Shares of both Delta and Northwest have fallen in recent weeks after leaders of their pilots unions were unable to work out an integration agreement. Delta and Northwest agreed to the framework of a deal that would have created the world's largest airline in late January, but went to their pilots in hopes of avoiding integration nightmares that have plagued past airline consolidation attempts.
The Wall Street Journal reported on its Web site Friday afternoon that Northwest has gone back to Delta, proposing the airlines proceed with their merger without salary enhancements and provisions that would have given each pilot an equity stake in the combined company. Both airlines declined comment, but the report confirms talk that has lingered for weeks that the companies are still considering their options even though the pilots could not reach an accord.
The case for dealmaking has only intensified in recent weeks, as a number of airlines including Delta have announced schedule cutbacks and layoffs in an effort to cope with record-high oil prices. But Delta management still faces a difficult choice when deciding how to proceed, and the company is far from certain to jump into dealmaking without the approval of its pilots.
Delta management has seemingly painted itself into a corner, having previously pledged not to do any deal that does not preserve its name, Atlanta headquarters and employee seniority. While the company is under no legal obligation to include pilots in its deliberations, to move forward now after the work group rejected deal talk could lead to more management/labor hostility than had they simply announced a deal back in January without first briefing pilots on their plan.
But should Delta not proceed with a deal that management seemingly believes in due to concerns over workers, the company could face rebellion from beaten-down shareholders, including many institutional investors who agreed last year to back Delta's standalone plan over a hostile takeover bid from US Airways Group Inc.
The most likely outcome, given the weak industry fundamentals, investor craving for consolidation and the promise of at least $750 million in new liquidity from international partner Air France-KLM Group, remains a merger between Delta and Northwest. But expect significant turbulence no matter how the airlines decide to proceed. - Lou Whiteman
See WSJ.com story on Northwest proposing the airlines move forward with their deal
See TheDeal.com story on Delta management weighing its next move
See TheDeal.com story on pilot talks falling apart
See DealScape post outlining the issues between pilot groups
News reports surfacing Friday afternoon that Northwest Airlines Corp. is attempting to rekindle deal talks with Delta Air Lines Inc. should serve as a positive signal to merger-starved investors that the airline consolidation effort is far from over.
