The stalled Delta Air Lines (NYSE: DAL) / Northwest Airlines (NYSE: NWA) deal talks should regain momentum next week, provided Delta's management makes progress in talks with its pilots, The Wall Street Journal reported Wednesday (Subscription required).

Further, independent stock analyst C. Leonard Bauer, said that while the Delta / Northwest talks have been stalled at a traditional, formidable hurdle -- pilot seniority and pilot flight schedules -- "the stars now appear to be lining up to get this deal done."

Bauer said that since the talks began, recent data released indicates that the U.S. economy has continued to slow, and is most likely already in a recession -- never a good backdrop for airlines -- which depend on consumer disposable income for a portion of their revenue. Further, oil has resumed its 'regularly scheduled' movement: up, which has increased aviation costs by at least another 10-15%. Or as Bauer put it, "From a fuel cost standpoint, this is no time to fly commercial jets around less than half full." Oil rose $3.71 to $112.21 per barrel -- an all-time high -- Wednesday afternoon after an unexpected decline in U.S. weekly oil inventories.

Both Delta (NYSE: DAL) and Northwest (NYSE: NWA) traded lower Wednesday afternoon amid a broader market selloff. Delta declined 68 cents to $8.67, while Northwest fell 75 cents to $9.41. Bauer added that he does not have a rating on, nor own, shares in either company. Also, due to its complexity and large risk, Bauer does not recommend that typical investors attempt deal arbitrage -- i.e. try to profit from the deal short-term via a speculative trade. If the merger occurs, Bauer said, evaluate the stock as an investment at that time.

Negotiating with an eye on oil

In the latest round of talks, Delta's pilots are being asked to agree to drop selected restrictions in their current labor agreement in order to give the combined airline more flexibility during the first phase of the merger, The Journal reported. In return, Delta's pilots would receive pay raises, equity and a board seat.

"The equity stake and board seat are decent incentives, but I think Delta's pilots now realize their bargaining power is not rising with time," Bauer said. "No one knows where the price of oil is going. Some think it will top at $115 or $120 or so, but what if it rises to $150? Imagine what that would do to airlines' flight costs and operations? I wouldn't want to be a pilot seeking new employment terms at that time."

Bauer added that since Northwest's pilots have a less-generous work agreement than Delta's pilots, he expects Northwest's pilots to reach a new agreement with the prospective new entity relatively quickly after it comes into existence.

Attractive fundamentals

Bauer said the attractive fundamentals that propelled the initial Delta / Northwest discussions remain in-place: absence of city pairs, economies of scale and passenger demand. Delta and Northwest have only 10 or 12 cities pairs that overlap, hence from a destination coverage standpoint the deal is attractive. The new company will also have massive economies of scale and will be a force in the new global market, and the prospects for international travel growth mean the new company probably would not need to announce a major layoff(s), he said.

A Delta / Northwest deal would create the world's biggest airline in terms of traffic, with a broad network that would boost revenue and reduce selected costs, Bauer added. Delta served about 74 million passengers in 2007; Northwest, about 56 million -- ahead of American Airlines' (NYSE: AMR) 129 million passengers.

A global market

Bauer puts the probability of Delta / Northwest deal "at 80-90%." The airline sector, in his interpretation, is in the beginning of its second major transformation, which he believes will involve two or three U.S. airline mergers to create carriers with the resources and planes to serve "the new mass market of this decade, the global mass market."

Any potential U.S. airline merger would be subject to federal anti-trust and national security reviews, Bauer added.