Should Delta Spin Off Comair and ASA?

[Heavy Set]

So, should Delta spin off Comair and ASA? I can't see how operating Comair and ASA is a requirement for providing a "quality" product - Skywest and CHQ provide good service and are not wholly owned... What is the benefit of full ownership in this case? Continental spun off most of Continental Express (CO still retains some ownership) and they still work reasonably well together - Continental derives the same benefits as before.

I can think of the following advantages/disadvantages for the various constituencies involved:

Advantages for Delta Airlines:

1. Much needed cash infusion (hundreds of $millions)
2. Less financing debt for new RJs
3. Better operating cost transparency - can't hide RJ costs
4. Lower operating costs provided by increased competition among all regionals COMPETING for feeder service
5. Maintain operational consistency through competition for contracts - better be on time or we will work with CHQ or Mesa instead...
6. Fewer HR hassles - avoid potential Comair-like strike in the future if it can work with many other regionals to potentially cover hubs (reduces operational risk for Delta)

Advantages for Comair/ASA pilots:

1. Ability to increase fleet through working with multiple airline partners instead of just Delta
2. Potentially new bases for flying outside of Delta system (any work for other airlines)


Disadvantages for Comair/ASA pilots:

1. Lower pilot wages most likely required in order to compete for business with Delta or other airlines - must have low operating costs to maintain some profitability while bidding for work
2. Compete with Mesa, CHQ and others for feeder contracts
3. Any RJ growth would require debt on Comair/ASA balance sheet which would not be guaranteed by Delta - more expensive for a smaller company


I don't see why Delta NEEDS to continue to own ASA and Comair. There are not that many operational benefits - Skywest and CHQ already work well with Delta and don't require ownership. Continental spun off COEX and retains benefits. Delta could use the cash and yet still maintain high service level standards by forcing all regional carriers interested in working with Delta to contractually agree to high quality standards.

So, what do you think? Should Delta spin off Comair and ASA? Everyone agrees that Delta could use the cash... Continental has done it successfully. If not, what are the benefits of retaining Comair and ASA given that other regional partners (CHQ and Skywest) are proving to be great partners without DAL ownership?

Any thoughts? Yes or no to spin off of Comair and ASA?

 

[601Pilot]

The only question: who would buy ASA/Comair? Not too sure
who has the money right now, except maybe Branson!

 

[Heavy Set]

They would be spun off into a public entity like COEX - shares sold to the public. No airline would need to buy them.

It worked for COEX and Continental made some much-needed cash...

 

[CF34-3B1]

What did DAL spend to acquire ASA and CMR?

What kind of price could they get if they sold them? Probably no where near what they paid.

What kind of impact would that have on the cashflow provided by thw WO's?

Except for maybe Gerry and Michelle B, I doubt anyone really knows for sure.

 

[ATR-DRIVR]

I would think the shareholders would be interested in the basic numbers. What was spent on both, what do they both bring to mainlines books, (pure cash numbers), what would be the hard numbers that they would sell them for.
For instance, would the price of a sale be equal to or greater than the cash flow generated by both per year, totaled up.
hmm

 

[rjcap]

It worked for COEX and Continental made some much-needed cash...

It would be very interesting. First and foremost it would be interesting to see the prospectus and what the operating numbers would be for both ASA and Comair. This would shed light on how profitable they are versus how unprofitable mainline is. Basically, if ASA and Comair are not extremely profitable then who would buy the shares of these companies?

To make both ASA and Comair attractive in the marketplace you would want to untie their hands and remove the scope restrictions on equipment and allow both to offer lift to other major airlines.

I'd go for it. Can't be any worse then what I have now.

 

[Heavy Set]

RJCap,

Thanks for a good reply. Clearly there would need to be a contract in place with Delta for both for a few years out - you would need to show somewhat "predictable" cash flow for the next few years to get a valuation for the stock offering to the public (need to show likely "value" over a 3-year time horizon at least). This is what Continental did with COEX (which is now a public company in its own right).

Delta could probably gain serveral hundred million dollars quickly and yet retain operational control. It's like changing the title on your car but still having the right to drive it day in and day out....

Any other opinions - yes or no?

 

[Pez D. Spencer]

I think that it is an eventual reality to see this happen. Timing will depend on Delta -- they'll get the best return they can. May not be tomorrow, but I'd bet it eventually does happen. Should they? When the time is right for it, yes. But, I think they have to consider the market for IPO's. Hopefully, it won't come as an act of desperation, but one of deliberation.

