United Airlines and Delta Air Lines have 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, according to an official with knowledge of the talks.
The reported talks come as all airline executives are wrestling with the implication of oil prices hovering close to $100 a barrel. That has sharply boosted jet fuel expenses - and accelerated a search for ways to cut costs, which typically are the result of airline takoevers.
Earlier Wednesday, Delta said its board established a special committee to work with management to review and analyze strategic options for the airline. Top executives have said recently they are trying to determine whether consolidation makes sense for Delta.
Delta issued a statement denying "published reports that it had engaged in merger talk with United." CEO Richard Anderson was quoted as saying, "There have been no talks with United regarding any type of consolidation transaction and there are no such ongoing discussions."
United called the report of recent talks "wholly inaccurate."
The Wall Street Journal's online edition, citing unidentified people, reported Wednesday that Anderson has informally talked about consolidation possibilities with counterparts at other airlines, including senior executives at United and Northwest Airlines.
Then-Delta CEO Gerald Grinstein said during a stop in New York on Oct. 12, 2006, that he had previously received "feelers" from United about a possible merger.
There is a sense of urgency in the most recent talks, which have been going on for some time and continued as recently as a week or so ago, the official with knowledge of the talks said Wednesday. The official spoke on condition of anonymity because the person was not authorized to speak publicly. The official stood by the assertions about the talks after learning of the statements by Delta Air Lines Inc. and United, a unit of UAL Corp.
"They want to get something done before a new administration gets in and so they get the clock ticking on" federal regulatory approval, the official said.
Financial details were not clear. But the talks involve United being the name of the combined airlines, the headquarters staying in Chicago and Delta's Atlanta hub being an operational center for the two carriers, the official said. One possible scenario involves Delta's Anderson being the chief of the combined airline, the official said.
Delta also has had talks with other airlines, the official said, without specifying which airline or the status of any such talks.
Shares of Delta rose 77 cents, or 4.1 percent, to $19.52 in trading Wednesday while UAL shares gained 67 cents, or 1.5 percent, to $44.17.
When Anderson was named in August as Delta CEO to replace Grinstein, there was immediate speculation in the investment community that Delta and Northwest might eventually merge. Anderson is a former CEO of Northwest Airlines Corp.
Anderson immediately tried to dispel such speculation, telling Delta employees he wasn't coming to Delta to facilitate a deal with Eagan, Minn.-based Northwest.
Delta's initial statement Wednesday about the establishment of a board committee followed the release of a letter by a hedge fund that owns 7 million Delta shares that called on the airline to consider combining with UAL.
Pardus Capital Management LP said in the letter to Delta's top management that it is "imperative" that the company undertake a merger transaction with another airline in view of soaring fuel prices and what it described as the increased risks of going it alone.
"Consolidation is needed to de-risk the industry and time is of the essence as now is the right regulatory environment," said Karim Samii, president of Pardus, and Shane Larson, a principal.
The hedge fund executives said they had determined since making a similar recommendation in a Sept. 7 letter that "the most attractive and practical combination would be a Delta and United Airlines combination."
It cited figures from a consulting firm estimating that the benefits of such a pairing would be about $585 million and said a combined Delta-United would boast a broader network than any other combination.
Pardus also owned 5.6 million shares of Chicago-based UAL as of Sept. 30.
Pardus executives said a Delta combination with Northwest would produce even bigger benefits of about $1.5 billion, primarily from combining the smallest hubs - Detroit/Cincinnati and Memphis/Atlanta.
"However, Northwest may not enable Delta to complete the breadth of network that business travelers require, resulting in the need for a potential follow-on transaction at a later date in order to achieve the same breadth of network that UAL would provide out of the box."
Pardus, citing information provided by the air transport consultancy Simat, Helliesen & Eichner Inc., said a third potential combination, with Continental Airlines Inc., would produce no synergies and would raise other challenges.
Robert Mann, an airline consultant in Port Washington, N.Y., said United's broad Pacific network and Delta's huge Atlantic presence would complement each other. However, he said, combining fleet information systems and labor could pose challenges. The biggest problem would be that neither carrier has any recent track record of integration, he said.
"I would see this as a very risky move from the standpoint of the actual implementation," Mann said. ( AP )