General Lee
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In the two months since US Airways Group's brash, young CEO Doug Parker, launched a quixotic $8.7 billion bid for bankrupt Delta Air Lines, many airline industry watchers felt that Parker's gambit was starting to lose momentum. For one, when Delta's own management team filed its business plan with the bankruptcy court in December, it valued Delta at potentially more than Parker had offered to pay. And his own comments to reporters in late December that he didn't intend to revise his original offer raised questions about whether the 45-year-old Parker had the stomach for a protracted takeover battle.
But now it's clear he does. On Jan. 10, Parker sweetened his original offer by another 28%, to $10.2 billion. That bold move is certain to appeal to Delta creditors, who in turn are likely to exert pressure on Delta's board to accept US Airways' (LCC) offer over that of its own management team. "There's no comparison between the two plans," says an attorney representing one group of Delta creditors, who will become shareholders when Delta emerges from bankruptcy. "Delta's plan makes all sorts of aggressive assumptions about the future. Most of the creditors just want cash, and US Air is offering more of it."
Still, even if creditors like to see cash on the table, US Airways faces a daunting obstacle course in Washington, where the Justice Dept. would assess competitive issues posed by such a large airline and key politicians have made disapproving noises about the consequences for consumers.
Northwest to the Rescue?
For its part, Delta officials said that while it would consider Parker's latest bid—which consists of $5 billion in cash, and roughly 90 million US Airways shares—the Atlanta-based carrier noted the higher offer "would increase the debt burden of the combined company by yet another $1 billion," to the highest in the airline industry. In a conference call with analysts, Parker said the debt burden would still be manageable, given the greater revenues of a combined Delta-US Airways. "This company is a lot bigger, of course, it has more debt and it makes a lot more money," he said.
And analysts believe that Delta may have a hard time going it alone. "This paints Delta into a corner," says Robert Mann, a New York-based aviation consultant. "The US Airways offer is going to be extremely attractive to the creditors committee."
To avoid the clutches of US Airways, Delta likely will have to seek another carrier to serve as its white knight, experts believe. The most likely candidate: Northwest Airlines, which according to The Wall Street Journal, has been in "recurring" talks with Delta about a possible merger in coming weeks. While Delta declined to comment on the report, industry experts believe that a merger-of-equals with Northwest—which like Delta is in bankruptcy proceedings—could represent Delta's best hope for avoiding Parker's bear hug. "Delta's only option now is to go find a partner of its own," says Mann.
The two carriers would be a good fit. Privately, Delta CEO Gerald Grinstein had been warning creditors that a Delta-US Airways merger would likely spur the remaining major carriers to strike deals of their own (see BusinessWeek.com, 12/13/06,
With United Airlines (UAUA) viewed as the likely match for Continental Airlines (CAL), and American (AMR) likely to merge with Northwest, Grinstein has been arguing that a combined Delta-US Airways would be the weakest of those three partnerships given its weak presence in Asia (see BusinessWeek.com, 12/22/06, "Airline Mergers: Ready for Takeoff?")
By contrast, analysts believe that a Delta-Northwest combination would be far stronger: By matching Delta's strong European network with Northwest's powerful Asian routes, the combined carriers would potentially be more profitable than a combined Delta-US Airways. Vaughn Cordle, CEO and chief analyst of AirlineForecasts, a Washington (D.C.)-based consulting firm, estimates that a Delta-Northwest combination would have a fair market value approaching $12 billion—or $500 million higher than that of a combined Delta-US Airways. "A merger between Delta and Northwest makes the most sense," says Cordle. "It would produce more value than any other partnership out there, more than United-Delta, US Airways-Delta, or even United-Continental."
While Northwest officials declined to comment on the reports of a merger with Delta, Wall Street analysts say the Minnesota-based carrier signaled its willingness to partner up when it hired Evercore Partners (EVR) last December to explore "broad strategic alternatives" on its behalf. "Northwest would sell under the right terms," says Ray Neidl, an airline analyst for Calyon Securities in New York. "And strategically, Delta and Northwest are a good fit."
