Delta Price May Be Burden for US Airways

The Associated Press
Thursday, January 11, 2007; 1:56 AM

PHOENIX -- Delta Air Lines certainly would be a huge prize for US Airways, but its proposed $10.3 billion price tag could become a heavy burden on the company's finances.

US Airways Group Inc., which was forged from the struggling America West Airlines and the bankrupt former US Airways, said Wednesday it will increase its offer for Delta by almost 20 percent and will borrow $5 billion to do it.

Delta, which also is in bankruptcy, would be the biggest purchase ever for the Tempe, Ariz.-based carrier. But it would sink the company's finances, at least at first.

US Airways officials estimate the combined debt of a merged carrier would be about $24 billion, including long-term leases for its aircraft. However, the company expects a merged carrier would save $1.65 billion per year by trimming its fleet of aircraft, cutting redundant routes and other synergies.

"It concerns me," Ray Neidl, an airline analyst with Calyon Securities in New York, said of the debt.

"I'd like to see that paid down as quickly as possible. But if the market thinks the deal is good enough and the financiers think it's good enough, they'll give them the chance to do it."

In a conference call with industry analysts, Chief Executive Doug Parker brushed aside concerns of his company taking on more debt.

Parker noted that companies like General Electric Co. operate successfully despite owning hundreds of billions of dollars because they also enjoy enormous earnings.

"The absolute level of debt doesn't mean anything," Parker said. "What matters is the ability to service the debt."

US Airways last year offered $8.6 billion in cash and stock for Delta. Parker added another $1.7 billion Wednesday. He said the offer would expire Feb. 1 if certain conditions are not met.

The increased bid includes 89.5 million shares of US Airways stock and $5 billion in cash. The original offer included 78.5 million shares of US Airways stock and $4 billion in cash.

US Airways shares rose $1.03, or 1.8 percent, to close at $58.93 in trading Wednesday on the New York Stock Exchange, boosting the value of the revised offer.

Delta's creditors now will have to decide whether to accept the offer or continue to support Delta's plan to emerge from bankruptcy as a standalone company.

Delta Air Lines Inc. has opposed US Airways' offer. The Atlanta-based carrier said in a statement Wednesday that its board would review the revised bid, but it was concerned about the amount US Airways planned to borrow.

"On its face, the revised proposal does not address significant concerns that have been raised about the initial US Airways proposal and, in fact, would increase the debt burden of the combined company by yet another $1 billion," the statement said.

Meanwhile, a Jan. 24 hearing has been scheduled by the Senate Committee on Commerce, Science and Transportation on the state of the airline industry and the potential impact of airline mergers. Parker was in Washington on Wednesday to talk to lawmakers.

Anthony Sabino, a business law professor at St. John's University in New York City, said he thinks US Airways' latest bid for Delta is risky. But it also puts Delta in a tough position to match it.

"I can guarantee you they're scrambling to sweeten the deal by wringing more inefficiencies out (of Delta's operations) and present a better deal to their creditors," he said of Delta.

Sabino added it might be a good time to take a chance on a US Airways bid, despite the debt, given the relatively low price of oil compared with previous years, the mild temperatures fostering a decent travel year and decreased security concerns.

"The question for the creditors is, is he (Parker) reaching or is he overreaching?" Sabino said.

Delta's creditors "are going to try to base that on cold hard numbers, but in the final analysis, a fair amount of that is going to be purely on just gut reaction as to what's the right move here. And only time will tell."


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