US Air bids for Delta

$8 billion offer for carrier in Chapter 11 would create top domestic line

November 16, 2006|By Tom Belden and Thomas Ginsberg | Tom Belden and Thomas Ginsberg,The Philadelphia Inquirer

PHILADELPHIA -- US Airways, fresh off one merger that is still unfinished, offered yesterday to buy struggling Delta Air Lines for $8 billion, a deal it said would create the nation's largest domestic airline.

US Airways said its proposal would give Delta's creditors $4 billion in cash and 78.5 million shares of US Airways' stock, valued at about $4 billion at recent prices. The combined operation would use the Delta name.

Delta said that it would review US Airways' proposal, but that it also would continue to work on its own plans to emerge from Chapter 11 bankruptcy protection as a stand-alone company.

The surprise offer is an indication of how successful the former executives of America West Airlines have been in merging with US Airways over the past 14 months, despite early doubts that the combination would work.

Although the work forces of the two carriers still need to be blended, analysts praise US Airways for having completed most other aspects of the merger smoothly.

In early 2005, US Airways was in Chapter 11 bankruptcy proceedings itself and in danger of being liquidated when management of the smaller America West stepped in and convinced creditors of the larger and older US Airways that it had a plan to bring the carriers together.

US Airways chief executive William Douglas Parker, who previously led America West, now is trying to use a similar bankruptcy process to persuade Delta's creditors that his proposal will give them a better return than supporting an independent Delta.

US Airways' stock has more than tripled in value since it began trading on the New York Stock Exchange just over a year ago. The stock closed up 17 percent, or $8.57, to $59.50 yesterday.

The combined networks of US Airways, the nation's sixth-largest airline, and No. 3 Delta, would serve 350 destinations on five continents.

Parker, speaking to industry analysts early yesterday, said the "new Delta" intends to maintain hubs, or at least a large number of flights, in other cities where the two airlines now have hubs.

Systems overlap

Parker indicated that Pittsburgh would continue to be a "focus city" for the new operation.

At the same time, the two airlines' domestic route systems have considerable overlap.

Delta has connecting hubs in Atlanta, Cincinnati and Salt Lake City, and US Airways operates hubs in Charlotte, N.C., Phoenix and Las Vegas.

Analysts predict the combined company would sell one of their East Coast shuttle services.

Both Delta and US Airways operate shuttles between Boston, New York and Washington.

The new company would eliminate about 10 percent of the two airlines' combined airplane fleets.

But that does not necessarily mean cutting many jobs at either airline, US Airways officials said. Combined, the carriers have about 85,000 employees.

Parker said it would set pay for each job category in an integrated work force at the highest level now used at the two airlines.

Labor disparity

About 80 percent of US Airways' 35,000 employees are union members. At Delta and its Comair regional subsidiary, about 17 percent of workers belong to a union.

Parker said US Airways approached Delta management with its merger proposal earlier this year but was turned down, prompting the unsolicited bid. He said he believes the offer is fair and that ultimately Delta's creditors will agree.

25 percent premium

US Airways said its proposal represents a 25 percent premium over the current value of Delta's unsecured claims, assuming the value of the unsecured claims at about $16 billion.

US Airways said it believes it can eliminate $1.65 billion in overlapping costs, primarily by returning some leased airplanes as part of Delta's reorganization process, and eliminating duplicated services.

Industry analysts cheered the proposed merger, although they noted that the bankruptcy process is still largely under the control of Delta management until Feb. 15, the deadline for it to file a reorganization plan.

Vaughn Cordle, an industry consultant and pilot who runs Virginia-based AirlineForecasts LLC, said the debtors who will hold many of the cards in Delta's situation would see far fewer losses under Parker's plan.

`Win-win situation'

"This is a win-win situation," said Cordle, who is neither an investor in nor consultant to either airline.

"It's a big win for Delta creditors and for labor, and for US Airways shareholders and labor, as long as they can acquire it before Delta emerges from bankruptcy."

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