By Del Quentin Wilber
Washington Post Staff Writer
Thursday, November 16, 2006
US Airways Group Inc. yesterday launched an $8 billion bid for Delta Air Lines Inc., a move that would create the nation's largest carrier and possibly trigger other airline mergers in an industry recovering from a major downturn.
US Airways chief executive Doug Parker said combining carriers would boost profit and substantially cut costs by eliminating overlapping work and flights. Parker, who is credited with helping to successfully merge US Airways and America West in 2005, said he wanted to take advantage of Delta's status in Chapter 11 bankruptcy protection. If he waited until after the carrier exited bankruptcy, it would be harder to jettison unneeded Delta aircraft, he said.
"It's a unique opportunity to create a significant amount of value," Parker said in an interview.
Topping the list of potential obstacles is Delta's management, which isn't excited about any merger. Chief executive Gerald Grinstein sent a memo to employees later in the day, saying he didn't want Delta to emerge from bankruptcy protection as a "merged, acquired or otherwise consolidated airline."
The new airline would retain the Delta name and offer more seats than any other airline in the nation, surpassing the current leader, American Airlines, US Airways executives said. Its network would extend from New York to Phoenix and abroad. Delta would become the top airline, serving 155 domestic airports and 350 destinations worldwide, the executives said.
It is not known which frequent-flier program the new company would retain -- US Airways is a member of the Star Alliance network, and Delta is a partner in SkyTeam, both extensive partnerships involving foreign carriers.
Although US Airways executives said they would not stop flying to any cities served by either carrier, they said the merger would allow them to cut about 10 percent of the two airlines' flights. The new airline would be able to cut costs by flying fewer aircraft with more passengers, the executives said.
"We would also benefit from reducing service to some underperforming markets and discontinuing some unprofitable" routes, Parker said in a conference call with analysts.
With the reduction in flights, the number of cheap fares offered by the combined airline on many routes would decline and the average ticket price would increase, experts said.
"Fares will go up a little bit because there will be less overall competition," said Michael MacNair, author of "Smooth Landings," a book on managing business travel. He added that business travelers are nervous about the deal because they "don't want to shoulder the burden of higher ticket prices because competition goes away."
US Airways stock soared yesterday in reaction to the bid, closing up 16.8 percent, to $59.46 a share on the New York Stock Exchange. Delta shares closed at $1.52, up 3.4 percent, and its distressed bonds jumped in value and were among the most actively traded corporate debt issues yesterday.
Most analysts seemed enthusiastic about the proposal, saying they welcomed the idea of consolidation in the industry. Airline executives, including the chief executive of United Airlines, have said the industry needs to shrink to remain competitive. Among other possible merger targets, analysts mentioned United, American, Continental and Northwest airlines.
Analysts cautioned, however, that a US Airways-Delta deal faces many hurdles. US Airways hasn't yet fully digested its last merger; it hasn't even finished painting all of its America West jets in the new company colors.
Delta's chief executive brushed off attempts by Parker to discuss a merger this fall, according to letters exchanged between the two men.
In a statement yesterday, Grinstein said his airline's "plan has always been to emerge from bankruptcy in the first half of 2007 as a strong, stand-alone carrier. Our plan is working and we are proud of the progress Delta people are making to achieve that objective."
Grinstein said in yesterday's memo to employees: "I've said before and continue to believe that the history of mergers in the airline industry is almost always one of failure."
Faced with that resistance, Parker sidestepped Delta's management yesterday and made a direct pitch to its creditors. The offer totals $4 billion in cash and 78.5 million shares of US Airways stock. If creditors like the deal, they could approach Delta management and encourage them to consider it.
Regulators also may question the bid. The new airline would probably have to shed one of its lucrative shuttle routes between Washington, New York City and Boston, US Airways executives acknowledged.
The Justice Department, which would scrutinize any potential merger, might also force the airline to eliminate some of its East Coast hub airports. The airline would have major operations at pairs of neighboring hubs, such as those in Charlotte and Atlanta, and New York and Philadelphia.
Antitrust lawyers said the Justice Department would focus on whether the proposed merger might diminish competition and harm consumers. Six years ago, the department seemed ready to challenge a proposed merger between US Airways and United Airlines before it fell apart.
But the emergence of low-cost carriers and Delta's struggles in bankruptcy may change the view of the department's lawyers, said Bill Bayer, an antitrust lawyer and a former head of the Federal Trade Commission's antitrust division.
"The market has obviously changed in six years," Bayer said, but questions remain about whether "it has changed to the point where the cost savings from combining these two carriers will outweigh the risks to consumers and competition."
If the airlines reach a deal, it will also probably be studied by the new Democratic Congress next year.
Rep. James L. Oberstar (D-Minn.), the ranking Democrat, and likely future chairman, on the House Transportation and Infrastructure Committee, said he would probably hold hearings on such a merger.
"A combination of carriers of this magnitude should be scrutinized in the public domain," Oberstar said.