Northwest Airlines Acquires Controlling Stake in Continental Airlines

Strategic Insights -

In a significant move, Northwest Airlines agreed to buy a controlling stake in Continental Airlines for $519 million, creating a third domestic and international airline network to compete with major carriers United Airlines and American Airlines. The unusual arrangement involves merging flight schedules and frequent-flier programs but maintaining separate identities and managements. This development is expected to provide consumers with a larger choice of flights to virtually any spot from Latin America to Asia, but may not necessarily lead to lower prices. One airport most affected will be Newark, which will likely receive more passengers and flights from Northwest and its European partner, KLM Royal Dutch Airlines.

Key Takeaways:

  • Northwest Airlines acquired a controlling stake in Continental Airlines for $519 million, creating a new domestic and international airline network.
  • The two airlines plan to merge flight schedules and frequent-flier programs but maintain separate identities and managements.
  • The deal will benefit consumers with a larger choice of flights to virtually any spot from Latin America to Asia.
  • The merger is unlikely to result in lower prices, as the two carriers do not compete on many routes.
  • Northwest's hubs in Detroit and Minneapolis, as well as Continental's largest hub in Houston, will be strengthened by the deal.
  • The alliance could lead to a new round of deals in the booming airline industry as smaller carriers feel pressure to compete with national and international air alliances.
  • US Airways shares rose 5.3% to $60 on expectations that it would be the next takeover candidate.
  • Delta Air Lines shares fell 1.5% to $112.3125 on fears of missing a strategic opportunity.
  • The competition to win Continental illustrates the frenzy of maneuvering in the airline industry.
  • David Bonderman, a Texas financier, controlled 14% of Continental's shares but 51% of voting rights and sought to sell his stake.
  • A revised offer from Northwest, devoid of immediate pilot approval requirements, convinced Continental's board to reject Delta Air Lines' offer.
  • Delta's offer would have resulted in widespread layoffs, according to executives involved in negotiations and union representatives.
  • The merger is expected to create jobs, as stated by Northwest's CEO John Dasburg and Continental's chairman Gordon M. Bethune.
  • The deal will enable Northwest to gain a larger share of the Asian routes, which will be opened up by a new air services agreement between the US and Japan.

Statistics:

  • $519 million: The cost of Northwest Airlines' controlling stake in Continental Airlines.
  • 5.3%: The rise in US Airways shares to $60 on expectations of being the next takeover candidate.
  • 1.5%: The fall in Delta Air Lines shares to $112.3125 on fears of missing a strategic opportunity.
  • 14%: The stake in Continental Airlines controlled by David Bonderman, a Texas financier.
  • 51%: The voting rights in Continental Airlines held by David Bonderman.
  • 80%: The estimated benefits of an airline alliance compared to a merger, according to Northwest Airlines' CEO John Dasburg.
  • $500 million: The estimated increase in revenues over three years by combining flight schedules, marketing, and frequent-flier plans.
  • $60: The price of US Airways shares after rising 5.3%.
  • $112.3125: The price of Delta Air Lines shares after falling 1.5%.

Sources:

  • The New York Times
  • Wall Street Journal
  • Morgan Stanley, Dean Witter, Discover
  • Goldman, Sachs & Company
  • Credit Suisse First Boston
  • J. P. Morgan
  • Unicom (Illinois utility)