For one, analysts note that Northwest has an aging workforce that is poised to retire in coming years, making the task of cutting labor costs that much easier. "A lot of those Northwest workers are going to drop off the rolls," says Roger King, airline analyst for CreditSights, a New York-based institutional research firm. Delta management would also have a selfish reason for partnering with Northwest: It's likely that Delta executives would run the combined airline, and preserve its headquarters in Atlanta.
No Avoiding the Altar?
What's more, a potential merger between Delta and Northwest would have a great chance at receiving the necessary regulatory approval than would a Delta-US Airways deal. While Delta and US Airways compete head-to-head in many Eastern and Southeastern markets, there's far less overlap between Delta, whose strength is its Southeastern network, and Northwest, which has major hubs in Detroit, Minneapolis, and Memphis. That would mean fewer layoffs, and fewer of the cutbacks in service that would likely rile lawmakers in Washington.
By contrast, some industry insiders fear that a combination of Delta and US Airways would have a hard time passing muster with regulators. While US Airways officials remain confident that they would be able to divest enough assets to appease antitrust regulators—such as selling off one of the Washington-to-New York shuttle operations the two carriers run—some airline experts fret that a US Airways-Delta merger would give the combined carrier too much control over many second-tier markets like Charleston, S.C. "The Department of Justice will have a hard time approving this deal," says Michael Boyd, an aviation consultant based in Evergreen, Colo.
Already, some of the new Democratic leaders in Congress are voicing their opposition and threatening to derail the US Airways bid for Delta. "This proposal is ill-conceived and designed primarily for the benefit of US Airways," says Rep. James L. Oberstar (D-Minn.), the new chairman of the House Transportation Committee. "I think we can slow it down and eventually stop it." While that must be music to the ears of Delta executives, they still need a Plan B of their own. Which means that as much as Delta might loathe coupling with US Airways, it's still likely there's a merger in its future anyway.
Click here for a slide show looking at the merger-and-acquisition picture in the airline industry.
Foust is chief of BusinessWeek's Atlanta bureau.
Bye Bye--General Lee
But now it's clear he does. On Jan. 10, Parker sweetened his original offer by another 28%, to $10.2 billion. That bold move is certain to appeal to Delta creditors, who in turn are likely to exert pressure on Delta's board to accept US Airways' (LCC) offer over that of its own management team. "There's no comparison between the two plans," says an attorney representing one group of Delta creditors, who will become shareholders when Delta emerges from bankruptcy. "Delta's plan makes all sorts of aggressive assumptions about the future. Most of the creditors just want cash, and US Air is offering more of it."
Still, even if creditors like to see cash on the table, US Airways faces a daunting obstacle course in Washington, where the Justice Dept. would assess competitive issues posed by such a large airline and key politicians have made disapproving noises about the consequences for consumers.
Northwest to the Rescue?
For its part, Delta officials said that while it would consider Parker's latest bid—which consists of $5 billion in cash, and roughly 90 million US Airways shares—the Atlanta-based carrier noted the higher offer "would increase the debt burden of the combined company by yet another $1 billion," to the highest in the airline industry. In a conference call with analysts, Parker said the debt burden would still be manageable, given the greater revenues of a combined Delta-US Airways. "This company is a lot bigger, of course, it has more debt and it makes a lot more money," he said.
And analysts believe that Delta may have a hard time going it alone. "This paints Delta into a corner," says Robert Mann, a New York-based aviation consultant. "The US Airways offer is going to be extremely attractive to the creditors committee."
To avoid the clutches of US Airways, Delta likely will have to seek another carrier to serve as its white knight, experts believe. The most likely candidate: Northwest Airlines, which according to The Wall Street Journal, has been in "recurring" talks with Delta about a possible merger in coming weeks. While Delta declined to comment on the report, industry experts believe that a merger-of-equals with Northwest—which like Delta is in bankruptcy proceedings—could represent Delta's best hope for avoiding Parker's bear hug. "Delta's only option now is to go find a partner of its own," says Mann.
