Another article to stir the pot of rumors and speculation.
Medeco
Delta dangles regional carriers
By By RUSSELL GRANTHAM
By RUSSELL GRANTHAMThe Atlanta Journal-Constitution
Published on: 04/12/05
With cash dwindling once again, Delta Air Lines is all but hanging a "for sale" sign on its two regional feeder units, Atlantic Southeast Airlines and Comair.
Chief Executive Gerald Grinstein has told analysts more than once that the regional subsidiaries are strategically important to Delta ,but then quickly added: "You do not have to own them to get all the benefits."
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Analysts think that's a clear hint Delta might sell ASA and Comair to generate badly needed cash later this year, especially if current high fuel prices hold. They estimate Delta could get from $600 million to $1.6 billion. It would then contract with the new owner to keep using ASA and Comair regional jets for "Delta Connection" flights.
Such a deal might help stave off a Chapter 11 filing. But it would be a bitter reflection of Delta's fall from financial grace in the past five years.
The Atlanta mega-carrier spent $2.5 billion — not counting absorbed debt and other costs — to buy the two regional airlines in 1999 and 2000. At the time Delta was awash in cash and enjoying a run of big profits, and ASA and Comair were longtime contract partners.
Delta executives saw the buyout as a way to ensure Delta had full control of the carriers' growing regional jet fleets. They also wanted to fix service problems and gain the bottom-line benefits of the units' historically strong profit margins.
But now, with their business tightly linked to a wobbly Delta, ASA and Comair are worth far less than what Delta paid — even though they still make money on their own, according to government reports filed by Delta.
Prospective buyers would be pushing for fire-sale prices, analysts say.
"I think everything's for sale. The question is for what price," said Robert Mann Jr., a Long Island, N.Y.-based airline consultant.
Fuel prices a problem
Worse yet, any cash generated could be quickly consumed by high fuel costs. A new government report predicts oil prices will stay around $50 per barrel through 2006, offering little reason to think jet fuel prices will soon drop. Grinstein says that will add $1 billion to Delta's fuel bill this year, offsetting a chunk of the hard-won savings the airline got from labor cuts and vendor financing late last year to avert a Chapter 11 filing.
"It gives them some cash. The bad news is they're going to lose all that money because the fuel prices are so ... high," said Darryl Jenkins, professor of airline management at Embry-Riddle Aeronautical University in Florida.
Another complication is the structures of the two regional airlines. Although owned by Delta, they have separate employees, unions and managers. Their union work forces could scare off nonunion independent regional airlines such as Utah-based SkyWest, mentioned as a potential buyer.
ASA has a long history of customer service problems — it consistently has one of the worst rates of lost luggage — that Delta hasn't fixed, Mann noted. Comair is better run, he added, but its pilots are the highest-paid among regional carriers.
"In either case, you're talking about a tough sell," he said.
Still, ASA and Comair may represent Delta's most valuable assets in a cash crunch.
Speculation about a sale erupted last month when an executive at SkyWest, a profitable carrier that feeds Delta's Salt Lake City hub under contract, told investors at a conference that Delta had discussed selling the units. Other Skywest executives quickly moved to cool acquisition talk, while Delta has remained coy.
"My sense is that although SkyWest initially responded to those questions ... they have subsequently pooh-poohed the whole idea," Mann said. "That in effect tells Delta, 'We weren't going to bid a lot of money anyway.' "
SkyWest may also have its hands full after recently reaching a deal to add planes and expand its contract flying for United Airlines, he said.
Other alternatives
Sale speculation has raised new uncertainty for the Delta subsidiaries' employees.
"We've talked about it for ... weeks now," said Capt. Nick Tomlin, with ASA's pilots union. "Will this be good for us or bad for us? Nobody knows."
For instance, SkyWest has higher pilot pay and seems well-run, he said, but ASA pilots likely would lose their seniority. "That's the one question that concerns us, job security."
A sale might not be the only way Delta could get cash out of its relationships with regional airlines, Mann said. In the last two months, US Airways inked deals with a hedge fund and two regional carriers to bankroll its efforts to re-emerge from a second bankruptcy case.
In exchange, US Airways offered the backers more flying contracts, some at the expense of its own regional subsidiary, and options to buy jets and coveted landing slots in New York and Washington airports.
The deals are a reversal of the airlines' usual roles, said R. John Hansman, head of the Massachusetts Institute of Technology's International Center for Air Transportation. Historically, network carriers propped up regional carriers with profitable, low-risk contracts for feeder flying.
But big network airlines "are not the cash cows they once were," he said. "What you're seeing with [US Airways] is the only people who are willing to lend them money are the people with a strong stake" in their survival — regional carriers.
