American and Northwest in Talks?
By Matt Paolucci

According to folks familiar with the situation, AMR Corp. (AMR), the parent of American Airlines, has approached Northwest Airlines (NWAC) regarding the possibility of a merger, though the talks still seem to be in the early stages.

A Northwest-American combo would help Fort Worth, Texas-based American keep pace with United in terms of size and help solidify its weak Asia presence, while increasing Northwest's footprint in Latin America.

No deal was imminent, sources say. Northwest has a current stock market value of roughly $2.5 billion. American's market capitalization is $4.2 billion.

Airline industry analysts and employees had long expected AMR to explore a possible bid with Northwest, especially after UAL announced its intentions to buy US Airways.

Sources say Northwest was willing to talk to AMR only if American was willing pay top dollar. Attractive assets at the Eagan, Minnesota-based carrier include strong Asian routes, hubs in Minneapolis and Detroit, and an alliance with KLM Royal Dutch Airlines (KLM).

News of the possible link-up sent shares of Northwest up $6.38, or almost 22 percent, to $35.44, while shares of AMR lost $1.19 to $28.25 in late NYSE trading.

A deal between the two carriers isn't that surprising. Most observers believe if American or Delta Air Lines (DAL) want to do a deal; they would want to be on the same regulatory timetable as UAL-US Airways rather than allowing rivals to obtain approval first.

Spokespersons from both companies declined to comment.

Airline industry analyst James Higgins of Donaldson, Lufkin & Jenrette, said he thought a deal between AMR and NWAC would have eventually been announced, but said completion of such a transaction may be a bit more difficult.

Higgins said looking at Northwest in terms of cash flow (EBITDA), the carrier would actually be worth less than what it currently trades for. But basing the deal on a multiple of NWAC's peak earnings, the company may be worth somewhere in the neighborhood of $50 per share.

Just like the UAL-US Airways combination, an AMR-NWAC transaction would require the approval of the U.S. Department of Justice. A Northwest deal could be more difficult than the UAL merger because it owns a majority stake in Houston-based Continental Airlines Inc. (CAL).

Opposition from powerful airline unions could also make a deal more difficult to complete.