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November 15, 2006
US Airways Bids $8 Billion for Delta
By JEREMY W. PETERS
US Airways offered today to acquire Delta Air Lines, now under bankruptcy-court protection, for $8 billion.
The combined company would carry more passengers each year than any other airline in the world, eclipsing American Airlines, the current leader.
The offer, extended to Delta’s bankruptcy lenders, is an attempt by the chief executive of US Airways, W. Douglas Parker, to circumvent Delta’s top management, who rebuffed two earlier approaches from Mr. Parker about merging the two airlines.
In a letter today addressed to Delta’s chief executive, Gerald Grinstein, Mr. Parker said he was disappointed that the two executives could not reach an agreement.
US Airways said today that it is offering $4 billion in cash, plus US Airways stock that was valued at $4 billion at the close on Tuesday. That price would represent a substantial premium for Delta’s creditors over what the airline’s unsecured debts now trade for. The creditors would own about 45 percent of the combined company.
Today, shares of US Airways jumped $8.57, or 16.8 percent, to close at $59.50 on the New York Stock Exchange. Other airline stocks including Continental and Airtran Holdings also rose.
A Delta-US Airways merger would further consolidate an industry that has already shrunk considerably — and painfully — over the past five years. Rising oil prices, plummeting profits, a wave of bankruptcies and disruptive labor strife have roiled the nation’s airlines since the Sept. 11 attacks. And as the old-line carriers have struggled to cope with an onslaught from low-fare airlines like JetBlue and Southwest, analysts have predicted that there would be fewer airlines flying over American skies by the end of the decade.
US Airways said the merger would save at least $1.65 billion in operating costs each year by combining facilities at some airports, eliminating overlapping flights and cutting capacity by about 10 percent.
Mr. Parker said in a conference call with analysts and reporters this morning that the figure could be even greater. “This is not value that either of our companies could create independently,” he said. “This only happens when the companies get together, and that’s why this is so important.”
Mr. Parker contacted Mr. Grinstein this spring to suggest a merger, but Mr. Grinstein resisted the idea. At the time, he said he felt that Delta preferred to reorganize and emerge from bankruptcy on its own, according to reports. Mr. Parker said he tried again in September, but was once again rebuffed.
“I was disappointed that you declined to meet or even enter into discussions in your letter of October 17, 2006,” Mr. Parker said a letter to Mr. Grinstein, dated today, that was included in the news release announcing the proposed acquisition. “Because the benefits of a merger of US Airways and Delta are so compelling to both of our companies’ stakeholders, we believe it is important to inform them about our proposal.”
Today, Mr. Grinstein again dismissed the idea of a merger. “Delta’s plan has always been to emerge from bankruptcy in the first half of 2007 as a strong, stand-alone carrier,” he wrote in a statement posted on Delta’s Website. “Our plan is working, and we are proud of the progress Delta people are making to achieve this objective.”
Under the terms of the deal that US Airway proposed today, the new airline would adopt the Delta name, with Mr. Parker as chief executive leading a combined management team. Nothing was said about a role for Mr. Grinstein.
Many analysts have been saying for years that the United States airline industry suffers from overcapacity. Several of the largest carriers have touched down in bankruptcy court in recent years, with Delta and Northwest Airlines seeking protection on the same day last year. US Airways itself has filed for bankruptcy protection twice.
As recently as a few years ago, some analysts thought US Airways’ days were numbered, given its high costs and dependence on short-hop routes in the East. The idea that it might someday be in a position to acquire two other airlines was unthinkable then.
But since its emergence from bankruptcy last year, US Airways has undergone a stunning reversal of fortune. It merged with America West in a partnership that greatly extended its domestic reach, and shares of the combined company have risen sharply since then.
The widespread expectation in the industry had been that Delta would find a merger partner after emerging from bankruptcy, not before, and that the airlines it has relationships with now, most notably Northwest and Continental, would be the most likely partners.
US Airways said its offer would yield more value for Delta’s unsecured creditors than Delta could deliver by reorganizing on its own. Delta’s unsecured debt has recently traded at 40 cents on the dollar, US Airways said.
Last year, Delta flew approximately 86 million passengers globally, according to the International Air Transport Association, about 12 million fewer passengers than American. US Airways flew about 37 million passengers.
Both airlines have had problems in recent years with their labor unions, principally the Air Line Pilots’ Association, whose resistance to pay cuts and other concessions was an important factor in forcing Delta into bankruptcy. And both have struggled to cope with low-price competitors like JetBlue and Southwest.
Mr. Parker said he was confident that the merger would be satisfactory to the various labor unions at each airline. He said that when it came to eliminating jobs, US Airways would prefer to do so by leaving vacant positions unfilled rather than through layoffs, he said.
Mr. Parker said he was confident that the proposed combination would pass muster under antitrust laws, though US Airways and Delta are the operators of the two rival shuttle services in the intensely competitive Boston-New York-Washington corridor. Mr. Parker suggested that the combined airline could simply sell one of the shuttle operations to satisfy regulators. “There are no antitrust issues that can’t be resolved,” he said.
Analysts said that a merger between Delta and US Airways could result in a leaner, more efficient airline. “Even though airline mergers tend to be messy while employees, cultures and fleet types are integrated,” said Ray Neidl, an analyst with Calyon Securities, “in the long term a merged carrier should benefit in synergies from revenue generation, the ability to cut overhead costs, and the probability that marginal hubs would be closed.”
Micheline Maynard and Peter Edmonston contributed reporting.
