Potential Delta/United merger?

[OhioGuy]

So if this occurred, would the world headquarters be in Atlanta or Chicago? Which city would lose its hometown airline?

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Delta says it's open to merger
Hedge fund with big stakes in both airlines urges Delta to buy United; Delta says it has committee looking at possible deals.

By Chris Isidore, CNNMoney.com senior writer
November 14 2007: 5:25 PM EST

NEW YORK (CNNMoney.com) -- Delta Air Lines said Wednesday it is open to a combination with another airline and was looking at deals even before one of its major shareholders wrote to push it to make a bid for United Airlines.

The suggested deal, which is being proposed as an answer to soaring jet fuel costs, would create the world's largest air carrier. A Delta-UAL combination would also likely spark a round of industry consolidation and sharply reduce the choices for passengers, which experts said could lead to higher fares on at least some routes.

The openness of Delta (Charts, Fortune 500) to a deal is a stark contrast to its stance a year ago, when the Atlanta-based carrier fought off a hostile takeover from smaller rival US Airways Group (Charts, Fortune 500). At the time it argued consolidation would be bad for the airline, its customers and employees.

Pardus Capital Management, which sent the letter to Delta Tuesday, estimates that a deal between Delta and United parent UAL Corp. (Charts) would save $585 million a year in costs and give the combined carrier the breadth of domestic and overseas routes to attract more lucrative business travelers.

It said its analysis showed that even greater savings were available in a Delta-Northwest Airlines (Charts, Fortune 500) combination, but that combination would not have as strong a route system.

And the letter said the fund was worried that high fuel prices could drive airlines to another round of bankruptcy filings or at least eat up recent profit gains.

But industry consultant Michael Boyd said any combination in the industry would take more than a year to start producing savings. He said any airline combination is an expensive and difficult process, and that most financial gains from such deals only come from reductions in competition and higher fares.

Boyd said that while Delta and United are likely looking at possible deals, he doubts an acquisition will actually occur.

"Every airline CEO has got to be considering scenarios because United is in play. And they'd like to bring capacity down to charge more for what's left," Boyd said. "But will it work in the airline industry? Only on paper."

Pardus' most recent federal filings had listed it as having 3 million shares of Delta (Charts, Fortune 500), but its letter said it now owns 7 million shares, suggesting it has been buying Delta at the recently depressed share price. It also has 5.6 million shares of UAL (Charts, Fortune 500). Its holdings represent about 3 percent of Delta's shares and nearly 5 percent of UAL.

Officials from Pardus were not immediately available for comment.

Rising oil prices hit holiday fliers
Delta issued statements denying a report that it has already held merger talks with United or any other airlines, but adding that its board has formed a special committee, headed by its non-executive chairman, to analyze strategic options. It also has retained financial and legal advisors to assist in this review.

"We appreciate receiving Pardus' views on the best course for Delta's future," said the statement from Delta CEO Richard Anderson. "We have been consistent in our public statements that Delta believes that the right consolidation transaction could generate significant value for our shareholders and employees and that strategic options should be evaluated. With oil at over $90 a barrel, this analysis takes on a heightened importance as we factor those prices into our long-term planning process."

"We have said for the last four years that we believe consolidation is necessary for the industry, and others independently are reaching the same conclusion. We make decisions in the best interest of United, and we don't comment on the opinion of one shareholder, or the actions or hypothetical transactions proposed by others," a company statement read.

Importantly, the Delta pilots union issued a statement saying it would not oppose a combination. Opposition from pilots has been a barrier to proposed airline deals in the past.

"Many analysts have suggested that airline industry consolidation is inevitable. The Delta pilots are not opposed to a rational and sensible consolidation scenario," said a statement from Lee Moak, a Delta captain and the head of the Air Line Pilots Association unit at the airline. "The 'right' merger opportunity could draw our support and result in a successful merger. However, we are not interested in a transaction just for transaction's sake."

Moak said that the pilots could only support a deal if it is included in merger discussions from the beginning of the process.

"Any consolidating event which involves the Delta pilots will not happen without our active participation and consent," he vowed.

United, the No. 2 carrier, behind only AMR Corp. (Charts, Fortune 500) unit American Airlines, saw its share close up 1.5 percent Wednesday, while Delta, the nation's No. 3 carrier which emerged from bankruptcy earlier this year, saw shares climb 4.5 percent.

AMR saw shares close slightly lower as did the major low-fare carriers, such as Southwest Airlines (Charts, Fortune 500) and JetBlue Airways (Charts). But other major carriers that could find themselves in play if consolidation takes place gained Wednesday, with Northwest shares up 5 percent and Continental Airlines (Charts, Fortune 500) up 1.5 percent.

