UPDATE 3-Delta wants merger talks with UAL, Northwest-WSJ

Thu Jan 10, 2008 3:59pm EST

(Adds details on potential savings)

NEW YORK Jan 10 (Reuters) - Delta Air Lines Inc (DAL.N) plans on Friday to ask its board for permission to begin formal merger talks with both Northwest Airlines Corp NWA.N and United Airlines parent UAL Corp UAUA.O, the Wall Street Journal reported on Thursday.

Citing people familiar with the matter, the Wall Street Journal said on its Web site that Delta would aim to ultimately choose between the two carriers.

Delta, which emerged from bankruptcy last spring after rebuffing a hostile takeover offer by US Airways Group Inc LCC.N, set up a special board committee months ago to help it review its strategic options, including mergers.

Betsy Talton, spokeswoman for Delta, said the No. 3 U.S. carrier was not providing updates on the special committee's work while it is in progress.

In November, Delta moved quickly to deny media reports that it was in merger talks with UAL.

Jean Medina, a spokeswoman for UAL, which has been a vocal proponent of airline mergers, said, "Our position on the need for consolidation generally in the industry is well known, and we don't comment on rumors or speculation."

Northwest was not immediately available from comment.

Airline shares, already soaring on renewed merger speculation ahead of the report, continued to rally.

In late afternoon trading, Delta shares rose 20 percent to $16.18, Northwest surged 37 percent to $16.49, and UAL climbed 23 percent to $32.00.

LARGEST CARRIER

A deal between Delta and either airline would likely create the world's largest carrier, overtaking AMR Corp's AMR.N American Airlines. An acquisition of either airline by Delta would be worth at least $3.5 billion, based on current market values. For a comparison of the airlines, see FACTBOX [ID:nN10208418]

According to a study conducted a few months ago for hedge fund Pardus Capital Management, which was lobbying for a deal, a Delta-United merger would generate synergies of $585 million and combine Delta's transatlantic presence and strength in the New York market with United's Asia routes and its position on the U.S. West Coast.

The study estimated that a combination with Northwest would net the combined carrier $1.5 billion in savings by combining smaller hubs, but it would not expand the network to the same extent as a Delta-United deal.

The modest recovery in the U.S. airline industry has begun to flag amid soaring fuel prices and a sagging U.S. economy. Most major U.S. airlines are expected to post losses for the fourth quarter of 2007 after profits earlier in the year.

Mergers are seen as a way to stabilize the volatile and fragmented industry by allowing carriers to cut costs, reduce capacity, and raise fares.

Some industry insiders suggest any proposed deal between major carriers would stand a better chance of clearing U.S. antitrust review under the Bush administration, which has approved two big airline mergers, rather than a Justice Department potentially controlled by Democrats beginning in 2009.

For a deal to succeed, Delta also would have to win over employees, especially its unionized pilots, who helped block US Airways' effort. For analysis, see [ID:nN10169813].

"Consolidation may indeed be at our door," Lee Moak, chairman of the Delta pilots' union, said in a letter to members on Wednesday.

"Any attempt at consolidation will fail without the active involvement and support of the pilots from the earliest formative stages of the effort," said Moak.

In September, Delta agreed to protect the seniority rights of its employees in the event of a merger. (Reporting by Chris Reiter; Additional reporting by Kyle Peterson in Chicago and John Crawley in Washington; Editing by Brian Moss)

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