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Little Headway in Delta-Northwest Talks
By SUSAN CAREY and PAULO PRADA
March 8, 2008

Informal talks among pilot leaders from Delta Air Lines Inc.
and Northwest Airlines Corp. over the past week failed to
produce the breakthrough needed for the two airlines to move
ahead with their plans for a merger that would create the
world's largest airline, said people familiar with the
talks.

Some progress was made during four days of discussions in
Washington on how to integrate the Delta and Northwest
pilot-seniority systems, and the talks are expected to
continue. But combining the seniority lists may be so thorny
a proposition that no agreement is possible, a person said.

That scenario is raising pressure on the airlines from some
of their key shareholders. Some investors who embrace the
idea of a merger are losing patience and believe Delta and
Northwest should proceed without a pilot accord on
seniority. Such an agreement isn't required by law or either
union's contract, so the airlines could go ahead with a deal
and force pilots to sort out seniority later, some investors
said privately. That is the how past airline combinations
have typically occurred.

Increasingly, Delta shareholders are making their
displeasure known to the airline's top management, according
to several investors. When Delta left bankruptcy-court
protection last year, its investor base was fairly
concentrated and included a large number of hedge-fund
investors eager for the quick returns they believed a merger
could provide. Over 20% of the company's shares at present
are owned by hedge funds, according to FactSet Research
Systems Inc.

Under Delta's governance rules, 40% of the holders of its
shares could require the company to hold a special meeting
at which the board could be removed by a majority vote.
There is no evidence such a proxy battle is afoot, but there
is chatter among some big investors that Delta management is
abrogating its fiduciary responsibility by insisting on a
premerger agreement with the pilots, said a person familiar
with shareholder sentiment.

A Delta spokeswoman declined to comment, except to say the
carrier won't enter a transaction unless it is in the best
interest of all of its stakeholders, including employees,
customers and shareholders.

Delta and Northwest want to enter into a labor-friendly
merger in the interest of avoiding worker squabbles and
integration problems that have plagued other airline
combinations and to smooth the deal's path among opponents.
Any deal is certain to hit resistance from some members of
Congress and could face opposition from antitrust
regulators, consumer advocates, other unions and
communities.

The companies especially want their most powerful employees,
the pilots, to be behind them, as a quick integration of the
pilot groups would lead to immediate savings and
efficiencies that would bring value to the merged entity,
said people familiar with their thinking.

That led the two carriers to work out a common labor
contract with sweetened terms for the 11,000 pilots
including pay raises, equity in the combined company and a
voting seat on its board. But getting pilot assent on the
all-important issue of seniority -- which governs which
planes they fly, how much they earn and their career
advancement prospects -- has been a bigger challenge,
especially in the compressed timeframe in which Delta and
Northwest negotiated the merger agreement. Without a
seniority plan, the economics of the new labor contract
might not be viable, said a person familiar with the matter.

After earlier efforts to find common ground on seniority
came to naught, Delta and Northwest last month canceled
plans to call board votes and announce the merger deal. The
pilots resumed talks only early this week after a lengthy
break, a fact that caused deflated Delta and Northwest
shares to gain ground, though Delta's shares were down 61
cents, or 4.5%, to $12.89 in 4 p.m. New York Stock Exchange
trading Friday, while Northwest's shares were down 73 cents,
or 5.3%, to $13.13.

The talks are informal and aimed at determining the basis
for a deal acceptable to both sides. Whatever is agreed upon
wouldn't necessarily be binding on the two pilot groups.
Neither of the groups, both members of the Air Line Pilots
Association, would comment on the talks