Should Delta Spin Off Comair and ASA?

[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.

 

[surplus1]

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."

Sorry, but this is a misconception. What you are calling "common carrier" is actually "single carrier" .... a ruling that would come from the NMB (National Mediation Board). This type of ruling deals only with union representation. It has nothing whatever to do with corporate mergers or single seniority lists. ASA and Comair are already represented by the same labor union, i.e., ALPA. Therefore a "single carrier petition" is irrelevant and would accomplish nothing.

There is no legal way for the MEC's or the ALPA to force Delta to merge ASA and Comair.

It is nothing more than an ill advised pipe dream that we should not be wasting any energy to pursue. If Delta management wishes to merge those paper corporations (ASA/CMR) it will do so and it will cost the pilots nothing. Obviously they do not want to do that or they would have already done it. Tryin to "buy" a merger, especially one that would produce zero tangible benefits for the pilot groups, is a bad idea. Even if ASA/CMR pilots all agreed to fly for free, I doubt you could convince Delta, and if you did convince them on that basis you would gain absolutely nothing other than a very doubtful increase in leverage at the bargaining table. Leverage you would then be required to use trying to get back to where you are now.

Delta would no longer be able to play you against each other (ASA/CMR) but they haven't done much of that anyway. They would still have the same ability to whipsaw you with Delta mainline, SkyWest, Chautauqua and who ever replaces ACA or comes out of the woodwork later on.

I admit I haven't been able to figure out what iyour MEC's think they would gain from this CMR/ASA merger. I guess that's why they're smart enough to be on the MEC and I'm not. I sure wish they'd focus on something beneficial instead of something politically correct.

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.

Delta does not have to sell one of them to prevent a merger. If you really think that it's another misconception. All that Delta has to do is ignore the merger proposals, nothing more. In case you haven't noticed, that is exactly what they have done.

With respect to the spin off of Comair or ASA, I see a lot of comparison with the spin off of COEX (XJT) by CAL. The idea is similar but the scenario is not.

At the time that CAL spun COEX, the latter was the sole provider of CAL feed. The subsequent "contract" between CAL and XJT (a part of the IPO) could reasonably be expected to provide a relatively stable source of revenue for XJT, thus encouraging investors to participate in the IPO. It did generate substantial "cash" for CAL.

If Delta were to "spin off" either CMR or ASA or both, it would not be the same. The "new" (we'll say it's CMR for the purpose of illustration) company would not have an "exclusive" contract with Delta, such as XJT has with CAL. Instead, it would be competing for Delta business with no less than 3 other "regional" airlines that also have contracts with Delta (ASA, SKYW and CHQ). This would significantly reduce the value of the IPO to any investors.

It is not very logical to expect (as an investor) growth and earnings from a company engaged in a bidding war with three other companies and whose sole source of revenue comes from a contract with a financially unstable corporation (Delta).

Of course there is always a "sucker with money" who will buy anything that is offered. Institutional investors often do that, since they are not investing their own money.

The CAL spin off may have been financially beneficial to CAL, but it certainly has not been a good investment for the people that put money on the line. The IPO opened at $16, is currently trading at $13.5 and hasn't made a nickel for any investor from day one.

I realize there is always a fool willing to part with his money and a crook willing to take it, but I'd be hard pressed to see the desirability of buying stock in a spun-off Comair as a good opportunity.

All the reasons why this proposed sale is a "good idea" for Delta have been listed (and then some) in this and the other related threads floating around. The folks doing the writing would like to see it happen (to further their own parochial interests) and promote every alleged advantage to Delta that they can think of, while carefully avoiding any mention of the disadvantages to the potential investor.

Delta paid a lot of money (1.8 billions) to buy Comair four years ago and shortly thereafter took another 700 million dollar hit from a strike. While Comair may be profitable (I know Delta pilots don't think it is), it is unlikely that Delta has had time to recoup its investment. Comair once had a value that could be measured, but Delta has long since removed the yardstick. What new stock in a Comair might be worth is a best a bad guess. Maybe they would just like to "write it off" and get rid of Comair, we'll have to wait and see.

I happen to be one of the people that wishes that Delta had never purchased Comair to begin with, so I'm not against the idea of a separate Comair per se. However, the Comair that Delta bought four years ago does not exist today and would not be restored by an IPO. The business climate is likewise quite different. A "spin off" of Comair is not likely to create a truly independent company, but rather one fettered to Delta by a contract that would preclude any logical opportunities for Comair. Comair woud still be the same puppet that it is now with perhaps a different puppeteer. Additionally, Comair's senior mangement (that put it on the map) is gone. Comair is today saddled with doing a whole lot of things that it would never have done in that way but for the takeover by Delta.

