Delta officials tightlipped on meeting dealing with consolidation

ATLANTA -- Delta Air Lines Inc. officials were mum Friday on the outcome of a board meeting at which executives could get the green light to enter formal talks with two competitors about a combination.

Asked if the meeting in New York had been completed, board member Walter Massey responded, "I can't talk about that." He then hung up the phone.

A Delta spokeswoman also declined to comment.

According to two people familiar with the situation, Delta's board was expected to be asked to allow formal talks between Delta and Northwest Airlines Corp. and Chicago-based UAL Corp.'s United Airlines, with the idea that Delta would ultimately choose to combine with one of the two.

The people spoke on condition of anonymity because of the sensitivity of the talks.

The Associated Press reported Nov. 14 that United and Delta had been discussing a combination between the nation's second- and third-largest carriers that would keep the United name and the corporate headquarters in Chicago. Delta issued a statement at the time denying "published reports that it had engaged in merger talk with United."

Since then, Delta has said little about the issue, except that its board is evaluating whether to enter into a deal to combine with another airline.

On Wednesday, the head of the Atlanta-based company's pilots union said in a letter to rank-and-file members that a combination involving Delta may be close. The union has a representative on Delta's board.

One of the biggest factors driving renewed talk of consolidation has been the sharp increase in fuel prices, among the industry's biggest costs. Jet fuel costs have surged along with the price of oil, which jumped 58 percent last year.

United, which hiked its recently added fuel surcharge to $25 one-way Friday, says every penny increase in the price of a gallon of jet fuel costs the industry $195 million annually.

United's increase is only the latest attempt by major carriers to increase ticket prices. While many of the fare hikes have been matched by competitors, getting the increases to stick over the long term has been tricky because of stiff competition.

As a result, Wall Street analysts have been pushing carriers to further reduce the number of flights they offer in an effort to boost revenues. A combination by two or more airlines would be a convenient way to accomplish that, analysts say.

"We believe consolidation would be beneficial to the industry, but only to the extent that it reduces overall capacity," Lehman Brothers analyst Gary Chase said in a research report Thursday. "In our view, consolidation absent capacity reduction is nothing more than trivia."

The clock is ticking to get any deals accomplished quickly. That is because industry observers believe a combination has a better chance of surmounting the considerable political and regulatory hurdles under the current administration than whatever might follow it.

"We have long felt that if a deal was announced by February 2008 it would be reviewed by the Bush [Justice Department] and likely to be approved in 6 to 9 months," Michael Derchin, an FTN Midwest Securities airline analyst, said in a note to investors Thursday.

A deal agreed to after February would mean the approval process would likely have to wait until the next presidential administration -- and until a new antitrust chief is appointed, Derchin said.

"High oil prices, if perceived as a permanent change, are another powerful driver to getting a deal done sooner rather than later," he said.

Derchin said the request that Delta simultaneously negotiate with two separate airlines is unusual, but it gives the carrier the advantage of keeping both potential partners "honest" during acquisition discussions.

Shares of Delta, which is scheduled to release its fourth-quarter and year-end results Jan. 23, fell 50 cents, or 3.1 percent, to $15.48 Friday.