Late Monday, Delta Air Lines (DL) and Northwest Airlines (NWA) announced a merger agreement that will create the world's largest airline with aggregate annual revenues in excess of $35 billion. When it comes into existence the merged entity will have a fleet of more than 800 aircraft and 75,000 employees on its payrolls.

In the proposed deal, DL would acquire NWA through a stock-swap transaction with NWA shareholders receiving 1.25 shares in the new carrier for each current NWA share. This marks a 16.8 per cent premium based on current prices.

The new entity will have an enterprise value of $17.7 billion.

The new airline, will retain the Delta name and be based in Atlanta. Delta CEO, Richard Anderson, would be CEO of the combined entity.

"The transaction is expected to generate more than $1 billion in annual revenue and cost synergies from more effective aircraft utilization, a more comprehensive and diversified route system and cost synergies from reduced overhead and improved operational efficiency," the airlines said in a statement. "The company expects to incur one-time cash costs to not exceed $1 billion to integrate the two airlines."

The merger must be approved by both companies' shareholders and gain required regulatory approvals, including antitrust clearance from the US Dept. of Justice. "It is expected that the regulatory review period will be completed later this year," the carriers said.

Delta chairman, Daniel Carp, would become chairman of a new board of directors that would total 13 members comprising seven current Delta directors, five NWA directors and one representative from the Air Line Pilots Association.

NWA chairman, Roy Bostock, would become vice chairman and current NWA CEO Doug Steenland would be a member. Delta president and CFO, Ed Bastian, would have the same roles with the new Delta.

The new airline and its regional partners would boast of a network of 390 destinations in 67 countries. "We're announcing a transaction that is about addition, not subtraction, and combines end-to-end networks that open a world of opportunities for our customers and employees," Anderson said.

According to the statement, the new Delta plans "no hub closures." It also said that consolidation was necessary because "record fuel prices have fundamentally changed the economics of the airline industry."

Fuel costs have "significantly [eroded] the financial benefits of restructuring" enjoyed by both carriers through Chapter 11 processes that ended last year.

The accord between the carrier's became possible through a tentative agreement reached yesterday with Delta's pilots to extend their existing collective bargaining agreement through 2012. The deal ensures that Delta pilots would gain a 3.5 per cent equity stake in the new company if the agreement is ratified.

Delta said it will "use its best efforts to reach a combined Delta-Northwest pilot agreement, including resolution of pilot seniority integration, prior to the closing of the merger."

Additionally, US-based non-pilot employees of both companies would be provided a 4 per cent equity stake in the new airline upon closing. The carriers said that no "involuntary furloughs" of front line workers were anticipated, and also promised that they would keep current pension plans intact.

The merger agreement is likely to spark similar negotiations between Continental Airlines and United Airlines. United has been vociferous in its calls for industry consolidation.

(Also see: The Delta - Northwest merger)