A takeover of Delta could spark more mergers

Roland Jones Business news editor • Profile • E-mail

If US Airways Group is successful in its $8 billion bid for Delta Air Lines, it would not only create one of the world’s largest airlines but also could lead to a new round of consolidation in the U.S. airline industry, analysts said Wednesday.

The deal would create the nation’s largest airline, larger even than American Airlines — a startling outcome for a carrier that has gone through bankruptcy twice, emerging most recently in 2005.

US Airways’ Chief Executive Doug Parker has long pushed for consolidation in the industry and first approached Delta — which is currently operating under bankruptcy protection — last spring.

Last year, as chief executive of America West, Parker pulled off a similar deal, proposing a merger with US Airways while that airline was still in bankruptcy. After US Airways emerged from bankruptcy the merger was completed and the airline retained the name of the better-known carrier.

“The success of consolidation is quite clear,” Parker told CNBC Wednesday. “[We have] already proved it with America West and US Airways, and our investors are quite happy,” he added.

In a letter outlining the proposal, Parker said the deal with Delta could create $1.65 billion in “annual network and cost synergies” including $710 million in reduced expenses.

So far, Delta has sounded antagonistic to Parker’s advance, but if he ultimately pulls it off and regulators approve it, the deal “will probably set off a series of potential [merger] activity in the industry,” said airline analyst Ray Neidl at Calyon Securities.

Industry observers like Neidl have long said that a new round of mergers is a logical next step for the airline industry, now that it is just beginning to get its legs back under it after billions of dollars in losses, cost-cutting and capacity reductions that followed an industry downturn brought on by a slump in the U.S. economy, a surge in fuel prices and the Sept. 11, 2001, hijackings.

The likely targets have been identified as bankrupt airlines including Delta Air Lines and Northwest Airlines, which are now approaching their exits from Chapter 11 protection.

Under bankruptcy, these airlines have been able to streamline their businesses, restructure fleets and renegotiate labor and vendor contracts and are expected to resurface leaner and meaner — ultimately, more attractive merger partners.

U.S. Airways itself is a good example. Since emerging from bankruptcy and merging with America West, the combined carrier has seen its business rebound and its stock price more than double.

Still, challenges remain for a deal between US Airways and Delta. It’s unclear whether it will pass regulatory muster, and integrating airlines is difficult, as it involves combining unionized labor with different rules and wage scales. Another challenge is integrating flight routes and aircraft fleets.

And at present Delta looks like it is not interested in deal. CEO Gerald Grinstein said in a statement Wednesday that the airline’s plan “has always been to emerge from bankruptcy in the first half of 2007 as a strong, stand-alone carrier,” adding that Delta has until Feb. 15, 2007, to structure its bankruptcy reorganization plan.

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