Medeco
Delta dangles regional carriers
By By RUSSELL GRANTHAM
By RUSSELL GRANTHAMThe Atlanta Journal-Constitution
Published on: 04/12/05
With cash dwindling once again, Delta Air Lines is all but hanging a "for sale" sign on its two regional feeder units, Atlantic Southeast Airlines and Comair.
Chief Executive Gerald Grinstein has told analysts more than once that the regional subsidiaries are strategically important to Delta ,but then quickly added: "You do not have to own them to get all the benefits."
[font=arial, helvetica]EMAIL THIS[/font][font=arial, helvetica]PRINT THIS[/font][font=arial, helvetica]MOST POPULAR[/font]
Analysts think that's a clear hint Delta might sell ASA and Comair to generate badly needed cash later this year, especially if current high fuel prices hold. They estimate Delta could get from $600 million to $1.6 billion. It would then contract with the new owner to keep using ASA and Comair regional jets for "Delta Connection" flights.
Such a deal might help stave off a Chapter 11 filing. But it would be a bitter reflection of Delta's fall from financial grace in the past five years.
The Atlanta mega-carrier spent $2.5 billion — not counting absorbed debt and other costs — to buy the two regional airlines in 1999 and 2000. At the time Delta was awash in cash and enjoying a run of big profits, and ASA and Comair were longtime contract partners.
Delta executives saw the buyout as a way to ensure Delta had full control of the carriers' growing regional jet fleets. They also wanted to fix service problems and gain the bottom-line benefits of the units' historically strong profit margins.
But now, with their business tightly linked to a wobbly Delta, ASA and Comair are worth far less than what Delta paid — even though they still make money on their own, according to government reports filed by Delta.
Prospective buyers would be pushing for fire-sale prices, analysts say.
"I think everything's for sale. The question is for what price," said Robert Mann Jr., a Long Island, N.Y.-based airline consultant.
Fuel prices a problem
Worse yet, any cash generated could be quickly consumed by high fuel costs. A new government report predicts oil prices will stay around $50 per barrel through 2006, offering little reason to think jet fuel prices will soon drop. Grinstein says that will add $1 billion to Delta's fuel bill this year, offsetting a chunk of the hard-won savings the airline got from labor cuts and vendor financing late last year to avert a Chapter 11 filing.
"It gives them some cash. The bad news is they're going to lose all that money because the fuel prices are so ... high," said Darryl Jenkins, professor of airline management at Embry-Riddle Aeronautical University in Florida.
Another complication is the structures of the two regional airlines. Although owned by Delta, they have separate employees, unions and managers. Their union work forces could scare off nonunion independent regional airlines such as Utah-based SkyWest, mentioned as a potential buyer.
ASA has a long history of customer service problems — it consistently has one of the worst rates of lost luggage — that Delta hasn't fixed, Mann noted. Comair is better run, he added, but its pilots are the highest-paid among regional carriers.
"In either case, you're talking about a tough sell," he said.
Still, ASA and Comair may represent Delta's most valuable assets in a cash crunch.
Speculation about a sale erupted last month when an executive at SkyWest, a profitable carrier that feeds Delta's Salt Lake City hub under contract, told investors at a conference that Delta had discussed selling the units. Other Skywest executives quickly moved to cool acquisition talk, while Delta has remained coy.
"My sense is that although SkyWest initially responded to those questions ... they have subsequently pooh-poohed the whole idea," Mann said. "That in effect tells Delta, 'We weren't going to bid a lot of money anyway.' "
SkyWest may also have its hands full after recently reaching a deal to add planes and expand its contract flying for United Airlines, he said.
Other alternatives
Sale speculation has raised new uncertainty for the Delta subsidiaries' employees.
"We've talked about it for ... weeks now," said Capt. Nick Tomlin, with ASA's pilots union. "Will this be good for us or bad for us? Nobody knows."
For instance, SkyWest has higher pilot pay and seems well-run, he said, but ASA pilots likely would lose their seniority. "That's the one question that concerns us, job security."
A sale might not be the only way Delta could get cash out of its relationships with regional airlines, Mann said. In the last two months, US Airways inked deals with a hedge fund and two regional carriers to bankroll its efforts to re-emerge from a second bankruptcy case.
In exchange, US Airways offered the backers more flying contracts, some at the expense of its own regional subsidiary, and options to buy jets and coveted landing slots in New York and Washington airports.
The deals are a reversal of the airlines' usual roles, said R. John Hansman, head of the Massachusetts Institute of Technology's International Center for Air Transportation. Historically, network carriers propped up regional carriers with profitable, low-risk contracts for feeder flying.
But big network airlines "are not the cash cows they once were," he said. "What you're seeing with [US Airways] is the only people who are willing to lend them money are the people with a strong stake" in their survival — regional carriers.
