Possible sale of its Atlantic Southeast Airlines and Comair subsidiaries

[asacap]

One move Delta might consider as it continues to restructure is the sale of its Atlantic Southeast Airlines and Comair subsidiaries, Grinstein suggested. In response to a question, the executive said that while the two connection carriers were strategically valuable to Delta, it was management's job to take a look at which assets are "more valuable in others' hands."

By Ross Snel
TheStreet.com Staff Reporter
12/15/2004 5:23 PM EST


I just thought this was interesting. This also gets rid of Delta's need to give Comair and ASA 25% of Delta flying. It would then be a total free-for-all. This doesn't look good.

 

[~~~^~~~]

ASA was mortgaged to the hilt to offset mainline losses and ASA's expansion. Delta would have to satisfy those creditors, who already have claim to ASA's assets.

Also, ASA is in contract negotiations. Who would want to buy an airline with labor problems?

And third, ASA is only worth a dime as a feeder to DAL. Delta has to be healthy and use the codeshare with ASA, or we are simply another ACA without the O & D hub that ACA has. Think Midway without the 737's.

 

[FDJ2]

The spinoff of either ASA and/or CMR would not be to any one entity, but rather as an IPO. Delta could continue to raise valued $$$ from such a spin off. I don't think any one could reasonably expect that DAL would recoup the amount of $$$ initially spent in the acquisition of ASA/CMR, but a hefty amount could be expected given the lucrative contracts ASA/CMR have with DAL. It's basically money in the bank. After all, ASA/CMR are wildly profitable small jet lift providers. The fact that ASA is in the middle of contract negotiations may play a part in whether or not CMR goes first, but at the end of the day most carriers ultimately are in some form of contract negotiations sooner or later, so it seems like relatively moot point. These are interesting times. I'm sure the RJDC crowd would be ecstatic to finally be shed of the wholly owned status they so much resent and once again work for an independent RJ feed airline.

 

[Draginass]

Same rumor going around about Eagle.

 

[jetstream]

How valuable is a company whose fate is directly tied to another company tetering on the edge of bankruptcy?

 

[asacap]

probably more valuable with the opportunity to cut loose. Also, Delta is looking forward, not backbard (at Leo Mullins f-up's). There is an opportunity advantage. No more 25% ASA & Comair flying Delta flight, and they can have everyone bidding against each other. Flying will go to the lowest bidder.

 

[sweptback]

While I'm sure this scenario would be the wet dream of some people on this board, there are many differences between the DCI system and the deal XJet has set up.

First of all, for ASA and/or Comair to be of any value to any potential buyer (IPO or otherwise), there would have to be some exclusivitity associated with it. Remember that XJet is the only RJ provider for Continental for another couple years, and they've already had a few years of that arrangement. Why would anybody bother with ASA or Comair if a year after they were sold (or raffled off, whatever) the powers that be at Delta decide that they don't need their services anymore?

This also isn't the same environment as it was when XJet was spun off. Even a few years ago 50-seat RJ flying seemed almost unlimited. Now there are few avenues for growth, and for every regional that is expanding, there is another with doubts about the future. If even one moderate-sized regional were to lose its codeshare, the flood of almost-new RJs on the market would significantly devalue any potential that the spun-off regional would have.

Not to mention that XJet has no peer in terms of Continental RJ flying. Even if in 2007 CO put out a bid to replace all of XJet's flying, or even to do certain sections of it cheaper, who could come up with that many jets overnight? Of course if Delta wanted ASA out of the picture they already have 3 other connection carriers in the system that could absorb that much quicker.

Of course, if Comair was spun off, other regionals would have to start worrying as they have the lowest costs in the DCI system. And ASA, with the George & John philosophy still lingering behind about spending as little money as possible to get the job done, can't be very far behind.

My uninformed opinion was that if this was really needed, it would have been done by now. GG is saying that he's looking at the possibility because the stockholders would revolt if he didn't at least consider it. However, I don't believe he'll actually pull the trigger.

 

[bailout]

You guys crack me up.. It ain't gonna happen..

 

[Medeco]

You guys crack me up.. It ain't gonna happen..

Well bailout,

When GG says they are considering it, you may want to give it a little more thought.

I am not saying it will, but it sure is a possibility.

Look at Song, everyone including GG thought Song was done and gone, but he was convinced to keep it around.

This time, just the opposite could be true, or not.

Bottom line is, now that he dangled this fish, it will hang outside the boat until he says definatively otherwise.

The reasons for him saying this in a public forum could be for many reasons. But remember, this was him answering a question from the audience, not him including it in his original speech.

Thats my window on the world
Medeco

 

[FDJ2]

Good observation Medeco.

 

[KingAirKiddo]

There is a potential upside to a spin off for everyone involved, IF the deal is executed properly. The only way that these subsidiaries would be attractive to outside investors is if DAL were to grant some sort of exclusivity on the growth opportunities afforded by the relaxed scope provisions contained in the latest DL PWA. Nobody is going to invest in a company with flat or decreasing revenues, which will be the case should Comair actually stop growing (as of this writing, ASA is back in growth mode given the results of last year's infamous RFP award...and rightfully so). In order to gain the confidence of investors, DAL would have to sign long term and exclusive (or nearly exclusive) agreements with the new company(ies) with regard to future DCI flying.

