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Delta builds ‘durable business model,’ weighs merger with American

It’s a stark reversal of fortunes for Delta.

On Valentine’s Day, Delta Air Lines will distribute $264 million in profit sharing to its 78,000 employees, including about 12,000 Minnesotans.

This good employee news comes more than three years after the U.S. Justice Department allowed Delta to acquire Northwest Airlines.

Federal regulators, in the waning weeks of the Bush administration, chose not to block Delta’s merger deal. About two years later, the Obama Justice Department cleared the path for the combination of United and Continental airlines.

“We’ve talked for a long time now about Delta making strategic moves to build a different, durable business model,” Delta CEO Richard Anderson said in a recent message to employees. “Our 2011 results show clearly that our plan is working.”

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Delta is in the midst of investing $2 billion in airport facilities and upgrades of its products, and it’s placed renewed emphasis on improving its operational reliability.

Delta’s net income for 2011 was $854 million, up 44 percent from the previous year. Delta’s profit was $1.2 billion when special items were excluded.

“We made this profit after covering a $3 billion run up on our fuel bill,” Anderson said in the recorded message.

It’s a stark reversal of fortunes for the Atlanta-based Delta, which acquired Northwest after both carriers restructured their businesses and slashed their costs in bankruptcy.

Delta is the world’s second-largest airline based on passenger traffic, eclipsed only by United Continental Holdings that’s still in the process of merging the United and Continental operations.

‘More hard work’

In a year-end message to Delta employees, Anderson wrote, “More hard work is ahead as we build on our momentum to further distance Delta from our U.S. and foreign competitors, many of whom will spend 2012 focused on integration and restructuring.”

Southwest Airlines, which acquired AirTran Airways in May, is occupied with integration issues this year. Its net income for 2011 dropped 61 percent to $178 million.

Delta was the first airline out of the gate in the last round of industry consolidation, which allowed it to capture a competitive advantage.

American Airlines was the final big U.S. network carrier to file for bankruptcy, entering Chapter 11 in November. American has disclosed that it wants to eliminate at least 13,000 jobs or 15 percent of its workforce.

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The Wall Street Journal and the New York Times, citing unnamed sources, recently reported that Delta, US Airways and a Texas-based private equity firm are eyeing American as an acquisition target.

It will be several months before American is in a position to file a reorganization plan with the bankruptcy court, so it’s too soon to tell who ultimately will make a bid for American.

A merger deal could be reached, American’s assets could be sold off in pieces or the carrier could emerge from bankruptcy as a free-standing airline.

At this early stage, nobody can predict with certainty what will happen. The lyrics from Bruce Springsteen’s song “Magic,” may apply in this scenario:  “Trust none of what you hear, and less of what you see.” There will be a lot of intrigue surrounding American, and anybody who succeeds in acquiring American or some of its assets may be the best chess player.

If a Delta-American deal is struck, the Justice Department would be forced to carefully scrutinize how such a combination would affect consumers. It’s likely that route concessions would be required to ensure competition in key cities. Delta and Northwest had very few overlapping routes, which is why regulatory approval for that merger was expected.

Minneapolis-St. Paul International Airport travelers would not see a significant impact from a Delta-American merger. A November report prepared by Metropolitan Airports Commission staff showed that Delta was serving the Twin Cities with departures to 134 U.S. and foreign cities, while American was providing nonstop service to Chicago, Dallas, Miami and New York.

Skeptical of approval

William Swelbar, a research engineer at the Massachusetts Institute of Technology, is skeptical that a Delta-American merger would be approved by the Justice Department.

Swelbar, who leads the Center for Air Transportation, wrote recently that so many “carve-outs” of routes might be required by regulators that it would have the effect of breaking up American.

“Delta might seem like an odd suitor,” Swelbar wrote. But, he added, “We have to accept the fact Richard Anderson’s Delta is not your father’s Delta. He and his team are aggressive and understand American holds many assets and relationships that are valuable.”

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He noted that Anderson, who previously served as Northwest’s CEO, and Delta General Counsel Ben Hirst, a former Northwest executive, recently led a successful effort to secure more takeoff and landing rights at New York’s LaGuardia Airport.

That deal was approved late last year by the U.S. Department of Transportation in a landing rights swap with US Airways that involved the two carriers’ operations at LaGuardia and Reagan National in Washington, D.C. The agreement with the federal government included the divestiture of some landing slots by Delta and US Airways, so other airlines with limited or no service at the major airports could gain the landing rights.

Airline consumers may be wary of the prospect of another airline merger. But oil-producing countries in the Middle East are having more effect upon air fares than U.S. airline executives and federal officials who’ve allowed industry consolidation to occur.

Southwest Airlines, the nation’s biggest low-fare carrier, serves the Twin Cities market. Like other airlines, it was hammered by high fuel costs last year and Southwest raised fares on its route system. Fuel is an airline’s No. 1 expense, with labor costs coming in second place.

This year, U.S. airline passengers should expect to keep flying on nearly full airplanes and continue paying higher fares than they did a few years ago.

Delta, which transports the majority of Twin Cities air travelers, has figured out how to turn a profit in a high fuel-cost arena. It typically is the first airline out of the blocks to trim costs when the economy weakens. Now Delta appears to be positioning itself to take advantage of the American bankruptcy.

It’s still early in this airline chess game, but the upcoming moves by Delta merit watching.