NWA, Delta shares fall to historic low

Potential merger partners Northwest Airlines and Delta Air Lines on Wednesday endured their worst day on Wall Street since they emerged from bankruptcy last spring.

The two airlines' shares fell 16 percent after crude oil reached a new record close of $109.92 a barrel and a J.P. Morgan Securities analyst projected that both companies will lose money in 2008.

Northwest ended the day at $10.25 per share, while Delta fell to $10.13 -- less than half the value at which they were trading days after leaving bankruptcy last year.

J.P. Morgan analyst Jamie Baker estimated in a new report that the U.S. airline industry will lose between $4 billion and $10 billion this year.

"These higher energy prices will make mergers even more critical at this stage, because the alternative will be revisiting Chapter 11 bankruptcies," said Julius Maldutis.

Maldutis, a consultant, is president of Aviation Dynamics.

The free fall of the two airlines' shares occurred as pilot leaders for the Northwest chapter of the Air Line Pilots Association (ALPA) were conducting their quarterly meeting in St. Paul. A solution for combining the seniority lists of Delta and Northwest pilots has so far eluded union officials.

"If the pilot union leaderships are not capable or not willing to reach an appropriate agreement, then the CEOs of Delta and Northwest will be faced with doing the merger without the appropriate agreement," the New York-based Maldutis said in an interview.

Pilot seniority negotiators broke off talks in New York on Feb. 21. In recent days, pilot leaders were discussing alternatives to mesh their seniority lists during sessions in the Washington, D.C., area, but those talks adjourned Tuesday. It's unclear when the two sides will reconvene.

"We're operating under the assumption that labor acts in its best interest," Baker wrote in his report. "Although labor has acted self-destructively before, we see no reason for deal derailment at this late hour."

In late February, Delta CEO Richard Anderson said in a letter to employees that the carrier had not yet arrived at a merger transaction that satisfied all of Delta's criteria. Securing the seniority rights of Delta employees was the lone missing requirement.

"So much has been made of getting the pilots' approval before going through with the deal that to step away from that now would be perceived even more negatively," Bill Hochmuth, senior research analyst for Thrivent Investment Management, said Wednesday.

By building a broad domestic and international route network, Delta and Northwest managements have hoped the combined carrier could increase unit revenue by attracting more high-fare business travelers. That would allow the merger to be done without abandoning current hubs, cutting routes or making significant layoffs.

However, oil has spiraled upward in price since the merger plan was formulated, leading some observers to question whether it might need to be amended. Oil has closed above $100 a barrel for several days. Northwest executives had assumed that oil would average $88 a barrel this year and Delta had planned for $90 a barrel. Hochmuth said both carriers likely will have to consider capacity cutbacks to take costs out of their operations this year.

Minneapolis attorney Ralph Strangis, who represented US Airways in a proposed United-US Airways combination that failed to win regulatory support in 2001, said the airlines need to reassess the validity of the assumptions they took into the merger deal, including the four-year labor agreement that would give pilots substantial raises.

"The pilots will be a fulcrum off of which everybody else is going to want to play," so the airlines need to review whether they can afford the pilots' contract as well as any increases contemplated for other work groups, Strangis said.

While high fuel prices intensify the need for industry consolidation, Strangis added, he gives "no better than 50-50 odds" that the Northwest-Delta merger will be completed.

"In a perfect world, everybody would understand this is the right thing to do and get it done," Strangis said. "But I'm not going to be optimistic that it will be done."

Liz Fedor • 612-673-7709