Walker has agreed to drop his GOP registration, and Mallot will also run as an independent (though he'll keep his party affiliation), meaning that Democrats won't formally field candidates in either race. (The two posts are nominated separately but run together in the general, so Democrat Hollis French also had to consent to giving up his bid for the second slot, as did Walker's original running mate.) But the move, which followed extensive negotiations, actually gives the party a much better chance at unseating the unpopular Parnell.
Polls had shown Parnell surviving a three-way race against both Mallot and Walker in spite of his weak approval ratings, simply because the anti-incumbent vote was getting split between two alternatives. But in a two-way matchup with Walker, Parnell looked a lot more vulnerable—much more so than in a direct head-to-head with Mallot, which is why Walker will get top billing. (Presumably, Walker has more crossover support as a former Republican.) In fact, last month, PPP found Parnell up just 41-40 on Walker, and a new Walker internal poll had Parnell trailing 43-30.
And Parnell definitely has some serious problems: He lacks charisma; his poor outreach efforts have cheesed off legislators in his own party; and he even crossed the local chambers of commerce (normally staunch Republican allies) when he refused to expand Medicaid. And in pushing for a huge tax cut for oil companies that was very nearly turned back by voters in last month's primary, Parnell showed he was on the side of BP, Conoco, and Exxon—and not Alaska.
In fact, it was that tax cut that inspired Walker to run against Parnell in the first place, so you know he's no rank-and-file Republican. He also supports Medicaid expansion and is pro-union. Undoubtedly there are areas where Walker won't be sympatico with Democrats, but he's united with them on the biggest issue of all: beating Sean Parnell.
A Republican loss in a state as red as Alaska would be a huge blow indeed, and that just got a whole lot likelier this week, which is why Daily Kos Elections is changing our rating on the race from Likely R to Lean R. Alaska's strong Republican lean might yet save him, but Parnell can definitely lose.