Even if American does make an offer, the deal would have to pass muster with regulators. Analysts say that's unlikely anytime soon, if ever.

Reports of a possible merger are making some wonder what would happen if Northwest moved its headquarters from the Twin Cities and no longer used the airport here as its hub. And others say consumers will pay the price of consolidation.

The Northwest Archive

Is Northwest Next?

FOR NOW, neither airline is commenting on the possibility they may be holding discussions about a possible merger. But analysts say American is courting Northwest to match last week's proposed $11.6 billion merger between the nation's first- and sixth-largest carriers, United Airlines and US Airways.

ING Barings analyst Raymond Neidl says American would love to acquire Northwest's extensive service to Asia. "For many years, American has wanted to broaden their Pacific route authority," he says. "They're very strong in South America, they're very strong across the Atlantic, they're very weak in the Pacific and Asia, and Northwest, perhaps, has the best system to that area of the world."

But Neidl says it's too early to speculate, considering the massive obstacles standing in the way of a deal. For one, federal regulators have yet to approve United Airlines acquisition of US Airways, and perhaps never will.

But that isn't stopping investors from speculating. Northwest's stock shot up more than 20 percent on June 2, even as American Airlines parent company AMR's share price dropped better than five percent; both moves typical of stock markets reaction to mergers and acquisitions.

Other than gaining size, it is not readily apparent what Northwest has to gain from a combination with American. That leads to some doubts about top management's motivations in pursuing a possible deal.

Adam Pilarski, senior vice president of Virginia-based airline consultant Avitas says Northwest's chairman Gary Wilson and his partners in their 1989 buyout of the airline would profit nicely. "It would be great for Mr. Wilson and for some shareholders of Northwest, because if American acquires them, they will make extra money, and it's a good exit strategy for Mr. Wilson. Will it happen? I don't think so."

But if it does, analysts say Northwest may decide to stop using the Twin Cities as a major hub. Northwest has an even bigger hub in Detroit, while American uses Chicago's O'Hare Airport for the same purpose. Analysts say it's likely one of the three - probably Minneapolis - would become superfluous.

Such talk has led to divided opinions about what impact this would have on the Twin Cities. Critics have long maintained Northwest's near-monopoly power inflates air fares. Minneapolis Federal Reserve Bank Senior Vice President Art Rolnick says other carriers would step into the breach, possibly even driving down airfares. "If Northwest, say due to a merger, was to reduce the number of flights out of here, reduce the size of its hub, and maybe no longer is a hub, it doesn't mean that other airlines that wouldn't snap up those gates and provide lots of jobs and services and economic development."

Others see it differently. Darryl Jenkins is a professor of Airline Economics at George Washington University in Washington D.C. "Because the hub is the thing that gives you service everywhere, and it gives you very very good service. "You have more frequencies, than you would normally have."

And that he says, is a boon to a region's economy. "Large industry is more likely to locate itself in a hub airport than not, and we know this from a large number of studies that have been done on this."

Hobbit Travel President George Wozniak agrees that losing its hub status would hurt Twin Cities fliers. "If I was a consumer in Minnesota, I would scream to my congressman, and say, 'Don't let anything like this ever happen,' because when you eliminate choices, you eliminate the possibilities of having air fares be where they should be."

Minnesota state legislators may have to consider another wrinkle. In 1992, the state lent Northwest a total of $760 million to rescue the airline from hard times. In return, Northwest promised to maintain the Twin Cities hub status and to keep its corporate headquarters here.

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