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Delta Chief Firmly Against Merger

By Del Quentin Wilber
Washington Post Staff Writer
Wednesday, December 6, 2006

The top executive at Delta Air Lines said he would vigorously defend his company against an unsolicited takeover bid, insisting that the Atlanta-based carrier would be a stronger company and better for consumers if it remained independent.

In his first interview since US Airways Group announced its merger proposal last month, Delta chief executive Gerald Grinstein said he was confident that creditors would accept his reorganization plan. He also said it would be difficult for a combined company to overcome internal and regulatory hurdles.

"Whenever you go from having two carriers to one, or three carriers to two, that is going to have a consumer impact," he said. "There will be a loss of service in some smaller communities. There will be an increase in fares. . . . There is no question that there are antitrust issues that won't be quickly or easily resolved."

"I think the track record of good mergers is hard to find" in the airline industry, he said.

Delta and US Airways are battling to convince creditors, regulators and legislators of the virtues of their competing plans. US Airways has dominated the early rounds. Its stock price soared the day the merger proposal was announced but has since retreated slightly.

Many outside analysts and airline executives think the industry needs to consolidate to improve its financial outlook.

Grinstein, 74, has been working to get Delta, the nation's third-largest carrier, out of Chapter 11 bankruptcy protection for the past year. He is expected in the coming weeks to present creditors and the court with a reorganization plan that he says would be better for creditors than US Airways' $8.5 billion offer.

Several analysts and executives at other airlines said US Airways appeared to have lost momentum, as investors and creditors look more carefully at the merger proposal. Among their concerns are the reaction of regulators, the new Democratic-controlled Congress and the short time available for US Airways to complete a deal. US Airways hopes to do that before Delta leaves bankruptcy protection, which is expected next year. Otherwise, US Airways would lose some cost-cutting advantages it could gain in the bankruptcy process.

"There are more chances of this deal being killed because of market forces and the Justice Department," said Michael Miller, an analyst with the Velocity Group. But, he added, the offer has "the power of dollars behind it."

Ray Neidl, another analyst, said the merger proposal has a 30 to 40 percent chance of overcoming internal and regulatory hurdles in such a short time.

US Airways chief executive W. Douglas Parker said he was confident that the merger would be completed. Creditors seem receptive to the offer, he said in an interview. "It was well received and the process continues. The process is gaining steam."

Parker expressed confidence that the companies could address antitrust issues. A combined airline would probably have to sell some airport gates and one of the lucrative shuttle routes among Washington, New York and Boston, US Airways executives acknowledged.

Parker is interested in Delta because the two airlines compete on many of the same routes. A merger would allow him to reduce the number of flights and aircraft serving those cities. He said he thought such a business plan would save $1.6 billion a year by combining functions and cutting flights.

Parker said such a strategy would benefit consumers by offering them a healthier airline that serves more destinations. He said the new airline would not raise fares.

"Consumers will be better off," he said.

Grinstein disputed that claim and said his airline would serve customers better without a merger because it has already streamlined operations and achieved more than $2 billion in annual savings.

Although it is still has problems with mishandled baggage and major delays at some airports, Grinstein said Delta is using planes more efficiently and plans to expand its lucrative international routes.

Grinstein would not discuss the specifics of his restructuring plan and said he did not know what creditors thought of the US Airways offer. "They have their cards to play and they are going to play them," he said.

He said there were a variety of obstacles that would make a merger difficult, such as the airlines' different fleets, employment structures and cultures.

US Airways also hasn't fully digested its prior merger, with America West, raising questions about whether it could handle a hostile takeover at the same time, Grinstein said.

"They haven't concluded last night's dinner before planning tonight's," he said. "This was totally unexpected, unsolicited, unencouraged and unhoped for. . . . We are so dissimilar. We have different equipment. We have different service philosophies."

If the merger sets off a spree of consolidation among the other major carriers -- American, Continental, United and Northwest -- the outlook wouldn't be good for a combined Delta and US Airways, which would be smaller than other partnerships, Grinstein said.

"If this devolves into three systems, which is the weakest of the three systems?" he said. "The answer is pretty clear."

Grinstein declined several attempts by Parker to discuss merger possibilities before US Airways made its offer public last month. The Delta executive said he was surprised to learn of the offer while listening to the radio at home before going to work. "I would have handled it differently," Grinstein said.

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