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Airline deal loses altitude
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October 19, 1998: 7:00 p.m. ET
Justice Dept. regulators may sue to halt Northwest-Continental alliance
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NEW YORK (CNNfn) - A landmark strategic alliance between Northwest Airlines and Continental Airlines may be on the skids unless Northwest can overcome objections to the deal by the Clinton administration, according to published reports.
Lawyers for the Justice Department are considering suing the airlines to halt the alliance in the event ongoing talks with Northwest officials fail to address regulators' concerns with the deal, the New York Times reported Monday.
Aside from the obvious legal conundrums, a lawsuit, analysts say, could jeopardize a slew of other alliances across the fast-consolidating airline sector that took shape in the wake of the Northwest-Continental deal.
Those partners are keeping close tabs on the outcome of the regulatory hazing of Northwest and Continental for clues about how turbulent their own futures may be.
In January, Northwest, the nation's fourth-largest carrier, agreed to acquire a controlling stake in Continental, the nation's fifth-largest carrier, from Air Partners LP, a Texas investor group led by David Bonderman.
Under the arrangement, Northwest agreed to pay Air Partners $311 million and offer 4.1 million shares of Northwest stock in return for Air Partners' 14 percent stake in Continental. That stake represents 51 percent of the voting rights.
Continental warned Monday that a government lawsuit would effectively block the alliance while the dispute was being thrashed out in court. Continental also said it had been involved in the talks with regulators, and predicted they would end "shortly."
"At this point, we can't predict whether the Justice Department's concerns will be addressed by the agreement or by litigation," said Jeffery Smisek, Continental's general counsel.
"If there is litigation, we expect that the implementation of our global alliance with Northwest will be delayed," Smisek said.
Short of a full merger
The alliance is short of a full merger in terms of cost and complexity. It would allow the two airlines to combine frequent-flyer plans and sell seat's on one another's routes, even as they continued to maintain separate fleets.
Such a collaboration, entailing a broad interlinkage between the independent carriers, analysts contend, would enable both airlines to compete more effectively with their three larger rivals: American, United and Delta.
That is essential, airlines say, if they are to remain viable in an industry where global competition is no longer an abstract concept.
Since Northwest and Continental announced their deal, American Airlines, a subsidiary of AMR Corp. (AMR), has said it would launch a partnership with US Airway Group's (U) No. 6 carrier, US Airways. Meanwhile, UAL Corp.'s (UAL) United Airlines, America's largest airline, is teaming up with third-ranked Delta Air Lines (DAL).
The Clinton administration is said to be concerned that the alliances -- which some have termed "virtual mergers" -- will hurt consumers by limiting competition and leading to higher fares for passengers.
The Justice Department is said already to be investigating several carriers, Northwest included, for possible antitrust violations. Add to this an already wary climate in Congress, where many legislators have been pressing for laws to better protect smaller airlines and consumers against what is seen as predatory behavior by the largest carriers.
Justice Department officials declined Monday to comment on the negotiations. Northwest could not be reached for immediate comment.
The Times reported, however, that regulators may be leaning towards a court fight after talks between Clinton administration officials and Northwest ended inconclusively Sunday.
According to one person familiar with the talks, cited by the Times, Justice officials assured Northwest that they would not take action Monday, affording the airline some extra leeway to reach a settlement.
Also Monday, Continental said its third-quarter net income fell 34 percent despite record passenger traffic after special charges related to a fleet restructuring.
Continental reported earnings of $73 million, or 97 cents a diluted share, down from profits of $100 million, or $1.44 a share a year earlier. Excluding the special charges, Continental said it earned $150 million, or $1.94 a diluted share.
Wall Street had projected earnings of $1.89 a share, without the charges.
Shares of Northwest (NWAC) rose 1-3/16 to 27-3/16 on the Nasdaq Monday. Continental stock (CALB) ended up 2-1/8 at 41-1/8 on the New York Stock Exchange.
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