US Airways Looks to Delta For Takeoff
Carrier bids $8 billion for the bankrupt airline
Why would anybody want to buy a bankrupt airline? Well, there are lots of good reasons, as US Airways CEO Doug Parker is well aware. Parker used to run America West Airlines until it merged with US Airways, which was in bankruptcy at the time. The new US Airways has since become one of the most profitable carriers in the industry.
Now Parker wants to work the same magic with Delta Air Lines, in bankruptcy since 2005. Last week, US Airways announced an $8 billion cash-and-stock bid that would create one of the world's biggest carriers, with 350 destinations. The merged route structure would pair US Airways' 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 US Airways-America West deal, which was set in motion while US 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."
Bankruptcy, for example, makes it easier to rejigger company assets. Parker says a US Airways-Delta hookup could result in $935 million in annual savings through "network rationalization synergies." Translation: cutting back on unprofitable routes and repositioning aircraft to make the overall 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 its fleet and get rid of older, fuel-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 $710 million more in annual savings from consolidating information systems, airport and maintenance facilities, and vendor networks.
Delta's creditors stand to gain. Parker says his offer "fully values Delta" and would offer its creditors a better deal than if the carrier emerged from bankruptcy on its own. (The combined airline would be called Delta.) Unless Grinstein can come up with a better offer for creditors, they may insist on a deal.
No dice. There's one small problem with the deal: So far, Grinstein and some of his Delta supporters aren't interested. Grinstein has spurned merger talks with US Airways, insisting that the airline's own analysis shows it will be stronger coming out of bankruptcy as a stand-alone airline.
The US Airways-Delta tango may be just the first dance. Even after years of downsizing, many analysts still believe the big network carriers have too much capacity, a major barrier to sustained 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 pairings could include American and Northwest, now in bankruptcy, as well as Continental and another carrier. And US Airways-Northwest is plausible, should Delta continue to spurn the advances of Parker.
Southwest, though, is most likely to remain independent. As the healthiest carrier, it has little impetus to crowd its skies.
This story appears in the November 27, 2006 print edition of U.S. News & World Report.
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