Did High Fuel Costs Nix Airline Deals?

CHARLOTTE, N.C. -- In the end, if this is the end, rising fuel costs may have ultimately halted merger talks between Delta (DAL Quote - Cramer on DAL - Stock Picks) and Northwest (NWA Quote - Cramer on NWA - Stock Picks).

In a letter this week to members of the Northwest chapter of the Air Line Pilots Association, union leaders said rising fuel costs increased their belief that they acted wisely in rejecting a case for seniority integration proposed by Delta pilot negotiators, since that case had been buttressed by growth expectations.

"Oil at $113 a barrel puts things into sharper perspective," the Northwest leaders wrote, not mentioning Delta by name. "What if the other management's aggressive business plan isn't workable at oil above $110? Will they even take delivery of the many aircraft on option, especially the less fuel-efficient ones?"

Meanwhile, at the JPMorgan transportation conference Tuesday, Delta President and CFO Ed Bastian unveiled a plan to reduce Delta's fleet by up to 45 aircraft and also to lay off at least 2,000 workers. Delta became the first mover on layoffs, even as it had been seen as the first mover on consolidation. "In this industry, as in most industries, speed and agility win," Bastian said.

Regarding the Delta move, aviation consultant Robert Mann says that "when carriers take proactive measures that are this aggressive, it becomes clear that they are actively moving on" from seeking a merger. "It looks like everybody's engaged in plan B, which is self-help," Mann added. "In the absence of a collective plan, you do what you need to do independently."

In an unprecedented arrangement, Delta pilots had been empowered by management to seek a pilot agreement before the airline committed to a merger. Although Delta and Northwest pilots managed to negotiate a tentative joint contract in record time, they were stymied in their efforts to concur on seniority integration.

Integration becomes far easier as airlines add new planes. Growth can make captains of first officers and widebody captains of narrowbody captains. But in their letter, the Northwest pilot leaders asked: "Do we base a seniority list which will affect NWA pilots for the next 30 years on an aggressive business plan and aircraft options over the next few years which may never be implemented?"

To be sure, consolidation is not entirely dead. Hedge funds are pressing the case for mergers without pilot consent, the Northwest pilot leaders wrote. They advised against that course, and suggested that arbitration could be used to resolve the seniority issues. "While not perfect, with the right economic incentive, this approach could get the job done," they wrote.

But Lee Moak, the powerful chairman of the Delta ALPA who crafted the arrangement to involve pilots in the dealmaking, considers arbitration to be unacceptable. (Delta pilots could be hurt in arbitration, because many of them are junior to Northwest pilots.) Moak, in a letter to his members, said pilots could not reach a seniority deal, but noted that if Delta continues to pursue a merger, pilots should remain involved.

At the JPMorgan conference, Scott Kirby, president of US Airways (LCC Quote - Cramer on LCC - Stock Picks), offered a mixed message on the possibility that acquisition efforts have ended.

"It appears consolidation is dead, perhaps," Kirby said, in discussing US Airways' perceived lack of involvement in merger talks. But "given what's happened in the last few weeks, [it] arguably increases the chance that we participate in consolidation if it does happen," he added.