Delta Creditors Reject Merger
Thursday, February 1, 2007
US Airways lost its aggressive takeover bid for Delta Air Lines yesterday when Delta's creditors rejected the $10 billion offer that would have created the nation's largest carrier.
The decision was a blow to US Airways' chief executive W. Douglas Parker, a blunt and fierce advocate of industry consolidation who led US Airways' merger with America West in 2005 that created the fifth-largest U.S. airline.
A committee of Delta's creditors said in a written statement that it decided against a merger because of the "timing and risks" of concluding a deal. The creditors said they would back Delta's plan to emerge from Chapter 11 bankruptcy protection as a stand-alone airline.
Parker said in a written statement that he was "disappointed" and that the committee was "ignoring its fiduciary obligation" to creditors. He did not respond to interview requests.
"Our proposal would have provided substantially more value to Delta's unsecured creditors than the Delta stand-alone plan," Parker said. "We would have created a better and more financially stable airline that offered more choice to consumers and increased job security."
Delta aggressively fought the proposal on Capitol Hill and in the news media. Delta, the third-largest U.S. carrier, has told creditors that it expects to be worth as much as $12 billion after emerging from Chapter 11.
Delta's chief executive, Gerald Grinstein, also declined a request for an interview. He said in a prepared statement that "this is a proud day for the thousands of Delta people, customers, communities, civic leaders and others who stood up for our stand-alone plan. . . . Our focus now is on the work still before us to emerge from Chapter 11 this spring as a strong, healthy, and vibrant global competitor."
Many analysts and airline executives said a US Airways-Delta merger would have sparked further consolidation in the industry.
Possible combinations included United and Continental airlines and Northwest and American. United and Continental have been in talks. Although Grinstein and other executives denied news reports that Delta was negotiating with Northwest, they have not ruled out considering such a merger.
Executives have said that consolidation is needed to help the industry expand networks, reduce costs and boost profits as carriers continue to recover from the economic downturn after the 2001 terrorist attacks. Analysts and trade groups expect the airlines to collectively report an annual profit for 2006, the first time in six years they will have done so.
Legislators and consumer groups have expressed uneasiness about potential mergers and how they would affect fares and service, particularly to small towns and rural areas. Several senators raised such concerns last week at a hearing. They said a Delta-US Airways combination would cut service to rural areas in such states as Mississippi and Maine.
Analysts said that resistance in Congress, potential trouble in obtaining antitrust approval and difficulties in combining antagonistic workforces probably led creditors to side with Delta's management.
"The US Airways' proposal had more money, but there were a lot of problems too," said Darryl Jenkins, an analyst and consultant. "Creditors saw Delta's plan as having less risk. Delta's management created enough doubt to be able to emerge free, for now."
Parker sought to merge with Delta while it was still under bankruptcy protection to take advantage of rules that make it easier to dump expensive leases on airplanes and other contracts. He said the merger would have allowed him to consolidate routes and reduce Delta's capacity by about 10 percent. He expected those efforts to trim costs by about $1.6 billion.
Analysts said they didn't expect US Airways to suffer much from failing to complete a merger. They noted that the company had been aggressive in controlling costs and raising fares, and they predicted that its stock price would rise.
Staff researcher Richard Drezen contributed to this report.