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.

 

[On Your Six]

I disagree. Future RJ growth will likely not go to ASA and Comair because they are more expensive alternatives to outside regionals like CHQ and Skyway. Delta could force partners to compete for growth on a cost basis - that will reduce costs at Delta big time - plus, future debt from RJ financings would be reduced considerably. I see no big operational benefit from owning ASA and Comair vs. "renting" them. In fact, Delta could avoid potential HR problems and resulting operational disruptions with Comair (i.e., future pilot strikes) and ASA by spreading out coverage among many regionals who comply with QUALITY STANDARDS developed by Delta.

It worked for Continental - its working relationship with COEX is still strong and it pocketed a lot of cash by spinning it off to the public...

 

[bvt1151]

I disagree. Future RJ growth will likely not go to ASA and Comair because they are more expensive alternatives to outside regionals like CHQ and Skyway.

Actually you are agreeing with me. Or am I agreeing with you?

Delta could force partners to compete for growth on a cost basis - that will reduce costs at Delta big time - plus, future debt from RJ financings would be reduced considerably.

Any debt passed on to Comair or ASA would result in a lower IPO. As of April 12th, Delta's Market Cap is a tad shy of $1.0 billion. How much more do you think Comair and ASA are worth as separate entities than all of Delta is as a whole? Don't forget that short of a large employee concession Comair/ASA's costs will not change. Even with a large change in costs, it would be negligable to the $240 million they were receiving, but are now paying.

I see no big operational benefit from owning ASA and Comair vs. "renting" them. In fact, Delta could avoid potential HR problems and resulting operational disruptions with Comair (i.e., future pilot strikes) and ASA by spreading out coverage among many regionals who comply with QUALITY STANDARDS developed by Delta.

Delta's ability to spread out the risk of operational disruption has nothing to do with whether or not Comair and ASA are IPO'd. They've been doing that for years.

It worked for Continental - its working relationship with COEX is still strong and it pocketed a lot of cash by spinning it off to the public...

Different airline, different results. Delta relies on the RJ much more heavily than CAL, not to mention airline stocks were much much higher at the time of the Coex IPO. If Delta could get $4 Billion out of Comair/ASA it may be pheasible, but with a market cap of only $1.0 billion (with Comair and ASA included) Delta is much better off taking the $240 million in profit yearly than paying it. Coex is stronger because CAL is not as involved in the portfolio concept as Delta is. You said it yourself, Comair and ASA would see no Delta growth after an IPO.

*Note: CAL market cap - $850 M
XJT market cap - $715 M

 

[On Your Six]

There is no way DAL could expect to get $3-4 billion out of ASA and Comair. Zero chance. That wouldn't even happen in a great economy. It is possible that DAL could squeeze $400-500 million out of it given that COEX still went for much higher in a slightly more favorable stock environment - all airlines except SWA are being punished now (high fuel doesn't help).

It is possible that DAL will rely a lot LESS on RJs in the future. Grinstein has mentioned publically that he is NOT A BIG FAN of RJs. The reduction of future RJ financings for ASA/Comair would probably be very welcomed I am sure...

Clearly, operating RJs in a low-cost environment where airfares are declining daily doesn't make as much sense anymore - you can't really spread the costs across 50 seats profitably with the low fares... That's just a FACT. Evidently the management at AirTran agrees...

"Renting" RJ capacity makes a lot more sense than owning it in this case because of the inherent financing costs of RJ ownership (future orders will go straight to Delta's balance sheet), the human resources headaches with so many disparate labor groups, and the "opportunity cost" for potentially lower operating costs (reduce costs to CHQ or Skyway levels per departure). Continental understood that if it can maintain operational standards with COEX as a partner, it should not have to pay the inherent ownership costs...

 

[MedFlyer]

I disagree. Future RJ growth will likely not go to ASA and Comair because they are more expensive alternatives to outside regionals like CHQ and Skyway. Delta could force partners to compete for growth on a cost basis - that will reduce costs at Delta big time - plus, future debt from RJ financings would be reduced considerably. I see no big operational benefit from owning ASA and Comair vs. "renting" them. In fact, Delta could avoid potential HR problems and resulting operational disruptions with Comair (i.e., future pilot strikes) and ASA by spreading out coverage among many regionals who comply with QUALITY STANDARDS developed by Delta.

It worked for Continental - its working relationship with COEX is still strong and it pocketed a lot of cash by spinning it off to the public...

You say that ASA/Comair will see no more growth which may be true. But if that's the case, that makes an ASA/Comair IPO all the less likely....who wants to buy shares in a company that will not grow?

The reason the CoEx IPO worked was because CoEx had big growth expectations and because CoEx was aligned with a semi-stable major carrier.

If Comair/ASA aren't growing and they are tied to a dysfunctional major (DL), who will want to take part in that?

 

[bvt1151]

If Delta can only get $400-$500 million off of Comair/ASA why would they consider an IPO that would cost them $480 M a year?

Clearly, operating RJs in a low-cost environment where airfares are declining daily doesn't make as much sense anymore - you can't really spread the costs across 50 seats profitably with the low fares... That's just a FACT. Evidently the management at AirTran agrees...

This is not a fact. RJ's are very capable of competing in a low cost environment, just not in a hub-and-spoke system. AirTran operates a hub-and-spoke system, so RJ's don't fit their model. Remember that when PSA and Southwest started, the 737-200's were the "RJ's", or one of the smallest jets economically available at the time. In my opinion, Delta's no point-to-point restriction within the scope clause is the single most detrimental restriction to the RJ's true potential being realized. But this is a different argument for a different thread.