The advocates (who seem mostly to be Delta pilots) had said that a spin off would allow Comair to seek contracts with other majors. That's interersting. I wonder what majors those might be? A bankrupt UAL, a failing USAirways, American with its own Eagle, NWA with Mesaba and PCL, CAL with XJT and others. The truth is there are no "other majors" with whom to contract, they are all married already. I suppose Comair could underbid Mesa and try to steal a contract. Why not? Everyone does that to Comair and I'm sure it would please the Delta pilots to see us working for less.

Delta pilots see Comair's "growth" as phenomenal because that's how Delta pilots think. Yes, more airplanes are being operated with the name Comair than before, but Comair hasn't grown, Delta has grown. They just don't call it Delta and the Delta pilots are unhappy because they aren't in CMR cockpits. The truth is if the RJs were being operated by "the mainline" and flown by Delta pilots, they would not be saying the things they are.

Now, if we could find a way to get Delta to truly "sell" Comair, that might not be a bad idea. An independent Comair could find a lot of things to do, but none of those things is likely to be pleasing to Delta. Comair was purchased to prevent it from being independent. If it is sold, it won't be done in a way that would allow it to be independent again.

Comair was once very attractive to investors and a successful Company. Delta killed it very effectively. An IPO in the style of CAL/XJT will not revive or return the Comair that once was, it will just create one more mundane, going nowhere, operation that may be of interest to pilots, but should not be of interest to any sensible investor.

If you'd really like to know how exciting it is to invest in a "regional airline" just go back a few years and look at the charts. I think you'll find that the only one that's made any money of any of them are the day traders. Speculators, not investors. Lot's of people go to Las Vegas, so I suppose you could find an equal number willing to invest in a Comair IPO. After all, NWA got somebody to buy Pinnacle.

 

[DAL737FO]

"Comair was purchased to prevent it from being independent."

Surplus do you really believe this drivel? Comair was bought because it made good business sense to Delta and obviously the then Comair leaders. It became more financially viable to just own Comair outright instead of continuing on a contractual basis. Without that Delta traffic where do you think Comair would be right now? An honest assessment.

 

[FDJ2]

Comair was purchased to prevent it from being independent.

COMAIR had the opportunity to be independent, but CMR management did not want to take the risk. CMR also could have continued as an independent small jet provider, like Chautauqua or ACA, but CMR management new that they would not be as profitable as they had been under a very lucrative DAL contract. A contract that DAL would not extend, particularly since there were many other small jet providers available and willing to provide the small jet lift DAL wanted for far less than what CMR had been getting from DAL. CMR management chose to accept DAL's acquisition proposal since it presented the best option for CMR. CMR's management referred to the acquisition as a "win-win" and a strengthening of our relationship with DAL . Unquestionably CMR has benefitted from it's acquisition and has experienced 85% growth in the four short years since its acquisition.

The real question isn't if DAL will spin off ASA and CMR, but rather when and which will go first.

 

[601Pilot]

The only way I see a spun-off ASA or Comair being
attractive to investors would be to tie a specific
amount of DAL flying to either ASA or Comair.
Such as 45% (based on DAL block hours) of DCI
flying done by either entity as part of the deal.
That would make sure that the spun-off company
would not have to solely rely on their "low-cost"
structure to remain a part of the Delta family.

Just my $.02!

 

[General Lee]

A ten year contract (or guaranteed flying) would be ample enough for most investors. Then, when trying to get additional flying from some other company--the new Comair/ASA management would request lower costs (pay cuts) to compete with the Mesa's and Chataquas out there--and investors would like that too. There is no way Dalpa would give up the 45% or whatever scope provision. As I keep saying in other posts---with lower fares coming and larger LCC's--we will need MORE larger aircraft with more seats to compete with the other guys. Dalpa will also probably give up a lot on pay to make sure we get that flying---probably set it up like Delta Express----less pay but more productivity.(an extra 5 hours per month etc...)

Bye Bye--General Lee

 

[surplus1]

Surplus do you really believe this drivel?

What I really believe is that the Delta MEC, composed of the Delta pilots writing in these forums, should replace the Board of Directors and Executive Officers of Delta Air Lines.

Delta's problem is one of management and I am convinced that if the General was Chairman of the Board, FDJ2 were CEO and DAL737FO President, things would get better.

You could then hire ALPA and Duane Woerth as your Financial advisers and CFO respectively. Follow that up with an increase in compensation and benefits for all pilots coupled with a lowering of your "cap" to 50 hours and an improvement in your rigs and within a few months Delta would be dominiating the airline industry.

Together you could eliminate all the regional jets and replace them with an equivalent number of new Airbus aircraft so that the Company might be able to distribute its costs over a greater number of empty seats, thereby allowing you to also recall all of your furloughed pilots, plus make good on your promise to hire all the ASA pilots.

