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VOL. 123 | NO. 38 | Monday, February 25, 2008

Airlines Could Stay on Own, Seek Another Carrier if Deal Falls Apart

By HARRY R. WEBER | AP Business Writer

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ATLANTA (AP) - Not too long ago, Delta Air Lines Inc. and Northwest Airlines Corp. seemed all but certain to announce a combination soon.

That still could happen in the next few days, but an impasse over seniority involving the pilots unions has jeopardized a deal, raising the question of what happens if Delta or Northwest walks away.

Industry observers say the two airlines could stay independent, seek a quick deal with another carrier or wait until next year to try the consolidation game again.

"I can conceive of the pilots not coming to an agreement and destroying a potential merger," said Ray Neidl, an airline analyst with Calyon Securities in New York.

While in bankruptcy, Atlanta-based Delta defeated a hostile takeover offer from Tempe, Ariz.-based US Airways Group Inc., arguing that Delta was better off as a standalone carrier. It emerged from Chapter 11 last April with that feeling intact, but soaring fuel prices soon prompted a wave of consolidation chatter.

Delta has considered a combination with Northwest or Chicago-based UAL Corp.'s United Airlines, but in recent weeks has apparently focused on trying to hammer out a deal with Eagan, Minn.-based Northwest, which was once headed by Delta Chief Executive Richard Anderson.

People close to the Delta-Northwest talks said the pilots unions have agreed on a comprehensive joint contract, a significant equity stake for pilots and big pay raises for some, but cannot agree to how seniority for the 12,000 pilots would work under a combined carrier. The people asked not to be named because of the sensitive stage of the talks.

Seniority is important for pilots because those at the top of the list get first choice on vacations, the best routes and the bigger planes that they get paid more for flying. It's also the reason pilots don't often leave to go work for another airline.

A person close to the talks said Tuesday night that a small group of Northwest pilot negotiators want thousands of young Delta pilots to go to the bottom of the combined seniority list as part of agreeing to a deal. The person said that was a major hang-up.

But Greg Rizzuto, a spokesman for Northwest's pilots union, said Wednesday that the labor group is united, and all it wants is what's fair, noting that a pilot's career is tied to his or her seniority ranking.

As of Friday, there was no word on any movement on a pilot seniority deal. Another person familiar with the negotiations said the new target remains Monday for a Delta-Northwest combination announcement, provided the pilot talks make progress over the weekend.

John Budd, a labor relations professor at the University of Minnesota, said Delta and Northwest could move forward with a combination without a pilot seniority agreement. Having an agreement in place in advance is clearly their preference, however.

"The other option is try to go it alone or seek other merger partners, although one would have to figure that if the pilots can't reach agreement in this case then it's not very likely they would be reaching agreement in a similar scenario with a different airline," Budd said.

Airline stocks have been battered in recent months because of soaring fuel prices, and analysts generally agree that consolidation would help the sector's performance. If deals in the works fall apart, it's unclear how much airline shares would be affected. Some analysts believe fears of a recession, which would hurt airlines, have already been factored in.

Gary Chaison, an industrial relations professor at Clark University, said he thinks Northwest and Delta are "operating out of high anxiety" due to the prospect of a recession and high fuel prices.

Both airlines believe they have a "rare opportunity to capture the opportunities of scale" and defend themselves against fuel prices and an economic downturn, Chaison said.

"But I also think they understand that if they don't merge it's not the end of the world," he said.

Neidl, the analyst, doesn't believe consolidation needs to necessarily happen this year to get regulatory approval. The industry's financial situation could prompt merger buzz to return next year if no deals happen now, he said.

"We're going to have consolidation one way or another," Neidl said. "Either the government will allow consolidation, or in the next recession some airlines will disappear."

Associated Press Writers Steve Karnowski in Minneapolis and Dave Carpenter in Chicago contributed to this report.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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