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Clock's Ticking on Delta-Northwest Merger

CHARLOTTE, N.C. -- With the Bush Administration set to end in nine months' time, the clock is already ticking on the anticipated merger between Delta (DAL - Get Report) and Northwest (NWA).

Not only is the devil you know better than the devil you don't know, but there is also no doubt the January 2009 transition in the White House could lead to a delay for such a merger deal, no matter which of the three presidential candidates is elected. The risk of a delay would increase in a Democratic administration, since both of the parties' presidential contenders are considered less sympathetic to airline mergers than Bush is.

While the situation remains fluid, the long-awaited announcement of the Delta-Northwest merger is likely to come Tuesday, a source said. The announcement is just the first step in a process that could take months before regulatory approval and years before the carriers are integrated.

NWA Pilots a Probable Speed Bump

Pilots are one hangup. While Delta pilots are being incented for their support, Northwest pilots remain a wild card, concerned their seniority could be sacrificed if they integrate with younger Delta pilots. The carriers appear willing to bet that the advantage to consideration by the Bush Administration outweighs the disadvantage of partial support from pilots.

Shares in Delta were rising 2.8% to $10.28 in recent trading Monday, while Northwest shares were up 2% at $11.18.

In general, Wall Street takes a positive view on mergers, which not only generate fees, but also promise capacity reductions, synergies for merged carriers and pressure for competitors to merge as well.

In a recent report, FTN Midwest Securities analyst Mike Derchin said the likelihood of a Delta/Northwest deal being announced this week is 80%. A merger would "create a world class network with, we estimate, over $1 billion in revenue synergies," he says. "It will be a merger of equals with a small premium for NWA shares."

Still, with the barriers that remain, it is easy to imagine that late next fall in the waning days of the Bush Administration, the airline industry will be waiting anxiously for an antitrust ruling.

While a favorable ruling is generally considered to be likely, given the minimal overlap between the two carriers and the harsh economic conditions facing the airline industry, objections will get a full hearing.

The Likely Critics

Representative James Oberstar, (D., Minn.), and chairman of the House Transportation Committee, has already said he is opposed. It is Oberstar who, more than any other single person, is responsible for the enhanced maintenance oversight that led to last week's 3,000 flight cancellations by American (AMR).

Oberstar pushed for more oversight of all carriers after whistleblowers with complaints about Southwest (LUV - Get Report) talked to congressional investigators. American got caught in the middle of the ensuing battle between Congress and the Federal Aviation Administration.

Oberstar, it can be assumed, will again assert himself. He "has a very loud voice when it comes to transportation and aviation law," says transportation committee spokesman Jim Berard. "He can use his bully pulpit to shine a bright light on this merger."

Perhaps a goal of the opposition will be simply to slow merger consideration until the Bush administration departs.

Oberstar's relationship with Northwest pilots is a longstanding one, and the International Association of Machinists, the largest union in the airline industry, is also opposed to a Delta/Northwest merger.

The IAM represents about 11,000 agents and ground service workers at Northwest, but there is no assurance that would continue in a merger with Delta, whose agents and ground service workers do not have union representation. Such a merger could "de-unionize the transportation labor movement," IAM General Vice President Robert Roach has said. The IAM, by the way, backs Hillary Clinton.

The airline industry well remembers the "Keep Delta My Delta" campaign from a couple of years ago. Strongly backed by Delta pilots, the employee-led campaign played a big part in preventing a hostile takeover of Delta by US Airways (LCC).

Is everybody ready for "Keep Northwest My Northwest"?

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