USAirways Bid for Delta Could Spur More Airline Mergers

USAirways Group Inc.’s surprise bid Wednesday to buy Delta Air Lines Corp. for $8 billion in cash and stock raised investors’ hopes for more merger activity in the overcrowded American airline industry.There could be competing offers for Delta, and plays for smaller carriers, as airlines seek revenue and cost synergies in an increasingly competitive business, industry experts said Wednesday. They cautioned, however, that mergers of major airlines face many challenges.Investors welcomed the news of the merger proposal, sending airline stocks and bonds sharply higher. Shares of US Airways hit a 52-week high and were up 14% to $58.05 recently. Shares of Continental were up 12% to $42.80,while United Airlines parent UAL Corp. gained nearly 10%, and American Airlines parent AMR Corp. was up about 5%.Historically, airline mergers have had poor results, because of problems with meshing complex aircraft fleets and union labor groups. For example, American, the world’s largest carrier, was unable to integrate TWA, eventually closing down the operations of the smaller airline a few years ago.But airline executives and other industry experts say that consolidation among American carriers is inevitable at a time when many have been forced to scale back capacity to deal with tough financial conditions. Last year’s merger of the old USAirways and the smaller America West, some observers say, is showing that mergers can succeed and do generate substantial benefits to companies and their shareholders.This deal will lead to a “flurry of activity,” the man who served as chairman and chief executive of America West until 2001, William A. Franke, said. “I just don’t see how United, American, and Continental can stand by and watch US Airways grab up Delta without some reaction. Whether they’re able to do anything about it, I don’t know.”Citigroup’s willingness to provide USAirways with $7.2 billion in funding for its Delta bid could be a key indication that more deals are possible. It “shows that big-time money is willing to buy into the airline industry,” a partner with Fulbright and Jaworski, which represents aircraft lessors and secured creditors in airline bankruptcies, William Rochelle III, said.“Until now, the smart money was saying that no domestic carrier has got the balance sheet to accomplish a merger. This shows that they don’t have to do it with their own resources,” Mr. Rochelle said.The USAirways chairman and chief executive, Doug Parker, said yesterday that the proposed merger’s ability to generate $1.65 billion in annual operating synergies hinges on inking a deal while Delta is in Chapter 11 reorganization. If it doesn’t happen by mid-2007, when Delta expects to emerge from bankruptcy, the merger would generate only half the financial benefit, Mr. Parker said, which wouldn’t be worth the effort. That’s because a company in Chapter 11 can legally renegotiate contracts for leased aircraft, and all its other operations.Mr. Parker said his work in the past year with merging USAirways, also in Chapter 11 at the time, with America West, has made him confident that the bigger deal can work. The USAirways executive, speaking to analysts and reporters on a conference call, also pointed out that USAirways’ stock is up 164% since the merger, while United’s stock, since it came out of bankruptcy, is is up 2%.Prior to that merger, in September 2005, the market had little appetite for airline mergers, a professor and transportation specialist at DePaul University in Chicago, Joe Schwieterman, said.Mergers are highly desirable, according to Mr. Schwieterman, because they accomplish the main goal of an airline, to grow without adding seat capacity, he said. In fact, a decrease in capacity, such as the 10% cut proposed by USAirways, helps all airlines; when seats get more scarce, carriers can raise ticket prices.United, the No. 2 domestic airline in terms of passenger traffic, is one of the carriers that’s made no secret about its intention to consider mergers and acquisitions. The Chicago-based carrier is reviewing its strategic options, with consulting help from Goldman Sachs.The UAL chief financial officer, Jake Brace, speaking Wednesday at an investor conference, said that mergers can generate significant benefits and that United will participate in consolidation if it makes sense for shareholders.He said consolidation is “a natural phase of the evolution of an industry as mature as ours,” predicting that no more than three or four domestic network airlines are needed.In 2002, USAirways and United came close to merging. The deal was rejected by the Department of Justice.Regulatory and political hurdles could stand in the way of the USAirways-Delta deal, and some industry experts see other reasons why it may be too soon to say that more mergers are likely.

USAirways Bid for Delta Could Spur More Airline Mergers

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