Could oil prices break or seal NWA-Delta merger deal?

Northwest Airlines and Delta Air Lines pilot leaders adjourned their latest seniority integration talks Tuesday without reaching an agreement.

It is unclear when the two pilot groups will reconvene the talks, but what is certain is that the airline industry is facing a new financial crisis.

Both airlines' largest expense is fuel, and crude oil soared Tuesday to a record close of $108.75 a barrel. Many forecasters previously had called for oil prices to trend downward, but now those predictions are being revised.

Economists at Standard & Poor's on Tuesday raised their projections for crude to about $95 a barrel in the current quarter, $103 for the second quarter, about $97 in the third quarter and $92 for the fourth quarter.

"The rapid increase in jet-fuel prices will add substantially to airline costs at a time when a weakening U.S. economy will make it more difficult to offset those costs with higher fares," Phil Baggaley, a credit analyst for Standard & Poor's, said in a Tuesday report.

The combination of Delta and Northwest has been envisioned as a way to create a global airline with a strong competitive and financial position, but that merger is on hold pending the outcome of the pilot negotiations. Delta and Northwest executives want serious conflicts about blending the pilot workforces to be settled before proposing a merger to federal regulators.

Northwest's pilot group, on average, is older than Delta's pilot group. So negotiating an agreement on how Northwest and Delta pilots would be ranked and allocated flying assignments for wide-body, overseas flying is a key issue. But some Northwest pilots also are concerned about career progression, not simply what the combined seniority list would look like on the first day of a merger.

Pilot leaders from the two carriers have made progress on multiple topics, but they remain deadlocked on other crucial issues, a person familiar with the talks said Tuesday.

Both carriers' pilots are represented by the Air Line Pilots Association (ALPA), and officials from the Northwest and Delta ALPA chapters recently have been conducting seniority integration talks in the Washington, D.C., area.

Northwest ALPA's executive council began a four-day meeting in St. Paul on Tuesday, and Delta's executive body is scheduled to meet this week as well.

Those Northwest and Delta pilot councils are expected to receive status reports on the talks. So far, the discussions have not yielded a combined seniority list, nor have they produced agreement on a process for building the list.

After entering bankruptcy in 2005, Northwest and Delta dramatically reduced their costs to return to profitability. But in Northwest's case, about $1.4 billion a year in cost savings that came from employee concessions could be wiped out by runaway fuel prices.

Excluding fuel taxes, Northwest projected in January that it would spend $2.63 a gallon for jet fuel this quarter. It also estimated that its fuel price would average $2.57 a gallon for the full year.

Northwest has some fuel hedges in place. During a conference call with Wall Street analysts in January, Northwest reported that it had hedged 11 percent of its projected fuel use for the year, with an average floor of about $74 per barrel and an average ceiling of about $93 per barrel.

At the time, Dave Davis, Northwest's chief financial officer, said, "We continue to have significant fleet flexibility to reduce capacity should we see an impact on demand as a result of increased fuel prices or general economic weakness." In the intervening weeks, fuel has hit record highs and the U.S. economy has soured.

Northwest has not provided new guidance on fuel hedging since January.

But CEO Doug Steenland talked about the seriousness of the fuel-price situation Monday in a recorded message to employees. If fuel remains above $100 a barrel, Northwest's fuel costs this year could be up to $1.7 billion higher than the carrier anticipated early in its bankruptcy case, he said.

"The economy appears to be heading into recession," Steenland said. "We will continue to consider all strategic alternatives that are in our best interests."

Steenland, Delta CEO Richard Anderson and their boards of directors are facing high fuel prices that they did not contemplate just a few months ago.

One analyst raised questions Tuesday about whether the two carriers ultimately will propose a merger this year.

"We're less enamored with a Northwest-Delta deal as the spike in crude and recession both risk squandering deal synergies," Credit Suisse analyst Daniel McKenzie wrote in a report.

However, Morgan Stanley analyst William Greene said that "we believe that consolidation remains the best path to improving the industry's volatile financials."

He indicated that a Northwest-Delta merger would stand a good chance of being approved by the U.S. Department of Justice because it has a low number of overlapping routes.

Liz Fedor • 612-673-7709