Should Delta Spin Off Comair and ASA?

[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.