Delta, USAirways, and Bankruptcy: Why It Fits
Why would anybody want to buy a bankrupt airline? Well, there are lots of good reasons, as USAirways CEO Doug Parker is well aware. Parker used to run America West Airlines until it merged with USAirways, which was in bankruptcy at the time. The new USAirways has since become one of the most profitable in the industry.
Now Parker wants to work the same magic with Delta Air Lines, which has been in bankruptcy since 2005. The $8 billion cash-and-stock bid would create one of the world's biggest carriers, with 350 destinations. The merged route structure would pair USAirways' strengths in the Northeast and Southwest with Delta's transcontinental and international routes, a complementary outcome that regulators would probably approve. And there's big money behind the deal: Citigroup has offered to provide $7.2 billion in financing.
Then there is bankruptcy, which provides advantages that wouldn't exist in a conventional deal. In a letter to Delta CEO Gerald Grinstein, Parker repeatedly referred to lessons learned from the U.S. Airways-America West deal, which was set in motion while Airways was deep in bankruptcy and finalized the day it came out. Parker stressed the need to exploit bankruptcy provisions: "Unless we act quickly to pursue a combination through the actions that can be taken during Delta's bankruptcy process, our respective stakeholders will not be able to realize what we believe are substantial economic benefits from such a combination."
Here are some economic benefits Parker is talking about:
Bankruptcy makes it easier to rejigger company assets. Parker says a USAirways-Delta hookup could result in $935 million in annual savings through "network rationalization synergies." That would mean cutting back on unprofitable routes and repositioning aircraft to make the systemwide fleet as efficient as possible. Solvent carriers have a hard time killing routes or returning unneeded jets to lessors. But bankruptcy provides legal cover for renegotiating contracts and other commitments. The combined airline could maximize use of the newest, most efficient jets in the overall fleet, for instance, and get rid of older, gas-guzzling planes or those that are the wrong size. Parker pointed out that analysis prior to the America West merger identified $250 million in possible network synergies. In 2006, he says, actual savings have been closer to $425 million.
It's also easier to combine back-office operations. Parker sees an additional $710 million in annual savings from consolidating information systems, airport and maintenance facilities, and vendor networks. Again, bankruptcy makes it easier to renegotiate vendor and supplier contracts.
Creditors stand to gain. Parker says his offer "fully values Delta" and would offer the airline's creditors a better deal than they would get if the carrier emerged from bankruptcy on its own. Unless Grinstein can come up with a better offer for creditors, they may insist on a deal.
There's one small problem with the deal: So far, Grinstein and some of his Delta supporters aren't interested. Until now, Grinstein has spurned merger talks with USAirways, insisting that the airline's own analysis shows it will be stronger coming out of bankruptcy as a stand-alone airline. Now he needs to make a very public and compelling case for why that is so.
If the deal does happen, more may follow. Even after years of downsizing, many analysts still believe the big network carriers have too much capacity, a major barrier to sustained airline-industry profitability. And with several airlines beginning to recover their health, investors may be more willing to finance deals. United Airlines CEO Glenn Tilton has been particularly vocal about the need for his airline to expand its footprint and has hired Goldman Sachs to explore merger or acquisition possibilities. Other airlines have less cash but might be forced to scramble for partners if the USAirways offer sets off a consolidation wave.