Delta-Northwest Deal Could Be in Jeopardy

Updated from 4:31 p.m. EST

CHARLOTTE, N.C. -- The proposed merger between Delta ( DAL) and Northwest ( NWA) faces a potential collapse, sources say, for an unusual reason -- Northwest's pilots want to arbitrate seniority.

Delta pilots oppose arbitration, which was shown in the 2005 merger between US Airways ( LCC) and America West to be an unreliable method to protect pilots from severe career disruptions.

In the effort to merge Delta and Northwest, "there is a solution still to be had," said a person familiar with the situation. "The door is still open, but not forever. If Delta passes its time line, it will just move on." The window of opportunity is a couple of weeks, the person said.

Delta executives, in a memo to employees late Tuesday, declared that they haven't been able to put together a satisfactory merger agreement.

"To date, we have not arrived at a potential transaction that meets all of our principles," the memo, signed by CEO Richard Anderson and President Ed Bastion, read. "Rest assured that we will not complete a transaction unless all of these conditions are met. We have a strong stand-alone plan. We will maintain our attention on executing that plan while we continue to look at strategic alternatives."

The memo listed five requirements "that have to be met if there were to be consolidation with another airline." Among them is this: "That the seniority of our people is protected."

Additionally, the executives will require any combined airline to be called Delta and headquartered in Atlanta, that employee and retiree pension plans are maintained, "that the network is strengthened and our plans for international expansion are accelerated" and that "that there is even greater job security along with more career opportunities for our people."

The memo didn't mention Northwest or any other airline by name. In fact, Delta has never formally acknowledged that it is talking with Northwest, although the talks have been widely reported.

Before entering intense merger discussions with Northwest, Delta spoke with UAL's ( UAUA) United and with Continental ( CAL), sources say.

When the Northwest deal began to fall into place, the two carriers sought to secure a pilot agreement in advance of their proposed merger, partially due to the close relationship between Delta and its pilots and partly due to a desire to avoid the pitfalls of the merger at US Airways.

There, seniority integration went to arbitration, and the arbitrator ruled that hundreds of pilots with 15 or more years at the former US Airways should be junior to pilots with just a few years at America West. The ruling led to a bitter dispute that now has pilots preparing to vote next month on whether to oust the Air Line Pilots Association as their representative.

In the Delta and Northwest pilot seniority integration effort, the principal problem is that many Delta pilots are younger, with fewer years of service than many Northwest pilots, yet have higher relative seniority due to attrition at the Atlanta-based carrier.

Also, while Delta pilots have a single leadership group, Northwest pilots have two -- the chapter leadership and a merger committee. It's unclear whether the two groups are in full agreement. They concurred on a package that includes pay increases for all pilots, but the merger committee wants an arbitrator to resolve seniority issues.

ALPA merger policy offers little assurance that seniority will be protected in arbitration, says aviation labor law attorney Lee Seham. He represents the U.S. Airline Pilots Association, which is seeking to replace ALPA at US Airways.

In the US Airways pilot seniority hearing, the attorney for the America West pilots argued that seniority had been eliminated from ALPA merger policy in 1991 and therefore should not be considered. That argument appears to have strongly influenced the arbitrator's ruling, he says.

"In ALPA merger policy, seniority suffers from a negative legislative history, because if a seniority integration factor that was once recognized is later excised from the policy, that sends a loud message to the arbitrator," Seham says, adding that Northwest pilots " should not relegate their members to a crapshoot."

The arbitrator also took the position that US Airways, operating under bankruptcy protection, was in imminent danger of collapse. That wouldn't be a factor in Delta and Northwest arbitration.

The market has shown concern about Delta and Northwest since pilots failed to reach a deal over the weekend. On Monday, the Amex Airline Index rose slightly, but shares in Northwest lost 2.8%, while Delta fell 1.5%, partially reflecting investor doubts about the likelihood of a merger. All three declined on Tuesday.

"This is definitely working at its own pace," says William Swelbar, a researcher at MIT's International Center for Air Transportation. "But in the end, I am going to be surprised if Northwest pilots stand in the way of a deal."

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