$400-$500 million is not a large enough sum for Delta to consider shedding its only profitable component of the company. $1.5 - $2 billion is not enough either.

 

[On Your Six]

Last time I checked Delta operated a hub-and-spoke system.... If that is the case, why does Delta operate so many CRJs out of its hubs in a low-cost environment?

I agree that $400-500 million is only an estimate - who knows what its valuation would be? That's what expensive McKinsey consultants and investment bankers are for - Leo's buddies...

As for Comair and ASA being the most "profitable" components of Delta - that is highly debatable. General Lee has mentioned several things that ASA and Comair don't have to pay for themselves like interest on RJ debt, insurance, reservationists, marketing/advertising, some gate handling at common destinations with the mainline, etc., etc. Fully allocate these costs to Comair and ASA and they would be a lot less "profitable" I would think...

 

[bvt1151]

How Comair and ASA is paid is a moot point regarding an IPO. The investors will pay what the market can bare. If Comair and ASA would not be profitable outside of Delta's umbrella, the investors would never invest in them, thus resulting in an ultra-low IPO...another reason Delta wouldn't sell.

When it comes to selling the companies to investors, Delta can't lie about how or how much Comair/ASA are paid. I'm not saying the General is incorrect, I'm just saying that if he is right, Delta won't get squat for the IPO. If he is incorrect, then it would be in the interest of DAL's bottom line to keep Comair/ASA on the property.

I'm not saying your $400-$500 M estimate is wrong at all. In fact I agree that the number would probably be pretty close. My point is that Delta would never shed such a significant part of the company for such little money.

 

[General Lee]

So, am I correct or incorrect? I think management would want to get some cash, and still sign you up for a 10 year contract just like Skywest--and still have your feed. Your rates would have to come down if you wanted any other new business from other companies---and then management would be high fiving each other....

Bye Bye--General Lee

 

[Tim47SIP]

Flawed data

I disagree. Future RJ growth will likely not go to ASA and Comair because they are more expensive alternatives to outside regionals like CHQ and Skyway.

DVT beat me to the point I wanted to bring up, but I can add a little more information..

This is a misconception. The fact is that Comairs CASM is 11.1 and ASA is 11.7. Skywest is 12.7 and Chitaco and Mesa are in the same ballpark as Skywest. This data has been posted several times with links to show documentation (a couple of months old so yes it could have changed). The WO's are cheaper to operate than "renting" a non WO as they don't have to make a profit (that they keep) on top of the costs of daily operations.

"Renting" RJ capacity makes a lot more sense than owning it in this case because of the inherent financing costs of RJ ownership (future orders will go straight to Delta's balance sheet),

OK, are you saying that if a contract carrier provides the lift that Delta's fee for departure costs will not include the cost of the aircraft? You are correct if you are implying that Delta could theoretically walk away from the deal when it no longer needs the RJ's. But if you are implying that it cost less with fee for departure versus ownership, then I think you are mistaken.

I wouldn't mind at all if ASA left and became a contract carrier. That way we could expand in other areas. But as DVT and others point out, Delta has just to much to loose by selling off these assets. Also, please explain why U and United are frantically trying to expand their RJ markets if there is really no place for the RJ in the LCC arena. The two carriers that had the tightest RJ scope in the industry are the same two carriers in the worst condition. I think Delta has much more expantion possibility out west, and I think that is where Delta's new RJ's are headed. Just a hunch. The thing that bothers me the most is that Delta is not in any way done expanding DCI. It SHOULD be Delta furlough's being hired now instead of off the street guys.

 

[bvt1151]

There is one factor we're not considering...Comair and ASA MEC's have petitioned to merge the lists. If I understand the legal part of this correctly, the MEC's could be able to force Delta to merge the list with something to do with "common carrier." Delta has already shown they are paranoid of their employee groups. If the MEC's really do have a good shot at merging the lists (or at least if DAL management thinks they do) then that could be the final straw that sends ASA to IPO.

ASA was given a large portion of the RFP aircraft, which shows growth to potential investors, hence a higher IPO. With Delta's deflated market cap, they could theoretically dump enough debt onto ASA to give them a zero equity. Any money made on the IPO would then be money in the bank. As a result, Delta released a large amount of debt ($500 M -1 B?) onto ASA, and still gets $300 - $400 in cash for the transaction. They no longer have the threat of two large employee groups creating a monopoly in Atlanta and most of Cincinnati and Dallas. The current contract negotionations will hurt an ASA IPO, but the stock price is so deflated that a 10% lower IPO only costs Delta $50 M in lost IPO revenue from ASA. Not to mention the $240 M a year profit they would lose in ASA is much more tolerable when you consider Delta could stand to receive $800 M - $1.4 B in debt relief and cash from ASA's IPO.

Somebody told me Delta planned to file for bankruptcy May 15th. I don't believe it, but the fact that dates are starting to be included in rumors shows that the desperation is beginning. That desperation, included with the opportunities ASA provides Delta in an IPO (ending the CMR/ASA merger threat, $800M - $1.4 B in total debt relief, IPO value can't really get any lower that it is now) could spell the end for ASA as a wholly-owned subsidiary of Delta.

Comair will remain on Delta's property, but after they see what happens at ASA when they are suddenly on the same playing field as CHQ and SKYW, the threat of an IPO will cost labor dearly. I do predict in an ASA IPO, that Comair will take the lion's share of ATL flying, since that's where Delta's bread is buttered.

I sure hope the Comair and ASA MEC's have considered that all Delta has to do is sell one of them to prevent all this merger nonsense.