Would a Delta deal affect Salt Lake?
US Airways' $8B bid stirs speculation about consolidation
By Harry R. Weber
Associated Press and
By Doug Smeath
Deseret Morning News
US Airways made a hostile $8 billion bid for Delta Air Lines on Wednesday, ignoring Delta's repeated statements that it isn't interested in a merger.
Photo by:Keith Johnson, Deseret Morning News
A Delta employee works among planes at Salt Lake International Wednesday. A US Airways spokesman says the airline's hostile bid for Delta wouldn't hurt the S.L. hub.
And although the move could start a stampede of competing bids in a long-predicted industry consolidation, a US Airways spokesman said it is not expected to put Salt Lake City's Delta hub at risk.
When US Airways merged with America West in September 2005, the company took on America West's Phoenix hub. But US Airways spokesman Philip Gee said that hub's proximity to Salt Lake City International Airport would not be a problem.
"A Phoenix and a Salt Lake hub can run very complementary to each other," Gee said. He said Phoenix would be considered a hub for connections in the Southwest, and Salt Lake would serve flights that would be more conveniently routed through the Intermountain West.
In addition to Phoenix, US Airways has hubs in Philadelphia and Charlotte, N.C. Delta's other hubs are in Cincinnati and Atlanta, the latter also serving as the airline's headquarters.
Gee also said the company has no plans to change staffing levels, so a merger would not impact employment at the Salt Lake airport. Rather, he said, a merger would open more flight routes to Utah customers. US Airways currently operates seven flights a day from Salt Lake to Phoenix and two a day from Salt Lake to Las Vegas.
Salt Lake airport spokeswoman Barbara Gann said the airport had no comment on the proposed merger.
Gov. Jon Huntsman Jr. told KSL-TV that he received a call from US Airways executives Wednesday morning.
"It was mostly a calming gesture," he said, "and that is, 'We know you're going to be reading about this, but we want you to know that if everything works out and this transaction goes through, that we fully anticipate that things will remain as they are."'
Proposals and impacts
A US Airways-Delta combination is far from a done deal. Analysts said United Airlines' parent company may make its own move to acquire Delta, and takeover bids for Northwest Airlines, which like Delta is being reorganized in bankruptcy court, can't be ruled out.
They also questioned whether US Airways could complete its plan to create the nation's largest carrier, even after a planned 10 percent cut in capacity, on the compacted timeline it is seeking.
"My main question mark is if the politicians and regulators would allow it to happen, because if it did it would probably set off a trend for industry consolidation," Ray Neidl, an airline analyst with Calyon Securities in New York, said of a Delta-US Airways combination.
A US Airways-Delta merger would create a company with about $28 billion in annual revenue, leapfrogging it past the current No. 1 U.S. carrier, American Airlines. The projection is based on revenue figures through the first nine months of 2006. It's unclear how any divestitures would affect a combined Delta-US Airways' revenue.
It also could lead to higher ticket prices for passengers, industry experts said. "With a capacity reduction of 10 percent, fares are going nowhere but up," said Robert W. Mann, an airline consultant based in Port Washington, N.Y.
Rep. James Oberstar, D-Minn., who is set to become chairman of the House Transportation Committee, said he is concerned the combination would reduce competition and increase costs for travelers.
"If the Justice Department on its own does not initiate an antitrust review, I would ask them to do that," he said.
Delta said its goal remains to be a stand-alone company when it emerges from bankruptcy and that it had the backing of its creditors committee when it declined earlier discussions with US Airways. It has yet to file its own plan of reorganization, but has the exclusive right to do so until Feb. 15.
If the deal is completed, the combined airline would operate under the Delta name and serve more than 350 destinations across five continents. The combined company would divest certain assets, including one of the two hourly shuttle services that Delta and US Airways operate between Boston, New York and Washington. US Airways has not decided where the combined company would be based.