I think we'll do fine -- we have good leadership that knows how to run an airline without instructions from Atlanta.

 

[JECKEL]

I think it would be tough for Delta to have it's cake and eat it too.
Yes, selling would bring in some much needed cash but they would also require the"strings attached" so no service would be disrupted for SEVERAL years. The latter makes it a tougher sell, even to the public. "Strings attached" means growth and aquisition problems for the new board and CEO so you may not have all the people in the world falling over themselves to buy something that would undoubtably have many contractual obligations and, quite frankly, many henderances. People don't just invest to make a little, they invest to make a lot, to grow something and make it big. Delta would not let this sort of thing happen with CMR and ASA.
Tough sell will generate less money for DAL.

 

[MedFlyer]

The question is, who would buy these shares of Comair/ASA? Currently (though it may change), DL is headed toward bankruptcy. With the Comair/ASA spinoff being so closely tied to DL's future, who would want these shares? People bought COEX stock because they believed that CO had a decent future and therefore COEX had a good future. How many investors feel the same way about DL? The only way you could get investors excited about a Comair/ASA spinoff is by convincing them that DL is a strong company that is going to stick around and not go into CH 11.

I'd imagine DL shareholders might also be ticked because the amount DL got from a sale of ASA/Comair would likely be far less than DL paid orginally.

Also, in the worse case scenario, lets say DL is forced into CH11. If DL owns ASA/Comair, that's an asset they can use to help get out of Ch11. If DL sells ASA/Comair and still ends up in CH11, they won't have many assets left. Almost all of DL's mainline planes are collateralized and the DFW/SLC/CVG hubs are all pretty much worthless. DL has no major international route authorities to use as collateral. The only things left of value are ATL and slots/gates at DCA/LGA. Those might not be enough for DL to get out of BK. ASA/Comair would be an extra asset that could be good to have.

Look at the CO situation. Selling off CoEx was pretty much the last asset they had left...everything else is collateralized. The only things keeping CO afloat at this point is good management, two strong performing hubs (EWR and IAH) and a relatively low cost structure. However, if another terrorist attack occurs, CO would likely be forced into BK with no way to get out. DL on the other hand might still stand a chance.

Eventually, I wouldn't be surprised to see Comair/ASA being spun off. The idea does have a lot of merit as Heavy Set describes. Once (or if) DL gets its financial house in order, I could see DL spinning them off and using the proceeds for things like rebuilding the dumpy terminals at JFK, buying a new 100 seater or buying some 7E7s.

However, given DL's current condition...I don't think it will work. As Grinstein has said, DL has to earn its way out of this mess. Selling assets is not a solution and aviation history is littered with examples of this.

 

[Heavy Set]

Continental was in pretty dire straits financially post 9/11 when it spun off COEX. The rationale was that COEX would do well on its own as a public company (with access to public capital if needed) and it could focus on its own operations better vs. competing with other CO divisions for resources. My understanding is that COEX is still doing reasonably well while CO enjoys the same operational benefits as before the spin off.

I keep hearing from all of the Comair and ASA folks on this forum that they are doing quite well (people say they are "profitable") - so, perhaps they should join COEX and operate separately. But, as potential Delta partners in the future (if they won the bidding wars for the feeder contracts), they would still benefit from Delta's marketing and brand equity.

In the end, Delta would benefit from the cash infusion from taking Comair/ASA public and from operating continuity (not much would change operationally - like CO/COEX situation) while Comair/ASA could potentially expand their fleets with other potential airline partners.

 

[rjcap]

Does anybody recall the amount of cahs raised from the COEX deal ??

If Delta is losing 300 + miilion a quarter I don't really think a spin off is going to solve any real operational problems. Its back to what Grinstein said. "We have to earn our way out of this."

 

[General Lee]

Medflyer,

Management's job is to NOT get into bankruptcy in the first place, and trying to blame everything on higher pilot wages (even though they are willing to negotiate for something lower) is wrong. There were mistakes made pre-9-11 by management---like the stock buy back that cost $2.3 billion (which evaporated right after 9-11), and allowing the Comair strike to last sooo long. But, I am sure that with a 10 year contract of services in place (like Skywest has)--many investors would jump in. I bet Delta could get close to $1 billion, or even more (since it cost close to $2 billion for both ASA/Comair....I believe..?). I think many investors (like GE Capital, Morgan Stanley etc....) would ask Grinstein why he didn't sell those off pre Chap 11 if it happened.... It would be interesting....