Pardus' letter proposes the deal as a merger, with Delta offering 2.395 of its own shares for every UAL share, which represents zero premium for UAL shareholders based on the 30 day average of the two companies' share prices. But it suggests that Delta management would be the ones to lead the combined company.

Jet fuel prices have soared about 24 percent since Labor Day and are now 55 percent higher since January, when Delta fought off a hostile takeover attempt by US Airways Group (Charts, Fortune 500), arguing that such a combination would run afoul of antitrust regulators and not be a benefit to the airline, its employees or its passengers.

A spike in jet fuel prices in September 2005 sparked bankruptcies at both Delta and Northwest Airlines (Charts, Fortune 500). Most of the U.S. airline industry has filed for bankruptcies since the Sept. 11 terrorist attack,

Since Delta fought off the US Air bid, it has gotten a new CEO, Anderson, a veteran of Northwest and Continental, who has spoken far more positively about the benefits of industry consolidation. UAL executives have long been on the record in favor of mergers in the industry.

"United has been talking about merging with anybody and everybody but you and me," said Boyd.

http://money.cnn.com/2007/11/14/news...ex.htm?cnn=yes

[DenverInfill]

The combined airline would be called United and the HQ would be in Chicago, according to several other articles I've read about this today.

[kickazzz2000]

Gotta love investment banks and hedge funds...

[Major AWACS]

Well the "combined" airline would be run by Delta's management, but this has about a 5% chance of happening.

The biggest thing up front would be CVG going tits up.
Cincy would be gone. Atlanta and Chicago would still be huge hubs for this airline.

Ciao,
AWACS

[vertex]

Originally Posted by kickazzz2000

Gotta love investment banks and hedge funds...

Gotta love the hypocrisy and short-sightedness of Delta management...

[10023]

Whomever said that various articles have stated that the combined entity, were they to merge, would be headquartered in Chicago is correct. It is also likely that Richard Anderson, Delta's CEO, would assume that role at the combined entity.

This is, as Pardus (the hedge fund) is saying, a transaction that would make a lot of strategic and financial sense. The U.S. airline industry has too much redundancy right now, and the dynamics of the industry are not sustainable. The airline industry in aggregate, over its entire history, has been a money-losing enterprise - meaning that if one were to add up all the profits and losses that every airline that has ever operated in this country has made or lost, the result would be a negative number. There is no reason to believe that this will be any different going forward - it will continue to oscillate between periods of profitability (the last couple of years) and periods of massive losses and threats of (and instances of) bankruptcy. The fact that neither of these airlines is currently threatened with bankruptcy makes it possible for this combination to take place at the present juncture.

Both Anderson and Glen Tilton, UAL's head, have made numerous comments regarding the need for consolidation in the U.S. airline industry, and despite the smokescreen being put down currently in response to today's market speculation (companies are more or less required by the SEC to make statements affirming or denying these sorts of rumors in order to make sure that certain parties aren't benefiting from asymmetric information), there is no reason to believe that they have not in the past discussed this transaction. And given the quotes in the article from the head of Delta's pilots union about their desire to be included in early discussions if they're going to support a deal, it certainly doesn't help these companies' respective Boards and management teams to have the pilots union think the party has started without them, either.

There would be integration concerns, for sure - the pilots union, UAL's unionized maintenance workforce vs. Delta's non-unionized maintenance workforce, differences in the equipment that both airlines fly and what would be an overabundance of hubs. But the synergies would be enormous and the strengths of the two are complementary (Delta has lots of coveted Transatlantic routes, United is strong in the Pacific Rim).

Government regulators will of course determine whether a deal can happen, despite the business logic, on competition grounds. But of course, if the price of oil stays high and something happens to disrupt growth in air travel over the next several years, a bunch of airlines going bust a la PanAm doesn't really help consumers, now does it? And even if this and another major transaction were to happen, the U.S. would have more than enough legacy carriers to ensure healthy competition, let alone the discount airlines that compete very aggressively on domestic routes. I don't think you could point to a market that would be significantly hurt by this, as Delta already dominates Atlanta (and United doesn't really fly there) and O'Hare has the larger American Airlines. Antitrust regulators will nix a deal that reduces an industry from two major competitors to one, or from three to two, but this would only reduce the major national legacy airlines from six to five (American, United, Delta, US Airways, Continental, Northwest) unless I'm missing any. And any problems in specific markets would just be solved by demands that they give up some gates, but as I said, I can't think of any airports where these are the #1 and #2 airlines. If AMR and UAL were to propose a merger, for instance, they'd have to give up probably half of their gates at O'Hare (although that one would probably be blocked anyway).

A consolidation in the U.S. airline industry will happen in the near to medium term, and this is probably the most logical combination out there, so watch this space.