Officials at St. George-based SkyWest Inc. said Wednesday they expect their existing contracts with Delta to remain in force.
SkyWest has two subsidiaries — St. George-based SkyWest Airlines and Atlanta-based ASA, which SkyWest bought from Delta for $425 million in 2005. SkyWest Airlines operates as United Express and Delta Connection carriers, and ASA operates as a Delta Connection carrier.
Mike Kraupp, SkyWest Inc. vice president of finance and assistant treasurer, said Wednesday that the company's contracts with Delta have been approved by the bankruptcy court and are meant to survive Delta's bankruptcy.
"We would anticipate that, even if Delta were to merge — and that's a big 'if' — that our contract is a valid, existing contract," Kraupp said.
He said any other carrier that acquired Delta probably would continue to honor those SkyWest pacts. "We think we would be in sort of a 'business as usual' kind of event."
Kraupp also downplayed one analyst's downgrade Wednesday of SkyWest stock. In a note, the analyst said a Delta merger could lead to less business for SkyWest.
"I think there are many different pieces ... of this transaction that need to be investigated," Kraupp said. "As we discuss it with analysts, I think their posture is, because of the unknowns associated with it, they're raising questions and saying, 'Could there be future ramifications?'... I don't think they've formed final, definitive conclusions."
Shares and creditors
As it stands now, Delta's existing common shares are likely to end up worthless when it exits bankruptcy. In most bankruptcy cases, debtholders end up with new shares of the company. That's where the US Airways offer comes in: It is proposing to pay Delta's unsecured creditors $4 billion in cash and 78.5 million shares of US Airways stock after Delta emerges from bankruptcy.
Shares of US Airways Group Inc. rose $8.57, or 16.83 percent, to $59.50 Wednesday on the New York Stock Exchange. Delta Air Lines Inc. shares are traded over the counter.
Doug Parker, chief executive of US Airways, based in Tempe, Ariz., said in an interview he believes Delta's creditors ultimately will see that his offer is fair. "The (bankruptcy) process is designed so that the creditors get the highest possible value for their clients," he said.
Parker said he would anticipate flying with 10 percent fewer planes, but "the plan is not predicated on any job cuts" for the 85,000 employees at the two companies.
Delta Chief Executive Gerald Grinstein said last month he had received "feelers" from UAL Corp.'s United Airlines about a possible merger 18 months ago but quickly rejected them. And he said in a statement Wednesday that "Delta's plan has always been to emerge from bankruptcy in the first half of 2007 as a strong, standalone carrier."
In a memo later to employees, Grinstein was more firm, saying "while Delta is obligated to review this proposal carefully, we remain skeptical that it would make sense to deviate from our plan."
Delta spokesman Anthony Black said the Atlanta airline had no comment beyond the Grinstein's statements.
UAL, based in Elk Grove Village, Ill., sidestepped questions about its intentions but didn't rule out another possible bid.
"We think consolidation is good for the industry," said Jake Brace, chief financial officer, when asked about its plans at a Citigroup investment conference in New York. "If it makes sense for us to participate in it, we will."
One analyst called United the perfect merger companion for Delta, with its trans-Pacific routes and international network matching up well with Delta's strengths on Atlantic and Latin American routes. "If anyone takes over Delta, bet on United," said CreditSights' Roger King.
Morningstar analyst Brian Nelson also said he sees a United pursuit of Delta as a possibility, even though it would conflict with its stated strategy of paying down debt.
Bill Hochmuth, an analyst who tracks airlines at Thrivent Financial for Lutherans, said Northwest Airlines Corp. could potentially be an acquirer, although probably as more of a merger of equals.
US Airways has received a commitment from Citigroup Inc. to provide $7.2 billion in new financing for the deal. The funding would be used to refinance Delta's debtor-in-possession credit facility, refinance US Airways' existing senior secured facility with GE Capital, and provide funds for the $4 billion cash portion of the offer.