Delta steps up merger review, denies UAL talks

NEW YORK (Reuters) - Delta Air Lines Inc (DAL.N) said on Wednesday it set up a special board committee and hired financial and legal advisers to help it review its merger options.

But the No. 3 U.S. carrier denied it is discussing a possible deal with UAL Corp (UAUA.O), parent of United Airlines, after news reports the two airlines were in deal talks.

A source familiar with the situation told Reuters all the major airlines have been in talks with one another at some stage and a UAL-Delta deal has been viewed as the most likely one to get done.

UAL discredited the reports.

"We do not respond to wholly inaccurate statements made by people who claim to have knowledge when they clearly do not," said UAL spokeswoman Jean Medina.

Both companies have market values of about $5 billion. A deal would be the largest airline merger on record and create the world's biggest airline based on passenger traffic.

Delta's move to create a special committee and hire advisors appear to move the industry a step closer toward a long-anticipated wave of mergers.

"This is the real thing," said DePaul University transportation expert Joe Schwieterman. "They appear ready to move to the next step."

Reports of potential Delta-UAL merger talks sent volatile airline shares soaring. Delta shares jumped nearly 12 percent, but came back to just over 2 percent in late afternoon trading.

Northwest Airlines Corp NWA.N, UAL Corp, US Airways Group Inc (LCC.N) and Continental Airlines Inc (CAL.N) all rose more than 8 percent before Delta's denial cut their gains.

'HEIGHTENED IMPORTANCE'

The U.S airline industry is recovering from years of losses due to brutal competition and high costs. Surging oil prices threaten to derail that recovery and have increased interest in mergers.

"With oil at over $90 a barrel, this analysis (of consolidation options) takes on a heightened importance as we factor those prices into our long-term planning process," Chief Executive Richard Anderson said in a statement.

"Delta believes that the right consolidation transaction could generate significant value for our shareholders and employees."

UAL, which has also been a proponent of consolidation, said: "We believe consolidation is necessary for the industry."

UAL did not comment on the reports of merger talks.

SHAREHOLDER PRESSURE

The move to hire advisers and set up the special committee, which is headed by Chairman Daniel Carp, comes amid increased shareholder pressure on U.S. airlines.

Hedge fund Pardus Capital Management LP, which holds 7 million Delta shares and 5.6 million UAL shares, has urged the two carriers to merge.

A Delta-United merger would be "the most attractive and practical combination," Pardus President Karim Samii and Principal Shane Larson said in a letter sent to Delta on Tuesday.

United's Pacific presence, hubs in Los Angeles and San Francisco, and slots at London's Heathrow airport would match well with Delta and provide "the service breadth to win more business and international travelers," said the letter that was sent to CEO Anderson, Chairman Carp and Delta President Ed Bastian.

Delta and UAL may be interested in a deal to take advantage of what is seen as a more permissive anti-trust environment under the Bush administration.

"Delta and United have been eyeing a marriage for years, but didn't feel the timing was right for anti-trust reasons," DePaul's Schwieterman said. "The mood is changing and they see the clock ticking on the current administration."

But opposition from employees, which helped Delta fend off a hostile acquisition from US Airways earlier this year, could also prove an obstacle.

"Delta pilots will be critical participants from the beginning in any consolidation discussion," said Lee Moak, master chairman of Delta's pilots union. "Any consolidating event, which involves the Delta pilots, will not happen without our active participation and consent."

(Reporting by Chris Reiter; additional reporting by Kyle Peters; Editing by Gary Hill and Andre Grenon)