Airline Merger Talks Advancing

Updated from 11:15 a.m. EST

Four of the country's six major airlines are engaged in merger talks that could lead to deals being reached in the next two weeks, according to sources familiar with the discussions.

Delta Air Lines (DAL Quote - Cramer on DAL - Stock Picks) and Northwest Airlines (NWA Quote - Cramer on NWA - Stock Picks) are having ongoing conversations and are believed to be getting closer to an agreement that would join the two sides, while UAL (UAUA Quote - Cramer on UAUA - Stock Picks), the parent of United Airlines, and Continental Airlines (CAL Quote - Cramer on CAL - Stock Picks) have also intensified their talks, the sources said.

In the case of Delta, a stumbling block involving the role of Northwest CEO Doug Steenland has apparently been resolved, sources with knowledge of the matter said.

When companies merge, it's not uncommon for the chief executives to divide the leadership responsibilities, with one taking the CEO post and the other becoming chairman. For Delta and Northwest, the situation is complicated by the role of Daniel Carp, who became chairman of Delta when the carrier emerged from bankruptcy last May.

Since he was brought in to enhance Delta's position, there is a feeling that he should remain because of the progress the company has made, a source said. Steenland has apparently accepted the idea that Carp and Delta CEO Richard Anderson will retain their current posts in a new company, the source indicated.

The resolution of the leadership issue was first reported in The Wall Street Journal.

A tie-up between the carriers would provide Delta, who is trying to become the leading U.S.-based international airline, with a mature route system to Asia, which it currently lacks. Additionally, it would formally combine two carriers who are part of the global Skyteam alliance.

Individually, the two are partners of European carriers Air France and KLM, who merged to create Air France KLM(AKH Quote - Cramer on AKH - Stock Picks). Already, the four airlines have sought joint antitrust immunity from the Justice Department.

As for United and Continental, their discussions, initiated over a year ago, are more complex.

They too have stalled over leadership issues, said a source. At the same time, Northwest's ownership of preferred stock that gives it the right to block various Continental merger transactions has been a hindrance. However, Continental can purchase the stake if Northwest enters into a merger transaction, even if the deal subsequently doesn't occur.

United has repeatedly demonstrated that it's eager for a merger, indicating that it might make concessions to ensure that one occurs.

Still, a variety of obstacles could get in the way of any dealmaking. Among them, regulatory clearance, far from a given, is required. And in order to ensure a smooth approval process, the carriers would have to negotiate with unions, particularly pilots, to garner support.

Moreover, two of the top six carriers, AMR's(AMR Quote - Cramer on AMR - Stock Picks) American Airlines and US Airways(LCC Quote - Cramer on LCC - Stock Picks) appear to be being left out. Were the other two mergers to occur, American, now the world's largest carrier, could slip to No. 3.

American, which also lacks critical mass in Asia that is only partially overcome by a code-share agreement with Japan Air Lines, has pursued Northwest in the past. Should it to do so again, different merger scenarios than those currently being contemplated could unfold.

For instance, Delta has also talked with United, and earlier, with Continental. Additionally, United and US Airways, both Star alliance members, sought to merge in 2000, and US Airways CEO Doug Parker has been a strong advocate of consolidation.

The current flurry of activity reflects the perception that it would be best to move soon, allowing sufficient time for Bush administration regulators to consider a deal. Otherwise, the airlines will have to wait until leadership that might be more reluctant about consolidation enters the White House.

Shares of most airlines were moving higher as the merger speculation gathered momentum. UAL was up 1.3%, and US Airways was adding 0.7%. AMR surged 5.4%, while Continental climbed 4.6%. Delta was tacking on 0.4%.

Northwest was sitting out the rally, slipping 0.1%.