UBS Analyst: Delta, Northwest Merger Still Coming Soon

A merger between Delta Air Lines and Northwest Airlines appeared hindered in the past week, but UBS airline analyst Kevin Crissey in a research note today said, "We still expect a DAL/NWA merger announcement in the near term."

Crissey said investors—who have salivated at whiffs of a deal—are growing frustrated at perceptions of a lack of progress toward consolidation, as detailed in media reports. For investors, mergers "may be the only way to soften the blow from the bear case which is playing out—high fuel prices and a weakening economy," Crissey said.

According to press reports, Delta and Northwest are awaiting the resolution of labor issues, notably pilot seniority lists, before entering into an agreement. Crissey noted several possible explanations for management being so resolute about labor support—from the belief that a lack of support would undermine financial synergies of a deal to the thought that union support will make Department of Justice approval more palatable. Crissey noted another theory: "It is possible that Delta and/or Northwest management have made seniority a deal breaker solely to give the appearance to shareholders and their boards that they've made an effort to merge." To that theory, Crissey wrote, "It is possible, but not our view."

Crissey noted another possible justification for delaying an agreement. "Upon the announcement (not closing) of a merger, Northwest would effectively sacrifice its Golden Share over Continental, which currently prevents Continental from merging without Northwest's consent (under most reasonable circumstances). Therefore, Northwest needs to be certain that whatever deal it announces will close."

Crissey said that even if labor groups throw their support behind Delta and Northwest, other forces could undo an agreement, including DOJ or political pressure. Still, Crissey said, "We believe the window for these deals to be announced is closing and that, given the upward move in fuel prices, labor may want to view the current proposal in a more favorable light."