This could be a win/win in a couple different areas. DAL raises some badly needed cash, ASA/Comair employees continue to have opportunities afforded by growth, and DAL furloughees have opportunities with companies that actually pay a liveable wage--as opposed to what they may be facing should things remain status quo and the growth goes...well, elsewhere.

At a casual first glance, may not be such a bad thing. Admittedly, though, I am not an MBA and would like to have some more information about how the deal will be structured if/when it happens. In the meantime, I'll just keep drivin' the bus and won't get my panties in too much of a knot about all this.

My $.02

KAK

 

[FL990]

It is interesting how this is just now coming out just a day or so after ASA pickets...it could be a threat to deter the pilots from pursuing the contract. I'm definitely not saying its all about the pilots, because its NOT....but the timing is a bit intersting.

I have read many of the posts on this thread and agree with the main points of those who believe this will NOT happen. ASA is valuable to Delta and Delta alone at this point in time. If they offer an IPO (which by the way is the only way I would see this "sale" happening at all), how much do you really think they would get if investors know this releases Delta from the brand scope...yea, you come buy our regional carriers so we can quit growing them; thats a great sales pitch!!

Their are many other reasons that others have brought up and there is no need to rehash, but in short, I just don't think its gonna happen. My best guess is that this could be a quazi threat to get the pilots attention!!

BUT, who the crap knows???

 

[atrdriver]

I can't see it happening simply because both ASA and CMR are worthless without the DAL feed, as someone said. Unless there is a guarantee by DAL management of continuing use them as feed they have no value. And having to commit to using them when they are not wholly owned would mean higher cost for the feed, which doesn't seem like a very good business decision.

 

[~~~^~~~]

The spinoff of either ASA and/or CMR would not be to any one entity, but rather as an IPO. Delta could continue to raise valued $$$ from such a spin off. I don't think any one could reasonably expect that DAL would recoup the amount of $$$ initially spent in the acquisition of ASA/CMR, but a hefty amount could be expected given the lucrative contracts ASA/CMR have with DAL. It's basically money in the bank. After all, ASA/CMR are wildly profitable small jet lift providers.

News bulletin - Delta does not have "money in the bank." Delta has a limited supply of cash, some of which is revenue for tickets sold, but services not yet delivered. ASA and Comair's stock was used for collateral along with everything else at Delta. Believe me, your MEC knows Delta's financial position and where the money isn't.

The ASA / Comair contracts are not "lucrative." Delta forced changes in the contracts ( which was the major reason the shareholders bailed out and sold to Delta during the acquisition - I was one of them ). The reason why ACA dumped United and Delta was that their cost structure would be unprofitable in the current marketplace for small jet lift. They had no choice but to form Independence Air as a tool for survival. ( And that is not working either ).

ASA and Comair have low costs and are fighting to keep their heads above the water against competition from CHQ. In my opinion CHQ is a ponzi scheme. They have to grow, or die. So they will desperately fight for every hour of flying they can get. Delta of course uses this competition for their maximum benefit - and ALPA has forgotten the meaning of "alter ego" to try to prop up the majors.

Releasing an IPO into this hyper competitive firefight would be a sure sign Delta is simply trying to survive for the next six months. If it happens, it is a very ominous sign, like a debtor selling his house and moving in under a bridge with a bottle of booze. Look at Pan Am Shuttle and Ransome Pan AM Express if you need some historical perspective.

~~~^~~~

 

[On Your Six]

I can't see it happening simply because both ASA and CMR are worthless without the DAL feed, as someone said. Unless there is a guarantee by DAL management of continuing use them as feed they have no value. And having to commit to using them when they are not wholly owned would mean higher cost for the feed, which doesn't seem like a very good business decision.

It actually makes sense. ASA and Comair could be spun off or even sold if Delta could guarantee a certain % of flying for the next 5-7 years (you pick a time horizon). This would be necessary in order to calculate a valuation. Coex serves as a perfect example - it was spun off but has maintained a large chunk of Continental flying for the next 5 or so years - I am sure the contract is renewable based upon a host of factors including performance, quality standards, etc. It makes sense for both parties to guarantee a chunk of flying because that maximizes the value to Delta/Continental in the spin off - Continental made a lot of cash in the spinoff and Coex gained its "relative" independence which it can probably exploit further at the end of the first contract stage - Coex is now a public company and it will need to boost its growth through diversification at some point like most regional airlines.

At the end of the day, I bet Grinstein is exploring how he can get around ingrained DALPA restrictions. Additionally, after the Comair strike a few years back, I am sure Grinstein does not want to put all of his eggs in one basket. Spin off, cash out, but retain operational benefits and perhaps exploit some legal loophole allowing use of larger aircraft (maybe through a code-share?).

For those of you who are naysayers out there - anything is possible in this industry and the precedent has already been set (Coex). With other regionals changing their structures and forming new companies (TSA, MDA and Republic), you can be sure Grinstein is watching and formulating a plan going forward. Never say never in this business....