By Shawn Tully

(FORTUNE Magazine) – When Northwest Airlines outsmarted Delta to connect with Continental in January, the deal's mastermind went virtually unnoticed. But the alliance is vintage Gary Wilson, Northwest's chairman and owner of 11% of its stock. At Marriott and Walt Disney in the 1980s, Wilson created the role of CFO as virtuoso dealmaker. He multiplied the number of Marriott hotels by getting S&Ls and other investors to put up the money to build them. At Disney he boosted film output by raising most of the financing from limited partners, while Disney pocketed much of the profits.

In 1989, Wilson and partner Al Checchi invaded airlines, taking over Northwest in a giant leveraged buyout. (Wilson's original $20 million investment is now worth $581 million.) Wilson has applied his formula--turning tiny amounts of capital into bushels of profits--to airlines. For Northwest shareholders, his Continental deal is a coup. For Delta, it's a huge threat. For customers, such alliances expand one-stop shopping--and bolster the outrageous fares that are making corporate travel managers sick.

Wilson practically invented the alliance in 1992 when he designed Northwest's linkup with KLM. The idea: combine your menu of flights with another big carrier's to capture more business--and earnings--without committing the huge amounts of capital needed for a takeover or merger. It was Wilson's idea to buy the 14% stake in Continental controlled by investor David Bonderman for $519 million instead of spending $3.4 billion to buy the airline, as Delta proposed. Wilson predicts the deal will generate $275 million in extra annual earnings by 2000. Says Wilson: "This deal gives us 80% of the advantages of a merger at a fraction of the cost and without the human agony of putting two airlines together." (Still, alliances can be tough--Northwest and KLM fought constantly until KLM agreed to sell its Northwest shares in 1997.)

The Northwest-Continental deal transforms the industry's balance of power. Both airlines were second-tier players, along with USAirways, TWA, and America West. With the alliance, Continental and Northwest move into the top tier, alongside American, United, and Delta.

It is Delta--which enjoys a huge market share of highly lucrative traffic from its Atlanta hub as well as traffic between secondary cities like Jacksonville and Savannah--that will be the big loser. The "transit traffic," as the secondary stuff is called, is a roughly $30 billion business, almost half of U.S. airline revenues. Yet for Delta, transit traffic represents 65% of its business, by far the most of all the big carriers.

So by offering more connecting flight options, the Northwest-Continental alliance will poach a lot of business from Delta. Take Kansas City to Fort Lauderdale. Right now Delta dominates that route, but when combined, Northwest and Continental will lure customers by offering eight connecting flights a day--as many as Delta.

For customers, the two airlines will look like one. Travelers will ride a single Northwest ticket all the way to Continental destinations like Baltimore and use their Continental frequent-flier miles to fly free on Northwest. So road warriors will relish building frequent-flier miles they can use on either airline, right? Sure, but that benefit will hardly compensate for the threat of higher prices. Industrywide, business fares have jumped 40% in two years. Corporations fear that the combined bargaining power of Northwest and Continental will inflict even more price pain.

For now Northwest and Continental cannot set prices together unless they win an antitrust exemption from the Department of Transportation; the airlines plan to apply for one on Continental's international routes. Wilson must feel hopeful: Northwest won the first immunity granted any partnership for its joint venture with KLM. "The alliance provides better scheduling options for business passengers, but immunity allows them to price together instead of separately," says Eric Altschul, head of the American Express unit that advises companies on corporate fares. "It can eliminate price competition."

Even in the U.S. the two airlines will be able to exert far-reaching price pressure on corporate travelers--especially in their six hub cities. Consider the case of automakers in Detroit, who get a modest discount on travel in and out of the motor city from the dominant carrier, Northwest. They fear that Northwest will cut those discounts unless they agree to fly on Continental when they are traveling through the south--at higher fares than they pay now. "It could happen," says Charles Braswell, who manages corporate travel at Chrysler. "When I negotiate with independent carriers, I get better discounts."

Part of the brilliance of Wilson's snagging Continental from Delta is that it leaves Delta with no logical partner. It could bid for USAirways, but so many of their routes overlap that the Justice Department might nix the deal. Without new partnerships to strengthen its national and international network, Delta could lose ground to its three big alliance-enhanced rivals. Score one more for Wilson.

--Shawn Tully