US Airways is still painting new logos on many of the planes it got when it combined with America West last year.
It may need more paint.
On Wednesday, the company said it was offering $8 billion in a hostile bid to take over rival Delta Air Lines and create what could be the nation’s largest carrier.
The move, despite Delta’s repeated statements it isn’t interested in a merger, could start a stampede of competing bids in a long-predicted industry consolidation.
The offer, however, faces many obstacles, and analysts questioned whether the deal can be completed on US Airways’ compacted timeline. Delta, which said it would review the proposal but was pushing ahead with its goal to emerge from bankruptcy as a standalone company, has yet to file its own plan of reorganization, and it has the exclusive right to do so by Feb. 15.
“My main question mark is if the politicians and regulators would allow it to happen, because if it did it would probably set off a trend for industry consolidation,” Ray Neidl, an airline analyst with Calyon Securities in New York, said of a Delta-US Airways combination.
The offer comes as US Airways and America West are still integrating their operations after their combination. To date, only 57 percent of America West planes have been painted over with US Airways’ logos, a spokesman said.
The deal also could cause some headaches for labor groups, said aviation consultant Robert W. Mann.
“There will be a huge seniority integration problem that will result. It’s already problematic after the US Airways-America West merger. This will only increase it fourfold,” Mann said.
The offer to buy Delta once the Atlanta-based airline emerges from bankruptcy protection by the middle of 2007 would give Delta’s unsecured creditors $4 billion in cash and 78.5 million shares of US Airways stock.
As it stands now, Delta’s common shares are likely to end up worthless when it exits bankruptcy. In most bankruptcy cases, debtholders end up with new shares of the company.
350 destinations across five continents
If the deal is completed, the combined airline would operate under the Delta name and serve more than 350 destinations across five continents. US Airways has not decided where the combined company would be based. It would divest certain assets, including a shuttle that operates in the Northeast. US Airways also said it would optimize flights at its hubs, but did not say what further impacts the hubs could face.
Shares of US Airways Group Inc. rose $6.67, or 13.1 percent, to $57.60 in afternoon trading on the New York Stock Exchange. Delta Air Lines Inc. shares are traded over the counter.
Doug Parker, chief executive of Tempe, Ariz.-based US Airways, said in an interview he is aware of the comments made by Delta’s management in recent months, but he believes this is a fair offer and that ultimately Delta’s creditors will see that.
“The (bankruptcy) process is designed so that the creditors get the highest possible value for their clients,” Parker said. “Given that process, what we have done is gone public with an alternative to a standalone plan.”
The deal would be subject to regulatory, creditor, U.S. Airways shareholder and court approval.
Delta Chief Executive Gerald Grinstein issued a statement saying the carrier would review the proposal, but would continue to pursue its goal to file its reorganization plan. “Delta’s plan has always been to emerge from bankruptcy in the first half of 2007 as a strong, standalone carrier,” Grinstein said.
Grinstein said last month he had received “feelers” from UAL Corp.’s United Airlines about a possible merger 18 months ago, but quickly rejected them.
As for other possible offers, a spokesman for AMR Corp.’s American Airlines said the company was studying the US Airways proposal but had no further comment. Said Jake Brace, chief financial officer of United’s parent, “We think consolidation is good for the industry. If it makes sense for us to participate in it, we will.” Northwest spokesman Kurt Ebenhoch declined to comment on the proposed deal. Southwest declined to say whether it would enter the bidding for Delta.
$28 billion in annual revenue
The combination of US Airways and Delta would create a company with about $28 billion in annual revenue, leapfrogging the airline past the current No. 1 U.S. carrier, American. The projection is based on revenue figures through the first nine months of 2006. It’s unclear how any divestitures would affect combined Delta-US Airways’ revenue.
Delta is currently the third-largest U.S. carrier in terms of revenue, while US Airways is the sixth.
Parker said the combined company would have about 85,000 employees. He said he would anticipate flying with 10 percent fewer planes, but “the plan is not predicated on any job cuts.”
During a conference call, some analysts were skeptical of US Airways’ confidence it can get the deal done if Delta is hostile to the bid.
They also questioned why US Airways is bidding for Delta, as opposed to another airline, like Northwest, which also is in bankruptcy.
Parker said the Delta bid makes more sense because of the savings that can be realized. He also said he is confident the deal can clear all the hurdles it needs to and “would prevail over any other bid if there were any.”
US Airways has hubs in Phoenix, Philadelphia and Charlotte, N.C. Delta’s hubs are in Atlanta, Cincinnati and Salt Lake City.
The deal makes the most sense only if it is consummated through the bankruptcy process, rather than waiting until after emergence to reach agreement, Parker said. That’s because of further cost cuts that could be gained through the bankruptcy court.
As for employees, Parker said “we happen to have similar labor costs on both sides.” He did not discuss pilot pay.
US Airways has received a commitment from Citigroup Inc. to provide $7.2 billion in new financing for the deal.
The funding would be used to refinance Delta’s debtor-in-possession credit facility, refinance US Airways’ existing senior secured facility with GE Capital, and provide funds for the $4 billion cash portion of the offer.
All other allowed secured debt and administrative claims would be assumed or paid in full. As of the end of May, Delta owed $7.49 billion to holders of secured claims, according to a court filing.
US Airways said the offer is a 25 percent premium over the current trading price of Delta’s pre-petition unsecured claims as of Tuesday, and a 40 percent premium over the average trading price for Delta unsecured claims over the last 30 days.
According to letters filed with the Securities and Exchange Commission, Parker originally had a conversation with Grinstein about a combination of the two airlines in the spring and followed up with a letter to Grinstein on Sept. 29.
In a letter to Parker dated Oct. 17, Grinstein said he and Delta’s board “believe it would not be productive to engage in the type of exploratory discussions that you proposed at the time.”
US Airways, which was created after US Airways emerged from bankruptcy and was acquired by America West last year, said the new deal is expected to generate $1.65 billion in annual savings from optimization of the airlines’ networks and combining facilities in overlap airports.
US Airways sent a letter touting the Delta buyout to its frequent flyers, claiming the deal would reduce fares and combine the two airlines’ frequent flyers programs, making it easier to redeem miles.