The two carriers would be a good fit. Privately, Delta CEO Gerald Grinstein had been warning creditors that a Delta-US Airways merger would likely spur the remaining major carriers to strike deals of their own (see BusinessWeek.com, 12/13/06,
With United Airlines (UAUA) viewed as the likely match for Continental Airlines (CAL), and American (AMR) likely to merge with Northwest, Grinstein has been arguing that a combined Delta-US Airways would be the weakest of those three partnerships given its weak presence in Asia (see BusinessWeek.com, 12/22/06, "Airline Mergers: Ready for Takeoff?")
By contrast, analysts believe that a Delta-Northwest combination would be far stronger: By matching Delta's strong European network with Northwest's powerful Asian routes, the combined carriers would potentially be more profitable than a combined Delta-US Airways. Vaughn Cordle, CEO and chief analyst of AirlineForecasts, a Washington (D.C.)-based consulting firm, estimates that a Delta-Northwest combination would have a fair market value approaching $12 billion—or $500 million higher than that of a combined Delta-US Airways. "A merger between Delta and Northwest makes the most sense," says Cordle. "It would produce more value than any other partnership out there, more than United-Delta, US Airways-Delta, or even United-Continental."
While Northwest officials declined to comment on the reports of a merger with Delta, Wall Street analysts say the Minnesota-based carrier signaled its willingness to partner up when it hired Evercore Partners (EVR) last December to explore "broad strategic alternatives" on its behalf. "Northwest would sell under the right terms," says Ray Neidl, an airline analyst for Calyon Securities in New York. "And strategically, Delta and Northwest are a good fit."
For one, analysts note that Northwest has an aging workforce that is poised to retire in coming years, making the task of cutting labor costs that much easier. "A lot of those Northwest workers are going to drop off the rolls," says Roger King, airline analyst for CreditSights, a New York-based institutional research firm. Delta management would also have a selfish reason for partnering with Northwest: It's likely that Delta executives would run the combined airline, and preserve its headquarters in Atlanta.
No Avoiding the Altar?
What's more, a potential merger between Delta and Northwest would have a great chance at receiving the necessary regulatory approval than would a Delta-US Airways deal. While Delta and US Airways compete head-to-head in many Eastern and Southeastern markets, there's far less overlap between Delta, whose strength is its Southeastern network, and Northwest, which has major hubs in Detroit, Minneapolis, and Memphis. That would mean fewer layoffs, and fewer of the cutbacks in service that would likely rile lawmakers in Washington.
By contrast, some industry insiders fear that a combination of Delta and US Airways would have a hard time passing muster with regulators. While US Airways officials remain confident that they would be able to divest enough assets to appease antitrust regulators—such as selling off one of the Washington-to-New York shuttle operations the two carriers run—some airline experts fret that a US Airways-Delta merger would give the combined carrier too much control over many second-tier markets like Charleston, S.C. "The Department of Justice will have a hard time approving this deal," says Michael Boyd, an aviation consultant based in Evergreen, Colo.
Already, some of the new Democratic leaders in Congress are voicing their opposition and threatening to derail the US Airways bid for Delta. "This proposal is ill-conceived and designed primarily for the benefit of US Airways," says Rep. James L. Oberstar (D-Minn.), the new chairman of the House Transportation Committee. "I think we can slow it down and eventually stop it." While that must be music to the ears of Delta executives, they still need a Plan B of their own. Which means that as much as Delta might loathe coupling with US Airways, it's still likely there's a merger in its future anyway.
Click here for a slide show looking at the merger-and-acquisition picture in the airline industry.
Foust is chief of BusinessWeek's Atlanta bureau.
Bye Bye--General Lee
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