Delta and America West Could Be Getting Serious

Editor's Note: Holly Hegeman's columns run exclusively on RealMoney.com; this is a special free look at her column. For a free trial subscription to RealMoney.com, click here. This article was published at 12:19 p.m. March 22 on RealMoney.

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It seems that merger talks between Delta Air Lines(DAL Quote) and America West(AWA Quote) have entered a phase that's worth discussing.

Although the airlines have declined to comment on the report I first made in the RealMoney Columnist Conversation on Wednesday, sources inside Delta confirmed that the Atlanta-based carrier is sniffing around Phoenix-based America West. Sources also tell me that some union representatives were given a heads-up by management about the talks.

Not everyone is at the table, though. In an email to me Thursday, the head of America West's pilot union (which is in contract talks with management) said he had not been invited to any discussions.

Let's face it, chatter among the players in this industry is a constant. But my rule of thumb is that when the stock price of the airline supposedly being acquired starts taking off, as America West's did last week, and when I hear there are discussions going on with the labor groups at both airlines, then it's time for the news to come out of the general rumor file.

Come Fly With Me

As for America West, it's been shopped and shopped for years. Back in the spring of 1998, Delta took a hard look at the airline. But then United Airlines(UAL Quote) stepped up to the plate with a bid. Apparently United could never make a proposal palatable to then-AWA Chairman and CEO Bill Franke, and that deal died.

Fast-forward to a couple of months ago. Several sources tell me United was again looking closely at America West -- just before AWA received its guaranteed loan from the government.

I'm told United didn't pursue the deal, but that Delta is still sending flowers and candy.

Thickening the plot, on Wednesday America West announced some hefty balance sheet cleanup items, in addition to reductions in formerly announced capacity growth.

The backoff in anticipated capacity growth was not unexpected. It simply reflects a more realistic estimate of the airline's growth potential -- something that was, perhaps, a little too rosy in the projected numbers the airline gave to the government late last year as part of its loan application.

But as far as cleaning up those pesky balance sheet issues, well, let's just say the timing is rather interesting.

Stay tuned. It's not clear how serious the talks are, but don't forget that as tough as things are in this industry, Delta is still sitting on a $1 billion pile of cash and has a couple of regional airlines it could spin off to raise more cash. It could handily pull off an acquisition like this.

Save Here, Spend There

Investors and analysts who were bouyed by Delta's move to cut base commissions entirely for domestic travel agents should be sobered by the carrier's near-simultanous launch of a stunningly aggressive fare sale. Continental and AMR's(AMR Quote) American Airlines quickly followed suit on cutting commissions, then jumped headlong into the fare fray.

Then, rather than following American's lead in tightening business-class fares, Northwest went after American, slashing fares in several markets where the two compete. Even Southwest Airlines (LUV Quote) got in on the frenzy, offering a reappearance of its hugely successful "Friends Fly Free" campaign in every market it flies.

All of this was great news for passengers but not that hot for investors, or for an industry that saw domestic unit revenues down some 9.6% year-over-year in February, as the Air Transport Association reported late Wednesday.

Recork the Champagne

It's downright comforting in a strange way that after a six-month struggle to recover from the Sept. 11 terrorist attacks, the airline industry is acting more like its usual dysfunctional self these days: dog-eat-dog fare wars, merger whispers, mergers falling apart.

The merger that collapsed this week would have wed Hawaiian Airlines (HA Quote) with privately held Aloha Airlines. When the deal was called off, Wall Street punished Hawaiian's stock on Monday, and it closed down 28% on the news.

The most interesting note about this collapse is that Greg Brenneman, former president of Continental Airlines (CAL Quote), who was also supposed to be the CEO of the merged Hawaiian-Aloha, is now on the loose again and could pop up somewhere else.