Delta cool to US Airways takeover bid
By Peter Pae and Martin Zimmerman
Los Angeles Times
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US Airways Group Inc.'s $8 billion takeover bid yesterday for Delta Air Lines Inc. would create the world's largest carrier and potentially set off a wave of consolidation in the industry.
Delta, the nation's third-biggest carrier, responded coolly to the overture, saying it would study the offer but preferred to remain independent as it attempts to emerge from Chapter 11 bankruptcy protection.
That didn't stop Wall Street from snapping up airline stocks. Shares of US Airways, the nation's sixth-largest carrier, soared almost 17 percent, closing $8.57 higher at $59.50. Bloomberg News' index of airline stocks gained almost 6 percent.
Travelers might not fare as well should the deal go through, some analysts warned.
Many airlines have already cut capacity by taking hundreds of airplanes out of service. By doing so, carriers have been able fill on average 80 percent to 90 percent of the seats on existing airplanes, allowing them to raise fares. The average airfare is up almost 11 percent this year, according to the Air Transport Association, the industry's lobbying group.
With US Airways estimating that it could reduce capacity by 10 percent under the merger, fares could continue to rise.
"From a consumer standpoint, consolidation is not a good thing," said Scott Hamilton, an aviation consultant with Leeham Co. in Issaquah, Wash. "To the contrary — the more competition the better."
But Tom Parsons, chief executive of Bestfares.com, said increases were likely to be limited because of the competition from low-cost carriers such as Southwest Airlines Co., JetBlue Airways Corp. and AirTran Airways Corp.
"It's harder for the legacy airlines to gouge us," Parsons said. He added, however, that capacity reductions will make it harder for families to find deals during peak holiday travel seasons.
US Airways said it is appealing directly to Delta's creditors after being rebuffed by Delta's management.
"We thought about this opportunity for quite a while," US Airways Chairman and Chief Executive Doug Parker said in a videoconference with the airline's employees. "They responded back that they didn't think it was a good idea."
Delta Chief Executive Gerald Grinstein said in a statement: "We received a letter from US Airways this morning and will of course review it." But he added, "Delta's plan has always been to emerge from bankruptcy in the first half of 2007 as a strong, stand-alone carrier."
Parker said a merger of the two airlines could provide a projected $1.65 billion in annual cost savings for the combined companies. He added that the bid was being made now because the projected cost savings could be shaved by half if it waited for Delta to emerge from bankruptcy. Under bankruptcy protection, the airline can cancel or renegotiate aircraft leases. Delta leases about 60 percent of its aircraft.
"We believe that the combination of US Airways and Delta ... is extremely compelling and will create significant value for each of our stakeholders," Parker said. If approved the combined airline would retain the Delta name, he said.
Combining the two airlines would create the world's biggest carrier in terms of miles flown by passengers, with a fleet of more than 800 aircraft serving 350 destinations in five continents. It would be the largest airline at 155 airports.
Under the terms of the offer, Delta creditors would receive $4 billion in cash and 78.5 million US Airway shares, valued at about $4 billion based on Tuesday's closing stock price.
US Airways said it has obtained $7.2 billion in committed financing from Citigroup.