US Airways launches $8bn move for Delta

US Airways launches $8bn move for Delta
By Doug Cameron in Chicago
Copyright The Financial Times Limited 2006
Published: November 15 2006 11:39 | Last updated: November 15 2006 13:25



US Airways on Wednesday announced an unsolicited $8bn offer for Delta Air Lines in a move expected to trigger a round of consolidation activity in the domestic airline industry.

The announcement marks the second time in 18 months that Doug Parker, US Airways’ chairman and chief executive, has sought to acquire an airline out of bankruptcy and transform his existing operation.

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Mr Parker’s America West operation led the acquisition of the old US Airways last year. Adding Delta would create the largest US airline, overtaking American Airlines. The merged US Airways/Delta would have forecast 2006 revenues of nearly $29bn. Delta said it wanted to remain as a stand-alone carrier and exit bankruptcy in mid-2007, when US Airways would like to complete a deal if it secures backing from unsecured creditors.

United, the current number two, is among those that have already approached Delta in the recent past about a possible merger. And although many private equity groups are currently looking to withdraw from the sector, bankers said there could also be interest in Delta and other major carriers from financial buyers if the regulatory climate changed.

Crucially, US Airways said it believed there would be no antitrust problems from the proposed combination, which would use the Delta brand.

The US Department of Justice blocked an attempt by United to acquire the old US Airways in 2000 on competition grounds, scuppering another proposed combination between American and Northwest. Industry executives such as Glenn Tilton, United’s chief executive, have suggested the regulatory climate has now changed to permit mergers that create a financially sustainable US airline industry.

The major US airlines have lost close to $50bn and shed 200,000 jobs since 2001 as fierce price competition combined with high costs and debt loads to push United, Delta, Northwest and US Airways – twice – into bankruptcy protection.

Intense cost-cutting and other restructuring efforts will see the largest carriers rebound with net profits of more than $1bn this year if fuel prices continue to fall, the first surplus for the sector in six years.

However, even this fragile recovery may be threatened by growing discontent from labour unions over the distribution of earnings, with the new head of the US pilots’ union calling for a tougher stance by labour.

US Airways has yet to complete the integration of the legacy and America West workforces, and labour integration has been the most common source of problems during previous airline mergers.

Delta, which filed for bankruptcy protection in September 2004, is unique in that only its pilots are unionised and it has already shrunk its network and shed 12,000 staff while in Chapter 11 protection.

Mr Parker said in a letter to Gerald Grinstein, Delta’s chairman and chief executive, that there would be no compulsory job losses, though he made no indication that unions have been consulted.

Mr Grinstein said: “We received a letter from US Airways this morning and will of course review it. Delta’s plan has always been to emerge from bankruptcy in the first half of 2007 as a strong, stand-alone carrier. Our plan is working and we are proud of the progress Delta people are making to achieve this objective.

“The Bankruptcy Court has granted Delta the exclusive right to create the plan of reorganisation until February 15 2007. We will continue to move aggressively towards that goal.”

Mr Grinstein is expected to retire next summer, but had indicated he saw Delta’s future as independent. Robert Milton, the head of Air Canada’s parent company, is among those understood to have been sounded out to succeed him.

The combination of America West and US Airways married two networks in the east and west of the country, and added US Airways’ transatlantic operation. Delta has expanded its international business by more than 20 per cent over the past year, transferring aircraft from domestic routes to serve Europe and Latin America.

While private equity is withdrawing from the sector, US Airways said it had secured $7bn in funding from Citigroup to back its cash and stock proposal, which would leave Delta’s unsecured creditors with 45 per cent of the enlarged company. Delta’s stockholders have been effectively wiped out by the bankruptcy.

FT VIEW

Doug Cameron, Chicago Correspondent, writes:

The new Democratic leadership in Congress is likely to oppose US Airways’ plan despite Doug Parker’s reassurances to workers and consumers, and the profound changes which the industry has undergone over the past two years. Mr Parker contends timing is everything, but the timing couldn’t be worse from a regulatory point of view.