April 10 (Bloomberg) -- Delta Air Lines Inc. and its pilots agreed in principle on a contract that would clear the way for a merger with Northwest Airlines Corp. to create the world's largest carrier, people familiar with the talks said.

An accord would raise pilots' pay and give them an equity stake in the combined airline, which would keep Delta's name and Atlanta headquarters, said the people, who didn't want to be identified because the plan is still private. Some terms are still being negotiated, two of the people said.

A proposed merger with Northwest may be announced next week, the people said. Delta, the third-largest U.S. carrier by traffic, is betting that combining with No. 5 Northwest will boost revenue and reduce costs after jet-fuel prices surged 78 percent in the past year.

``With oil at $110 per barrel and the weakening economy, Delta probably got to the point where they felt like they needed to move ahead,'' said Michael Derchin, an analyst with FTN Midwest Research Securities Corp. in New York. ``It always made strategic, long-term sense for these companies.''

The merged company would surpass AMR Corp.'s American Airlines as the world's biggest carrier.

The plan includes a small premium for Northwest investors, three of the people said. Delta Chief Executive Officer Richard Anderson will run the combined carrier, and Northwest CEO Doug Steenland will likely be a board member, the people said.

Seniority Negotiations

Delta and Northwest had been prepared to announce a combination in mid-February, people familiar with the talks have said. Those plans were postponed because the carriers' pilots, represented by the Air Line Pilots Association, weren't able to agree on a way to protect members' seniority rankings after a merger.

To work around the impasse, Delta wants to draw up a new contract with just its 7,000 pilots, said the people. Northwest's 5,000 pilots would be asked to join under a single contract later.

Delta spokeswoman Betsy Talton declined to comment, other than to reiterate that the company's board committee to assess mergers remains active. Tammy Lee, a spokeswoman for Eagan, Minnesota-based Northwest, declined to comment.

Negotiations to create a combined seniority list may take months to complete, the people said.

``It is hard to anticipate Northwest pilots' level of interest in agreeing to an unknown Delta seniority integration proposal,'' said Robert Mann of R.W. Mann & Co. in Port Washington, New York, a consultant for airlines and unions.

Delta jumped 84 cents, or 9.4 percent, to $9.75 at 4:15 p.m. in New York Stock Exchange composite trading. Northwest rose $1.22, or 13 percent, to $10.87.

To contact the reporters on this story: Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net; Mary Schlangenstein in Dallas at maryc.s@kbloomberg.net

Last Updated: April 10, 2008 19:58 EDT