Pilots in a position to make or break deal

With a merger agreement between Delta Air Lines and Northwest Airlines hanging in the balance, the highest stakes may have switched from management to the leaders of the two companies' pilot unions who have been unable to combine seniority lists.

Northwest pilot chairman Dave Stevens and Delta pilot chairman Lee Moak both insisted that the Air Line Pilots Association (ALPA) be brought into merger talks at the front end of any deal.

They and their respective executive councils also have emphasized the potential benefits of a merger, including the prospect of contract improvements, equity in the new carrier and an opportunity for job security and career opportunities that would come from working for a global powerhouse. That's raised the expectations of many in the pilot ranks, who have endured steep pay cuts and longer work hours in recent years.

Now, after the two managements have included the pilots as partners and placed the fate of the merger into their hands, those proposed wage gains could vanish as quickly as it takes for the two boards to meet and decide to call off the deal.

And if a merger doesn't occur, Northwest pilots could be in for a long wait before they see substantially better pay and working conditions. Their contract doesn't become amendable until the end of 2011.

The involvement of competing constituencies has made negotiations difficult. Delta and Northwest pilots reached an impasse Feb. 21.

Curt Kruse, chairman of the Seattle council of the Northwest pilots union, said in a memo last week that the proposed combination would be the largest integration in the history of pilot group mergers, which means there are more "anomalies" than usual in trying to combine the two lists. There were different retirement and hiring patterns at Northwest and Delta.

For example, Kruse noted that about 1,000 Northwest pilots will hit the age-60 retirement age within the next five years. Delta, where a huge number of pilots retired before their defined-benefit pension plan was terminated a few years ago, has younger pilots flying its largest aircraft, so they face the threat of seeing their relative seniority reduced in a merger.

On Friday, the Northwest union said, "The harmony needed to grow a competitive world class airline comes from a leadership willing to sustain a successful company and protect the seniority of their employees, current and future."

Delta would acquire Northwest in a stock swap according to the structure of the merger deal. Delta management wants a pilots deal, but not at the cost of harming what Calyon Securities analyst Ray Neidl said is an excellent relationship with its pilots union.

"Keeping this relationship intact is probably even more important to Delta management than merging the airline," Neidl said in a Friday report. "We do not believe that they will pursue a merger without a pilots agreement."

If Northwest and Delta pilot leaders fail to deliver on an equitable deal, they could be swept aside like fellow ALPA leaders who were blamed for the contract givebacks that multiple airlines secured during bankruptcies.

But Northwest leaders from the Twin Cities local council -- including chairman Mark Shanahan -- have made clear they are unwilling to trade short-term financial gains for a seniority list that fails to address career progression issues "for many years into the future."

Delta pilot leaders declined to be interviewed for this story.

Northwest pilot leaders also have cautioned that they want to avoid both a standoff and an outcome like that at US Airways. More than two years after the US Airways-America West merger, there is still rancor within the two pilot groups, who lack a combined contract and whose seniority list has been arbitrated.

While the issues standing in the way of a Delta and Northwest pilots' deal might seem insurmountable, Jerry Glass, an aviation consultant and former US Airways executive, said it's still possible to secure an agreement on pilots' seniority.

"I don't think a hard and fast deadline is to anybody's advantage," especially a publicly stated deadline, Glass said in an interview. "You need to be patient to allow labor to go through the process that it needs to go through to reach a good conclusion, meaning they finally resolve the seniority issue."

Delta President Ed Bastian said Friday on CNBC that management hasn't run out of patience.

"We don't feel in a big rush to get this deal if it's not the right deal for our people," Bastian said.

Translation: There's still time to negotiate.

"The fact that Delta and Northwest are looking to get this taken care of before any merger announcement is undoubtedly the correct move and one that would certainly impact the success of a merger," said Bill Hochmuth, a senior research analyst at Thrivent Investment Management in Minneapolis.

If no deal is proposed to federal regulators within the next few weeks, the industry consolidation that observers have been expecting for several years might be put on hold until next year, Neidl said.

"If the Delta-Northwest proposal does not materialize because of the pilot disagreement, we do not believe that Delta can quickly switch its sights to United," Neidl said.

What will it take to forge a pilots' deal?

After a break in the negotiations and an assessment of the consequences of failure, it's possible the pilot negotiators could modify their positions and reach a deal. They might also welcome help from an objective third party. ALPA leaders at the international level could also be called in.

Or management and the two ALPA groups could agree to a narrowly defined arbitration process, which presumably would not yield the type of results that divided the Northwest and Republic pilots following the 1986 merger.

Liz Fedor • 612-673-7709