RJCAP,

Fitch services said in it's downgrade last week that Delta had $2 billion in cash and they thought there would be NO MORE EROSION of that cash through the rest of the year---due to higher loads this Summer season. The only losses should be due to additional one time charges that they come up with.



Bye Bye--General Lee

 

[XRMEFLYER]

I think many investors (like GE Capital, Morgan Stanley etc....) would ask Grinstein why he didn't sell those off pre Chap 11 if it happened....

And he would take however many millions he is going to fleece the company for and give the old Cav salute (you wouldn't understand private) when asked.

 

[General Lee]

Is that like the one fingered salute, sarge?

 

[XRMEFLYER]

That is how he would be wanting to respond I'm sure, but decorum prohibits such things, in public anyway.

Actually it's a big indiffirent shrug of the shoulders. Oops!

 

[wms]

I think the spin-off of a merged ASA/CA (Delta Connection) would be attractive. It would be a larger yet more efficient company. I wouldn't invest in any company that had ASA's leadership, but a combined company with good leadership would be fine.
As far as pay, the spin-off at COEX doesn't seem to be a factor in their negotiations for better pay. The bottom line at ASA/CA would be good enough for better pay, and being out from under the DALPA shadow, we wouldn't have to worry about them lobbying against us for pay cuts.

 

[On Your Six]

WMS,

Excellent reply. I agree that COEX serves as the model for a spinoff of the combined ASA/Comair. Plus, the combined ASA/Comair could expand to other opportunities like Skywest or CHQ. In the end, DAL needs the cash and it could get the same operational benefits by partnering with ASA/Comair vs. owning them...

 

[wms]

I would probably earn more on the stock than I do on the 59.80 as a 4 yr CRJ CA.

 

[bvt1151]

Comair and ASA currently have a distinct advantage over CHQ and SKYW: they are both owned by Delta. This is advatageous for Delta as well, for the same reasons Rockefeller and Carnegie bought every company they dealt with, an economy of scale. Both Comair and ASA fly 100% within the Delta system. For Delta to sell them both would cost around $480 million a year. Allow me to explain that number:

Both Comair and ASA averaged around $30 million a quarter within the last year (a bit conservative but it illustrates my point with easier math).
$30 million * 4 quarters = $120 million per airline * 2 airlines = $240 million in net profit 2003.

That $240 million will be put right back into the Delta system. If Comair and ASA were seperate companies, not only would Delta lose the $240 million profit a year they make from CMR/ASA but they would also have to pay it! That means a total opportunity cost of $480 million for Delta airlines to sell ASA/Comair per year!
How much do you think an IPO would raise? $1.5B - $2.0B for both (and that number is liberal)? Thats 3-4 years until the deal comes around to bite them in the rear...not a good business decision, especially considering the price they paid for the two airlines. Even if my net income numbers were high for CMR and ASA, it would just result in the second half of the equation (IPO) getting smaller as well.

Delta would then risk Comair or ASA going Indepenence (pun intended). We've all seen at least what Comair alone can do to the Delta structure by removing all of their airplanes from it, and trust me, Chuck Curran and Siebs, along with about every other manager, would be licking their chops to return to Comair and finish the plans they had to go it alone before Delta bought them.

Granted the terms of the contract could be revised to prevent ASA/CMR from going independent, but that would make an IPO that much less attractive to investors, and result in a lower IPO. Likewise the revenue terms by which Comair and ASA are paid would probably be revised...once again, lower IPO.

What would an IPO mean to Comair and ASA? It would most likely be terrible news. Neither Comair nor ASA have the cost structure to compete as a contract carrier. Suddenly there would be no difference between CMR/ASA and CHQ/SKYW other than their cost structure. RFP's would run rampant and CHQ would win every one of them, probably with their pilots laughing the whole way to the bottom. Could CMR/ASA look for other contracts with other carriers? Sure, but then instead of competing with just SKYW and CHQ, they would have to deal with MESA as well. We all know how that would end up.
Comair could attempt to go it alone again, however the cash that was there in 2000 wouldn't still be there after an IPO. Delta has long blown that money. Not to mention Big D would probably put some strict penalties to prevent it from ever being a viable option.

So could an IPO ever be a good idea? Absolutely. If the $2 Billion Delta raised could be applied to debt that resulted in more than $480 million savings a year in interest payments...not really likely.
Another way it could work is if there were no alternative to Delta's survival. This is far from happening, especially considering that Grinstein just said "If you sell assets, you sell your future. We have to earn our way out of it."

Don't get me wrong, an IPO is definately possible. Just because its a bad idea doesn't mean Delta won't do it.