NWA urges Delta to consider merger

Northwest Airlines management has urged Delta Air Lines executives to move forward with a merger deal, a person familiar with the talks said Friday.

The possible combination stalled two weeks ago after Delta pilots' union chairman Lee Moak said the Delta and Northwest pilot unions had failed to negotiate a seniority integration agreement -- which had been made a precondition of a merger.

Now, Northwest is prepared to propose a merger without that pilots agreement. But it's unclear whether Delta, which would acquire Northwest in a stock swap, is willing to go forward with a traditional merger that leaves labor issues to be settled later.

A seniority agreement eluded the Delta and Northwest pilots even though management agreed in February to a four-year pilots contract that provided substantial pay increases for both groups.

If the two airlines decide to propose a merger in the coming weeks, the terms of that four-year pilots agreement will vanish because it is now viewed as too costly, partly in light of oil prices that have topped $100 per barrel, said the person close to the merger talks.

The enhanced pilot agreement was contingent on the airlines having a seniority integration list in hand on the first day of the merger, so the combined carrier could immediately operate as one company and put the "right aircraft on the right route," the news source said. That business benefit would have been used to help pay for contract improvements.

The contract had pay raises in excess of 30 percent for Northwest pilots over four years. But Northwest pilot leaders said they wouldn't trade their seniority for short-term economic gains.

"In order for any airline merger to be successful, the pilots of both groups must be involved and agree to the terms," Dave Stevens, chairman of the Northwest pilots union, said in a Friday statement. "We will reserve our judgment and support until the economic and contractual elements of an agreement have been negotiated."

Delta pilots' spokeswoman Kelly Regus declined to comment on Friday.

In a March 17 memo to his members, Delta pilots' chairman Moak said that "pilot involvement before a final decision in any consolidation option is absolutely essential."

Moak also said: "In the event of any corporate merger announcement, we will retain our rights to seek to shape, or if we deem appropriate, oppose a transaction." The Delta pilots helped kill a hostile takeover by US Airways in 2007.

For months, Delta CEO Richard Anderson has insisted that key conditions must be met before Delta would do a merger, and protecting the seniority of Delta employees was on Anderson's short list of conditions.

But Anderson and his board have been getting pressure from investors to simply proceed with a merger.

In a report this week, Credit Suisse analyst Daniel McKenzie said, "As for labor concerns, it is management's job to set expectations and lead." He argued that "disgruntled shareholders" want Delta management to move forward with a merger or "face consequences."

McKenzie noted that a political window will close soon. If a merger is not proposed to federal regulators in the coming weeks, it may be too late to secure a decision by the Department of Justice before the Bush administration ends.

Investors have been losing patience. Northwest and Delta shares traded at post-bankruptcy lows on Friday until after news broke midday that Northwest still wants a merger deal. Then Northwest shares rose 3.55 percent, up 30 cents, to close at $8.76. Delta's stock ended the day at $8.61, up 26 cents or 3.11 percent. Both stocks have lost more than half their value since the airlines exited bankruptcy last spring.

Northwest declined to comment on Friday. However, Northwest CEO Doug Steenland previously has said the carrier views consolidation as "inevitable," and Northwest CFO Dave Davis said at a recent investors' conference that high oil prices strengthen the case for airline mergers.

Delta spokesman Anthony Black declined to address Delta's position on Northwest's latest merger overture, but said: "We support industry consolidation as a vehicle to ensure Delta remains an industry leader." He added that a Delta board committee continues to work with Delta's management on strategic alternatives.

Anderson, a former Northwest chief executive, raised the potential of a Delta merger last October -- in his second month on the job at Delta.

Under the merger deal that the Northwest and Delta boards have endorsed, the merged carrier would be led by Anderson, called Delta and headquartered in Atlanta.

If that merger is proposed, U.S. Rep. Jim Oberstar, D-Minn., is poised to vigorously oppose it as chairman of the House Transportation and Infrastructure Committee. "If you create one mega-airline, it's going to force the other airlines to merge in self-defense and ultimately we'll wind up with three very large airlines controlling everything," Oberstar spokesman John Schadl said Friday.

Delta also looked at United Airlines as a possible partner but ultimately chose to negotiate a deal with Northwest. If a Delta-Northwest deal is proposed, many experts expect that a United-Continental merger deal would be announced as well.

Julius Maldutis, a New York-based aviation consultant, said Northwest's maneuvering could be viewed as "one last attempt to do the merger."

But he added, "The $99 question is: Would Steenland and Anderson proceed with the merger if they do not get the pilots' support from both groups?"

Robert Mann, an aviation consultant who worked with the America West pilots on their integration issues with US Airways pilots, said there could be some short-term benefits to a Delta-Northwest merger.

But, he added, there is a major risk in failing to secure agreement on Delta-Northwest pilot issues in advance of a merger, because the combined carrier could face the same kind of "polarization" and conflict that has plagued the US Airways merger of 2005.

Staff writer Conrad Wilson contributed to this report. Liz Fedor • 612-673-7709