United Airlines, competitors see stock jump as Delta Air Lines to explore merger with UAL, Northwest Airlines

Shares of United Airlines parent UAL Corp. jumped sharply higher Thursday, along with those of Northwest Airlines and other industry rivals, after a published report raised fresh investor hopes for a merger between two major U.S. carriers.

An as-yet-unconfirmed article on The Wall Street Journal's online edition said that Delta Air Lines Inc. will ask its directors Friday to approve opening formal merger talks with United and Northwest, as it seeks to cut costs and gain efficiencies.

The idea of an airline-industry merger has become something of a Holy Grail on Wall Street, because such a combination could help trim excess industry capacity and help boost profit for the sector.

Although the financial logic of a combination between so-called legacy carriers is compelling, mergers in the airline industry are difficult to pull off, in part because they require the cooperation of the powerful unionized pilots and other workers. At many airlines, employees who made deep concessions regarding pay and work rules during the troubled years between 2001 and 2005 are wary of new cost-cutting plans.

United open to idea

Chicago-based UAL has signaled in the past that its management is open to the idea of combining with another airline, and Delta took preliminary steps last fall to "explore options," including acquisitions. But while rumors surface periodically, no major combination has come to pass in recent years.

In truth, airline stocks have been hammered over the past several months, as investors fretted that the softening economy will weaken passenger traffic, while soaring jet-fuel costs continue to push airline operating costs dramatically higher.

On Thursday, however, the sector staged a frenzied rebound.

Early in the session, airline stocks got a modest boost as oil prices eased. But the real catalyst for the jump was the Journal's story about Delta pushing for consolidation.

The article, based on unidentified sources "familiar with the matter," generally a reference to company insiders or investment bankers acting as counselors, said Delta would ultimately choose one of the two airlines as a merger partner.

By day's end, shares of Northwest had jumped an eye-popping 32 percent, or $3.84, to close at $15.85. UAL, which suffered a punishing sell-off this week when an analyst downgraded its shares because of United's simmering labor woes, reversed course Thursday and climbed 23.7 percent, a $6.16 gain, to a close of $32.19.

Shares of purported suitor Delta showed nearly as much bounce, surging 18.2 percent, or $2.46, to close at $15.98.

Even airlines not mentioned in the report moved higher. American Airlines parent AMR Corp. enjoyed a 13.3 percent jump, or $1.57, to $13.41, and Continental Air Lines Inc. matched UAL's percentage gain, adding $4.45, to finish at $23.25.

Bargain share prices

Airline stocks had sunk so low recently that a number of experts have been suggesting investors shop for bargains. On Wednesday, for example, UBS analyst Kevin Crissey raised his recommendation to "buy" from "neutral" on six major airlines, including United, Northwest and Delta, citing the enhanced potential for consolidation in the industry during 2008.

"We believe the announcement of a major merger is more likely than not in the next six months," the analyst said in a report, adding that "a Delta/Northwest combination looks most likely."

Also Wednesday, JPMorgan analyst Jamie Baker upgraded UAL shares to "overweight," saying that while there's plenty of reason for caution, the stock has been sold off to a level that "we can no longer resist."

Meanwhile, Delta's unionized pilots met this week to address merger possibilities involving the carrier. Airline consolidation "may indeed be at our door," Lee Moak, chairman of the pilots union, told members in a letter posted Wednesday on the union's Web site.

Thursday's Journal item simply served to crystallize the growing sentiment that an airline-industry merger might at last be preparing for takeoff.

The talk last peaked in October, when a hedge fund that owns relatively modest stakes in UAL and Delta sent a letter to the latter, urging it to explore a combination with United. That letter was leaked to the press, and a wire service later proclaimed it had confirmed UAL and Delta were in active merger talks, but within hours both airlines publicly denied that.

However, Delta directors did create a committee and hire advisers last autumn to look into strategic options for the carrier, "including potential consolidation transactions."

A number of experts think a Delta/Northwest merger is more likely than a UAL/Delta one, because Delta's board in August tapped Northwest's former chief executive, Richard Anderson, to succeed Gerald Grinstein as Delta's CEO.

UAL CEO Glenn Tilton is among the most prominent backers of industry consolidation. In September he told the Tribune that he believes United needs a large-scale merger to remain a global player.

UAL Chief Financial Officer Jake Brace sounded the same theme at an investor conference in New York in early December.

"We are not standing around waiting for consolidation to happen," Brace said. "We're interested in that. But we're focused on our business plan."

Talk that a deal needs to happen soon or risk facing less receptive regulators in Washington under a new administration is just "idle speculation," Brace told the group. "Nobody really knows."

A UAL spokeswoman declined to comment on the Journal story, saying that while "our position on the need for consolidation generally in the industry is well known ... we don't comment on rumors or speculation."

Delta and Northwest representatives declined to comment.