CHICAGO U.S. airline stocks rallied on Tuesday on falling oil prices and a Wall Street Journal report that Delta Air Lines Inc (DAL.N) was in merger talks with Northwest Airlines Corp NWA.N and United Airlines parent UAL Corp UAUA.O.
Delta, Northwest and UAL shares rose sharply after the report, along with shares of Continental Airlines Inc (CAL.N) due to a growing belief that Continental would play a key role in industry consolidation.
"It is fair to say because whoever is left out of the Delta merger may look to Continental," said Standard & Poor's analyst Jim Corridore.
Continental stock closed up 8.22 percent at $25.27. Northwest shares finished up 8.56 percent at $17.38 and Delta shares ended up 4.44 percent at $15.98. UAL closed up 4.98 percent at $34.57.
Corridore said the decline in oil prices also helped to boost airline shares. On the New York Mercantile Exchange, February crude CLG8 settled down $2.30 or 2.44 percent at $91.90 a barrel, trading $90.98 to $94.38.
The Wall Street Journal reported on Tuesday that Delta's board gave Chief Executive Richard Anderson permission last Friday to hold talks with both carriers simultaneously. The report cited unnamed persons familiar with the situation.
Delta aims to present a preferred partner at its next board meeting in early February, with a deal announcement coming as early as mid-February, the newspaper reported.
Delta spokeswoman Betsy Talton, reiterating previous statements, said: "A special committee of the board is working with management to explore strategic options, including potential consolidation transactions. However, we are not providing updates while this process is ongoing."
Representatives for Northwest and UAL declined to comment. But Northwest CEO Doug Steenland said in an internal memo to employees on Tuesday the airline would consider all options in order to ensure a competitive position in the industry.
"... we need to pro-actively consider all options available to us and not just wait for our future to be dictated to us," Steenland said in the memo.
The U.S. airline industry is trying to rescue its fledgling recovery, which is threatened by fuel prices and a softening 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 of stabilizing the volatile and fragmented industry by allowing carriers to cut costs, reduce capacity and raise fares.
Either deal would make Delta, which has said it wants to be a buyer if the industry consolidates, the largest airline in the world, overtaking AMR Corp's AMR.N American Airlines.
Delta, the No. 3 U.S. carrier, has a market value of over $4.1 billion, higher than No. 2 UAL's $3.8 billion and No. 5 Northwest's $3.7 billion.
Analysts and industry experts see a deal between Delta and Northwest as more likely because it would involve fewer risks. The companies already cooperate through the SkyTeam global airline alliance. Also, Delta's Anderson was previously CEO at Northwest and is familiar with Northwest's operations.
Delta, which emerged from bankruptcy last spring after fending of a hostile bid from US Airways Group Inc LCC.N, has been at the forefront of airline merger talks for months.
In November, it said it had set up a special board committee and hired financial and legal advisers to help it review strategic options.
Industry lawyers and consultants say Delta would likely come under an unprecedented antitrust review if it decides to propose a merger with either airline.
For a deal to succeed, the carriers would have to win over the industry's powerful unions, which are seeking to claw back some of the concessions made during the industry's five-year slump, which ended in 2006.
"We will not tolerate any transaction that serves to delay, disrupt or impede our efforts to improve compensation and working conditions," Greg Davidowitch, president of the Association of Flight Attendants at United, said in a statement.
The pilots union at United echoed that sentiment.
"CEO Glenn Tilton and other executives must understand that any merger or consolidation involving United Airlines will not be consummated without the involvement of its pilots," Steve Wallach, chairman of the Air Line Pilots Association at United, said in a statement.
(Additional reporting by Chris Reiter and Ritsuko Ando in New York; Editing by Toni Reinhold)