Merger Talk Sends Airlines Soaring

Updated from 1:49 p.m. EST

CHARLOTTE, N.C. -- Airline stocks closed sharply higher Thursday, as renewed speculation that consolidation is close at hand lifted the major U.S. carriers.

Delta ( DAL) primed the pump because its board will meet Friday in New York to discuss whether to give CEO Richard Anderson permission to begin talks with Northwest ( NWA) and UAL ( UAUA), the parent of United Airlines, said a person familiar with the situation.

Although hedge funds have repeatedly pressured Delta's board to consider a merger, "the combination of tighter credit, the darkening earnings outlook and rising fuel prices" may have made the board more receptive to the possibility than it has been in the past, the person said.

The first report of Friday's meeting appeared in The Wall Street Journal. That enhanced the level of airline merger chatter that was triggered Thursday by the release of a letter to Delta pilots from Lee Moak, chairman of the Delta chapter of the Air Line Pilots Association.

"While we have been hearing about 'inevitable consolidation' for many years, it is becoming increasingly difficult to discount these facts and other recent events as simply more rhetoric," Moak wrote. "Consolidation may indeed be at our door."

Shares of all three carriers climbed sharply. Delta rose 18% to $15.98, and Northwest gained 32% to $15.85. UAL was rising 24% to $23.66.

At the same time, AMR ( AMR),the owner of American, was up 13% to $13.26, and Continental ( CAL) advanced 24% to $23.25. US Airways ( LCC) was up 15%.

Discount airlines JetBlue ( JBLU) and Southwest ( LUV) were also higher, but not as dramatically as the network carriers.

In most consolidation scenarios, Delta is an acquirer, and Northwest is considered its likely partner. Were the two to hook up, attempts at other combinations could follow.

A complicating factor comes in the form of a deal, dating back to 2000, under which Northwest owns a stake in Continental. The position gives Northwest the ability to vote against any merger attempt Continental makes. However, were Northwest to enter into an agreement with another carrier, it could lose it its right to block a Continental merger.

The pact between the two carriers was reached after the Justice Department sued to block Northwest's 1998 purchase of controlling interest in Continental.

Under the DOJ arrangement, Northwest sold most of its shares but retained preferred stock in Continental. The preferred stock can be redeemed, and the blocking rights eliminated, if Northwest enters into any agreement involving a merger with a major carrier, a transfer of 25% of a major carrier's shares to Northwest or a transfer of 25% of Northwest shares to another carrier.

At a Thursday meeting, Delta pilots were expected to elect a merger committee. Already, pilots maintain a merger fund with a $1 million balance and retain legal counsel specializing in mergers and acquisitions,

Moak said in his letter that he continues to support consolidation that benefits Delta and its pilots.

"Nothing less can justify a change in the status quo," he said. "Any attempt at consolidation will fail without the active involvement and support of the pilots from the earliest formative stages of the effort."