April 15 (Bloomberg) -- Delta Air Lines Inc. and Northwest Airlines Corp. fell in New York trading as investors questioned whether the carriers' proposed merger would produce enough savings to overcome surging fuel bills.

Delta's purchase of Northwest for $3.63 billion in stock would create the world's largest airline and generate a total of $1 billion in new revenue and cost cuts, the companies said yesterday. Still, the airlines said they won't shut any hubs or expand previously planned reductions in domestic capacity.

``They need to raise fares, and to do that seats need to come out,'' Kevin Crissey, a UBS Securities LLC analyst in New York, said today in an interview. ``Delta and Northwest aren't doing that.'' He rates both airlines as ``neutral.''

Delta, the third-biggest U.S. airline by traffic, is betting that combining with Northwest, the fifth-largest, will help blunt a 77 percent jump in jet fuel over 12 months. Delta will control about 25 percent of the U.S. air-travel market.

``Given high fuel prices and going into a recession, it makes you wonder how things will improve,'' said George Hamlin, managing director of New York-based consulting firm ACA Associates. ``The assumptions are fairly optimistic.''

Shares Decline

Delta dropped $1.32, or 13 percent, to $9.16 at 4:01 p.m. in New York Stock Exchange composite trading, the most in a month. Northwest slid 94 cents, or 8.4 percent, to $10.28.

Each Northwest share will be exchanged for 1.25 Delta shares, giving Northwest investors $13.10, or 16.8 percent more than yesterday's price, the airlines said. With Delta's decline today, the deal's value slipped to $3.17 billion.

The airline will keep Delta's name, Atlanta headquarters and Chief Executive Officer Richard Anderson, 52, the carriers said yesterday in a statement. The tie-up will include one-time cash costs of $1 billion, the companies said. Delta has $7.35 billion in bonds and loans, according to Bloomberg data, while Eagan, Minnesota-based Northwest has $3.46 billion.

Northwest CEO Doug Steenland, 57, will join the new airline's board and Delta's Ed Bastian will keep his roles as president and chief financial officer. Steenland said today in an interview in New York that he plans to step down from daily operations when the deal closes.

Other Mergers?

The combination is likely to hasten merger talks among rivals including United Airlines, the world's second-largest carrier, and Continental Airlines Inc. to counter Delta's wider network.

Continental, No. 4 in the U.S. by traffic, said today it intends to redeem the so-called golden share that Northwest holds, freeing it to pursue a tie-up.

``Expect dominoes to fall,'' Bear Stearns & Co. analyst Frank Boroch in New York said today in a note to investors.

Delta and Northwest and their regional partners flew 176 million people last year. The combined carrier would vault past AMR Corp.'s American Airlines as the world's largest by traffic, and would have 800 aircraft and 75,000 employees.

Shareholders of Delta and Northwest will have to approve the transaction, which also would need clearance from federal antitrust regulators. While Delta pilots would get a 3.5 percent equity stake and a board seat under a new contract, Northwest's pilots said they would ``aggressively oppose'' the tie-up.

The merger comes on the eve of the first-quarter earnings reports starting tomorrow that may include losses at most major U.S. airlines. Four small carriers filed for bankruptcy in the past month: Frontier Airlines Holdings Inc., Skybus Airlines Inc., Aloha Airgroup Inc. and ATA Airlines Inc.

Routes, Hubs

Delta's biggest contributions to the new carrier include trans-Atlantic routes to Europe and a network in Latin America, while Northwest has Pacific routes including access to the restricted Narita airport in Tokyo.

Delta has U.S. hubs at Atlanta, New York's Kennedy airport, Cincinnati and Salt Lake City. Northwest's are in Minneapolis, Detroit, and Memphis, Tennessee. Northwest also operates hubs in Amsterdam and Tokyo.

No new capacity reductions are planned, Anderson said yesterday on a conference call with reporters. Delta said in March it will cut 2,000 jobs and lower capacity by 10 percent, double its previous goal, and Northwest said it would halt hiring and pare capacity by 5 percent.

Delta's Comair regional carrier remains wholly owned, and the company has ``no immediate plans'' to sell it, Anderson said today in the New York interview.

Predecessor's Prediction

For Anderson, the accord fulfills the prediction made 13 months ago by predecessor Gerald Grinstein that Delta would become ``an acquirer'' after spurning a hostile takeover bid from US Airways Group Inc. before leaving bankruptcy in 2007.

Acquiring Northwest also puts Anderson back in charge of the airline he led as CEO from 2001 through 2004. His lieutenants at Northwest included Steenland.

Talks on the transaction stalled in February after pilots couldn't agree on how to mesh union seniority lists.

Delta and its 7,000 pilots broke the impasse in the past few days with a new labor agreement running through 2012 that includes the equity stake. Northwest's 5,000 pilots would be asked to join a unified contract before the deal closes.

Delta's financial advisers were Greenhill & Co. and Merrill Lynch & Co., and its legal advisers were Wachtell, Lipton, Rosen & Katz and Hunton & Williams.

Northwest's financial advisers were Morgan Stanley and JPMorgan Chase & Co., and the carrier's legal advisers were Simpson Thacher & Bartlett and O'Melveny & Myers.

Bond Covenants

The combined company plans to ask Minnesota officials to amend covenants in local bonds requiring Northwest to keep its Eagan headquarters, its Minneapolis hub and an unspecified number of jobs, Steenland said today on a conference call. The bonds total $245 million, he said.

``One option, and for the merged entity this is not the preferred option, would be to redeem the bonds, pay them off,'' Steenland said.

Moody's Investors Service placed Delta and Northwest debt under review for possible downgrade, while Standard & Poor's said it was reviewing Delta's rating with positive implications and Northwest's with negative implications. Fitch Ratings revised Delta's outlook to negative, from stable, citing fuel expenses and U.S. economic weakness.

Delta's 7.9 percent bond due November 2010 declined 3 cents to 93.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Agency. The yield climbed to 10.87 percent.

Northwest's 7 percent bond due April 2022 fell 2 cents to 97 cents on the dollar. The yield rose to 7.39 percent.

Credit-default swaps on Delta debt were unchanged at 1,183 basis points on April 9, the last day with such data, according to CMA Datavision in New York.

The contracts are designed to protect bondholders against default. A drop in price indicates an increase in the perception of a company's credit quality.

To contact the reporters on this story: Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net; Mary Schlangenstein in Dallas at maryc.s@bloomberg.net.

Last Updated: April 15, 2008 17:19 EDT