[atl2phx]

Originally Posted by vertex

Gotta love the hypocrisy and short-sightedness of Delta management...

and you're basing that comment on what?

[the urban politician]

As I said elsewhere, it seems like suddenly everybody is denying that any merger talks are on

[atl2phx]

Originally Posted by kickazzz2000

Gotta love investment banks and hedge funds...

true.

moreso, you gotta love the media and pr machine that took a press release from pardus and apparently ran with it sans any attempt at due diligence.

[10023]

Originally Posted by the urban politician

As I said elsewhere, it seems like suddenly everybody is denying that any merger talks are on

Yes. They have to say that. They could say that today and announce a deal Monday, happens all the time. Won't repeat my whole post and not saying it's going to happen imminently, but reducing the number of legacy carriers from 6 to 5 or even 4 through one or two combinations makes an immense amount of sense. And the CEOs of these two companies have both espoused that belief repeatedly. And industry analysts think this is one of the most logical combinations. You catch my drift I'm sure.

[totheskies]

It will suck to have to experience the downsizing that always happens with corporate coups, but hopefully it will also be a chance for smaller companies (Jet Blue for example) to fill in the service gaps.

[10023]

Well, some downsizing is necessary in this case. It's not a healthy industry long-term.

[Steely Dan]

if this goes through, the combined entity would be a monster, what with all of delta's atlantic routes and united's pacific routes, holy crap!

as for hubs, who would be the losers?

delta - atlanta, JFK, cincinnati, & salt lake city

united - ohare, dulles, denver, san francisco and LAX.



my guess is that cincinnati and salt lake city would be most hurt.

[vertex]

Originally Posted by atl2phx

and you're basing that comment on what?

Err, reality????


If you really need brushing up, you can start with this thread.

And in case anyone else has forgotten, you heard it here first.

[atl2phx]

Originally Posted by vertex

Err, reality????


If you really need brushing up, you can start with this thread.

And in case anyone else has forgotten, you heard it here first.

reality, huh?

let's call it like it is.....sour grapes from the phoenix/us air contingent.

[Rail Claimore]

Originally Posted by Steely Dan

if this goes through, the combined entity would be a monster, what with all of delta's atlantic routes and united's pacific routes, holy crap!

as for hubs, who would be the losers?

delta - atlanta, JFK, cincinnati, & salt lake city

united - ohare, dulles, denver, san francisco and LAX.



my guess is that cincinnati and salt lake city would be most hurt.

United said earlier this year they were considering cosolidation and wanted into the Northeast (particularly NYC) and the South. I expect SLC to be the big loser if this goes through.

I suspect CVG would be downgraded more to a secondary-hub/focus-city sort of deal, and function similarly to STL for AA. CVG is an airport with a lot of infrastructure available to use, and is one of only five airports in the US that can handle trimultaneous operations. It's advantageous to have a back-up hub in the Midwest when things go bad at O'Hare.

[vertex]

Originally Posted by atl2phx

reality, huh?

You're entitled to your spin and bias. I'll stick with the hard facts.

[atl2phx]

Originally Posted by vertex

You're entitled to your spin and bias. I'll stick with the hard facts.

you've presented nothing other than a link to an old thread about the failed acquisition of delta by us air. is that the quality and depth of your hard facts?

Originally Posted by vertex

Gotta love the hypocrisy and short-sightedness of Delta management...

seriously, i thought you might be rich with substantive data to support your original comments. what have ya got? gotta story brewing there? working on, working on that for quite some time? huh?

[Go7SD]

Economically, it would make sense for both companies to do the merger in order to survive the struggling state of the airlines industry today just to stay afloat and become more competitive. Maybe the two Texas based airlines American and Continental could merge leaving the HQ in Ft Worth or Houston. Let's all merge together just for the hell of it.

[nomarandlee]

http://www.chicagotribune.com/busine...,4606041.story

A look at the hedge fund pushing United, Delta into merger talks
By Julie Johnsson | Tribune staff reporter
2:55 PM CST, November 15, 2007

If they were to merge, United Airlines and Delta Air Lines would create an international colossus that would spur job growth rather than job cuts, says former Continental CEO Gordon Bethune.

That's the scenario envisioned by the New York hedge fund that's pressuring the nation's No. 2 and No. 3 carriers to join forces before oil spikes and a softening economy drive airlines into another downturn.

For the past month, Bethune has been helping Pardus Capital Management LP, a major shareholder of both carriers, devise a strategy to prod United and Delta into serious merger talks.

..............The merger scenario sketched out by Pardus wouldn't involve major job cuts, or closing any hubs, sources say. Pardus also envisions giving employees five percent of the equity in the combined company, a stake it estimates would be worth $1.2 billion by 2012...........................

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