You could then negotiate a new Scope clause with yourselves to prohibit AirTran from operating out of ATL, American from flying out of DFW and JBlue from operating out of JFK.

Your scope might be challenged by those fellows but that's OK. Voting as a solid Republican block you can guarantee the rellection of GWB, who would then repay you by declaring them all terrorist airlines with WMD and overthrow their BOD(s) putting them into chaos. Ashcroft would then declare your scope as fully compliant with the Patriot Act and dismiss all challenges to it. Powell and Condeleza would join your team as ambassadors and and threaten Chirac into giving you super seniority on Air France, just in case there were any bumps along the way or difficulties with your business plan.

WIth the pilots running the airline your success will be guaranteed, just as it was at KIWI.

Good luck.

Comair was bought because it made good business sense to Delta and obviously the then Comair leaders. It became more financially viable to just own Comair outright instead of continuing on a contractual basis.

If the acquisition made could business sense, if it was more financially viable to own Comair instead of contracting with it, what changed that into bad business sense that now requires its sale after only four years? Was it Delta management that turned Comair from good business sense and financial viability into the current loss leader that must now be sold?

Without that Delta traffic where do you think Comair would be right now? An honest assessment.

How about the owners of a much bigger AirTran and one of your principal LCC competitors.

 

[General Lee]

Surplus1,

Now there is a plan! I like it. We could hire you as my "right hand man" or "Speech writer" (please, nothing over 3 pages...). I could get Caveman and Medflyer and make them my "sargents at arms" (sorry X-ream-me)--and they could "rough up" the people who don't like my plans. (ATRdriver and Wil would be senior VPs, along with Fins and Tim47SIP)


I never said that I would want to get rid of RJs, I just think that we need to replace them with larger equipment on routes that compete directly with LCCs. Those carriers are growing, and their routes are growing, and soon they will compete with us on many many city pairs. We will have to bring our fares down to their level, and then offer as many seats as possible to try to squeeze out a profit. Yes, we will also have to get our costs down (ie pay cuts), but that might not be enough. There are many other cities that the LCCs will not fly to, and those can be well served by RJs and have higher than normal fares. Look at today's announcement of new RJ service to Sioux Falls from CVG. I think that is great---probably higher fares for people who want to go there---and no chance of LCC service for the time being. How about CVG to Billings this Summer? I like that too. All RJ service form YYZ (Toronto) to ATL? Bad idea. DFW to SNA/ONT/OAK/PHX/DEN/MSY/MEM/TUS etc......not good. We need marketing to get it in gear and crank out some real advertising and go after customers. We then need new programs for better customer service and early retirement programs for all the old stews. And after all of that is done, I would like more bubble gum machines in the lounge! And I would like free shoe shines for all pilots! And stacks of $100 bills for each pilot as they walk out the door!

Bye Bye--General Lee

 

[surplus1]

General,

The irony is I believe you really do want all of those things.

Look, I think it's great that you haven't just given away your contract in exchange for promises similar to those at AAA. I also think it will take more than a reduction in "pilot costs" to solve Delta's problems.

The bottom line however, is that pilots (like you or me) do not have the information or the ability to decide how this airline or any other should be run.

Throwing rocks at management for every decision that they make may give us a "good feeling" about ourselves, but it does not solve the problems. Ultimately, the people that are paid to run the airline have to be allowed to do it, for better or for worse.

The Company is not a democracy and we do not elect the executives nor do we appoint them. We may not like their decisions or approve of their methods but, like it or not, the future of this Company or any other will be determined in the Board Room, not in the cockpit. The sooner we accept that reality the better.

With fingers crossed, I wish us all the best. The truth is we are spectators, not coaches or even players. The outcome of the game will affect us all and determine our futures but we are not in control and all the rhetoric in the world will not put us in that position.

Surplus 1

 

[DDpaysoff]

The real question isn't if DAL will spin off ASA and CMR, but rather when and which will go first.

I reccomend that you listen to the CC today, you can find it on yahoo/finance. Pay particular attention to the Q&A session and the two questions regarding a potential spinoff of CMR or ASA, instead of just coming up with this stuff off the top of your head and making yourself look foolish.

 

[General Lee]

DDpaysoff,

Also look at the "$116 million" operating profit had they not pre-paid the pensions early, even though pension reform now allows them a two year extension. And, look at the $102 million expense this quarter alone on RJs. We are the scapegoat and you get the benefits.

Every stockholder would question greatly if we were ever "forced" into Chap 11 without selling off key assets first--like ASA/Comair. Don't say it could NEVER happen.

Bye Bye--General Lee