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Delta-Northwest: Combining Losses, Not Forces

Posted: Apr 24, 2008 12:46 PM by Wayne Pinsent

Tickers in this Article: DAL, NWA, UAUA, AMR, JBLU, LUV

Delta Air Lines (NYSE:DAL) and Northwest Airlines (NYSE:NWA) reported losses that came to $10.5 billion combined on write downs and fuel costs. The two are attempting to merge in a deal that would create the world's largest airline. This would have consolidation benefits, but with how pitiful the recent results have been and oil at $120 a barrel, is the merger just creating a bigger sinking ship?

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Change For The Worse At Delta
Delta came out of chapter 11 in 2007, and I had some high hopes for the newly issued stock - hopes that were quickly dashed. The stock has dropped more than 60% since then, and has been a huge disappointment. On Wednesday, Delta reported a net loss of $6.4 billion ($16.15 per share), which included a $6.1 billion one time impairment charge of goodwill due to the sharp decline in the market value of Delta's stock. Excluding this, the company had a net loss of $274 million (60 cents per share), which is still wider than the $130 million net loss reported in 2007. The loss was spurred by a $585 million year over year increase in the cost of fuel for Delta.

Northwest Flying South
Northwest reported results on the same day, and the numbers were not any prettier. The airline reported a first quarter loss of $4.1 billion ($15.78 per share), including a $3.9 billion one time charge for the impairment of goodwill. Excluding one time charges, Northwest reported a net loss of $191 million compared with a $73 million profit in the first quarter of 2007. The results by the company were hurt by a $445 million year over year increase in the cost of fuel for the first quarter.

Combining Problems
This leaves the combined loss of the two companies at $465 million, excluding one time charges. These reports came on the heels of UAL Corp's (Nasdaq:UAUA) $537 million first quarter loss, and will combine to probably be the industry's largest losses ever. All the airlines from the big carriers to the discounters, like Southwest Airlines (NYSE:LUV) and Jet Blue (Nasdaq:JBLU) have been feeling the pain of high fuel costs. This caused the bankruptcy of several airlines in the past, and the fuel picture is not any better now. Delta came out of bankruptcy to face the same problems. Oil could come down significantly at some point, but even if it drops by $30, down to around $90 per barrel, it is still significantly higher than the recent past.

There certainly are benefits to the combination of the companies. Delta and Northwest will be able to combine costs through consolidation. The companies will be able to trim a lot of operational costs, and be able to create a bigger and yet leaner competitor in the industry. Still, the industry is in significant trouble and is not functioning well. This has been brought back to the surface again with the recent mayhem at American Airlines, a subsidiary of AMR Corp. (NYSE:AMR). I think the consolidation, if it goes through, will be somewhat positive for the companies, but will not mask the significant problems that the companies and the industry still face. (To learn more, see Mergers and Acquisitions: Why They Can Fail.)

Where will They Land?
Both Delta and Northwest came out with big losses in the first quarter. The two are trying to merge, which should provide some benefit. But, with the airline industry is continuing to face significant challenges, the combined entity will still be treading on thin ice. I would stay away from any of the big airlines, as problems will continue to weigh down the stocks.

By Wayne Pinsent

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