RockBottom

US Airways, Delta merger has 80% likelihood, analyst says

Cincinnati Business Courier - 9:29 AM EST Thursdayby Lucy MaySenior Staff Reporter

JP Morgan Securities analyst Jamie Baker has predicted an 80 percent likelihood of ultimate creditor and regulatory approval for US Airways' proposed merger with Delta Air Lines and doesn't think that bodes well for Comair.

In a report to investors, Baker said the other option is a competing bid for Atlanta-based Delta (Pink Sheets: DALRQ).

"Clearly, lots of twists and turns lie ahead," he wrote.

Baker thinks a US Airways/Delta merger would bode negatively for regional airlines in general because of the many partnerships that both airlines already have with such carriers, and he has doubts about the future of Comair in particular, he wrote in a separate report.

He called Erlanger-based Comair "the red-headed stepchild in the mix" that might shield other regional carriers from deeper cutbacks if the merger occurs.

"We believe that significant cuts (or perhaps a shutdown) may be in Comair's future," he wrote.

Executives at Delta, which operates its second-largest hub at the Cincinnati/Northern Kentucky International Airport, have said repeatedly that the airline wants to emerge from bankruptcy in early 2007 as an independent carrier.

Delta CEO Gerald Grinstein underscored that sentiment in a memo to employees Nov. 15, the day US Airways publicized its merger intentions.

"While Delta is obligated to review this proposal carefully, we remain skeptical that it would make sense to deviate from our plan. We are working hard to regain an industry position of strength and leadership," Grinstein wrote. "From that position, we can best control our own destiny and pursue the direction that best benefits all Delta constituents, including Delta people, now and in the future."

US Airways CEO Doug Parker first talked to Grinstein about a possible merger in the spring and followed up with a more detailed proposal in September. Grinstein rebuffed the offer in a letter last month, and US Airways (NYSE: LCC) went public with its intentions to turn up the heat on Delta and try to convince the bankrupt airline's creditors of the benefits of a merger.

In his memo, Grinstein wrote that he had the backing of Delta's Creditors Committee when he declined merger discussions in October.

"Obviously, others are recognizing the success we've achieved together by reducing costs, increasing revenue, and improving customer products and services," he wrote. "You have good reason to be proud of the positive response you've helped our company earn."

Grinstein stressed that the U.S. Bankruptcy Court has granted Delta management the exclusive right until Feb. 15, 2007, to create its own plan of reorganization and, during that time, others can't submit competing plans.

"I've said before and continue to believe that the history of mergers in the airline industry is almost always one of failure, with over-promise of synergies and under-delivery of results," he wrote. "That continues to be my view."

Still, Baker said such a merger wouldn't be a threat to any existing legacy carrier's network. Because of that, it's hard to predict how the nation's other major airlines would react.

Response from the U.S. Department of Justice and Congress will be key, he wrote, saying that Democrats are likely to be sympathetic to the concerns of unions at the airlines.

Ellen

Yeah right. What do analysts know anyway? Are these not the same people who said ENRON and WORLDCOM were best investments. I won't hold my breath that is for sure.

Flatspin7

And even if the creditors approve the merger... the Government would have to allow it to.

rickair7777

My experience with Doug Parker is that he would not have launched this unless he had a reasonably good chance of succeeding. He would have done all of his homework...

Key Points:

1) Financing: DP has the credibility to get the financing to do this, and would not have proposed it publicly unless he had the money all lined up...

2) Money talks, BS walks: The creditors will have to choose between $8B, (of which $4B is cash) or the promises and assurances of DL's management team regarding a rosy future...what would YOU do if it were YOUR stocks or unsecured debt on the line? I would cash out, since folks holding BK debt usually don't get opportunities like this.

3) Looking at the route structure...Big picture, there is not massive overlap system wide. There is clearly overlap in the east, but there are other carriers in that region to provide the needed competion. There may be a few small markets with significant overlap, but the DOJ is not going to ixnay something this large just because a few small/medium towns will lose a competitor.

My gut feeling is that it has a good chance of happening, but who knows.

I also think this will be bad for comair, and fatal for mesa ( ).

HSLD

My guess is the DOJ is the only hurdle here. DAL bonds are up, way up, on this offer and the creditors stand to make more here than any other offer in DAL's Chapter 11.

Any opposition needs to aimed at DOJ via congress.

Tinpusher007

Ummm...there is nothing short of massive overlap. In fact the only region where there isn't significant overlap is out west and even there SLC, PHX and LAS are not that far apart. A look at the proposed merged route map underscores my point: http://www.usairways.com/awa/content.../routemap.aspx

Flare Armed

A New York Post article said there was 50% route overlap, and I read 36% elsewhere. Airways brings nothing additive to the Delta mix, other than problems.

undflyboy06

If Delta and US Airways do decide to merge, will that affect the number of new hires for the new merged company, or slow down hiring?

Sideshow Bob

To me (being a UseLessAir furloughee with 18 years useless seniority) I grieve for the Delta folks. USAir has destroyed PSA, Piedmont and is working on AW...each great carriers in the "pure sense" notwithstanding the economics. Few may remember that right after buying PSA one of the first orders of business was to "erase" the smiles off the PSA MD80's. While most have stories about the arrogance of DL types it is still sad to see this apparent demise.

rickair7777

Well, both companies have pilots furloughed now, so hiring will have to wait until they finish the route consolidation and fleet reduction, and then recall all the furloughs.

It's possible that one or both might hire a little before the consolidation occurs.