NWA-Delta Merger Talk Fills Air

The idea of a Northwest Airlines-Delta Air Lines merger is gaining altitude on Wall Street.

Talk of a potential merger has been circulating for weeks, but was revived Wednesday when an analyst with UBS detailed why a Delta-Northwest combination makes sense.

Also on Wednesday, a union leader at Delta told members in a letter that "consolidation may indeed be at our door."

A variety of forces, including high fuel costs, a sluggish economy and plummeting stock prices, are pushing the airlines to consider merger options sooner than they might have, analyst Kevin Crissey said.

"Now that the sector has pulled back much more" and weaker demand is anticipated, it's more appropriate to anticipate consolidation, Crissey wrote in his report. "Concern about another downturn, as suggested by recent economic data and stock price moves, may spur management into action," he added.

A Delta-Northwest combination is the most likely, he says, because of how the two airlines' networks and hubs line up, the alliances they already have on transatlantic routes and the higher likelihood of regulatory approval because there isn't much overlap.

Eagan-based Northwest is the dominant Twin Cities carrier. It also has hubs in Detroit and Memphis, Tenn. Delta is based in Atlanta.

Crissey also pointed to Delta CEO Richard Anderson as a contributing factor. Anderson, who joined Delta in September, was CEO of Northwest from 2001 to 2004.

Crissey upgraded his ratings on the stocks of the six legacy carriers, moving most, including Northwest and Delta, from "neutral" to "buy."

Northwest declined to comment on merger talk Wednesday.

Northwest shares traded at $18.48 on Dec. 7. But the stock's been in a steady decline since, along with the rest of the airline industry, as oil prices remained high and employment news and other economic indicators have signaled trouble. Northwest's stock closed Wednesday at $12.01, up 34 cents.

Even with that steep decline, "when I plug in a reasonable assumption on fuel prices for 2008, I can make the case that the status quo share prices are not sustainable," said Vaughn Cordle, an airline analyst with AirlineForecasts.com . "They'll continue to fall. That makes a merger quite compelling."

A combined Delta-Northwest airline would cut capacity and find economic advantages through cost cuts and fare increases, Cordle said.

The letter to Delta pilots from Lee Moak, chairman of the Delta pilots union executive committee, didn't say why he thinks Delta might be close to a merger. But the union does have a representative on Delta's board of directors.

Northwest pilots continue to keep a close eye on merger possibilities, said Wade Blaufuss, a spokesman for the Air Line Pilots Association at Northwest. He noted that Wednesday's predictions were nothing new, but that the rumors appear to be heating up.

"Our cooperation (with a merger) would be dependent on the viability of the new company, an equity stake and contract improvements in exchange for our support," Blaufuss said.

In the fall, Northwest CEO Doug Steenland said the company was prepared to go it alone after emerging from bankruptcy with improved financials. But he said the airline would look closely at any merger proposals, as it owes that to its shareholders.

Northwest has formed a group to look at strategic alternatives, Crissey noted in his report.