Delta to US Air: Back Off

The bankrupt carrier promises to leave Chapter 11 early next year -- and not through a merger.
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Updated from 11:47 a.m. EST

Delta Air Lines

pushed back Tuesday against a hostile takeover bid, laying out the case that its substantial progress in bankruptcy could be derailed by the "trust me" proposal from its principal competitor.

The Atlanta-based carrier also unveiled a plan of reorganization that it said would return the company to profitability in 2007 and provide creditors with as much as 80 cents on the dollar for their claims.

On a conference call, Delta CEO Jerry Grinstein called the buyout offer by

US Airways

(LCC)

"a bad deal for Delta and its creditors." The bid, he said, faces substantial roadblocks because of antitrust concerns, labor contract issues and questions about the veracity of US Airways' assertion that it would produce $1.65 billion in savings and benefits.

Because of the antitrust matters, "US Airways is the worst of all potential merger partners," Grinstein said, contending that a combination of the two airlines would create monopolies in 2,000 city-pairs. "It may sound good to a monopolist, but the regulators would not like it at all," he said.

An antitrust review, he added, would delay Delta's emergence from bankruptcy by at least 12 months and could lead to divestitures. The Justice Department has already indicated it doesn't want an exchange of information with US Airways "without getting clearance from them," Grinstein said.

Additionally, he said the proposal has "serious labor issues, some of which the US Airways team did not seem to understand." Among them, a provision in the Delta pilots' contract sets a minimum number of hours that Delta pilots fly. The provision would seem to prevent the reduction in Delta's fleet envisioned in the US Airways plan.

"Simply saying that these

issues can be worked through or managed is not an answer for a high-risk $8 billion bet," Grinstein said.

Grinstein also repeated a charge, already made by Delta pilots and denied by US Airways, that thousands of jobs would be lost in the merger. "This is a 'trust me' deal," he said.

Financially, Delta said the US Airways plan relies on "claimed synergies that are premised on flawed economic assumptions." It would burden the merged company with debt of $23 billion, highest in the airline industry, and would reverse the progress made in bankruptcy court, he believes.

Delta COO Jim Whitehurst said if the sides were to merge, low-fare competitors would rush in to use the slots and gates Delta would have to vacate at New York La Guardia, Boston Logan and Washington National airports, forcing fares in big markets down and reducing merger synergies, he said. Meanwhile, competition in small markets would be diminished, forcing fares up.

Delta's plan foresees emergence from Chapter 11 bankruptcy protection in the spring. The company said its financial advisers had estimated the equity value of its plan at $9.4 billion to $12 billion, compared with US Airways' $8.6 billion offer. Unsecured creditors could recover 63% to 80% of their claims, with payment primarily in Delta stock.

Five years out, Delta expects higher cash flow, operating margins and net income, driven by increased revenue, lowered costs and reduced debt. It projects 2007 net income, after profit sharing, of $500 million, rising to roughly $1.2 billion in 2010.

Delta noted it has made substantial progress in bankruptcy, restructuring its domestic route system and vastly expanding its international flying. It has reduced debt to $7.6 billion from $17 billion, with continued reductions expected. Additionally, it now collects 94% of the industry average revenue per available seat mile, up from 86% in 2005. CFO Ed Bastian said the gap would close by 2008.

Standard & Poor's analyst Philip Baggaley said a Delta and US Airways combination would create synergies, "though likely not on the scale projected by US Airways."

Additionally, Baggaley said in a research report that it's reasonable to assume continued improvement at Delta. However, some of its projections carry risk. In particular, he said, it will be tough to close the RASM gap given Delta's continued exposure to leisure travel and ongoing improvements by competitors.

Delta said its board had unanimously rejected the unsolicited merger proposal made by US Airways on Nov. 15, concluding that its own standalone plan is superior.

Under the plan, Delta's existing shares will be cancelled, and holders of common stock -- the last in line for claims during bankruptcy reorganizations -- won't get any distributions. The same condition is part of the US Airways plan.

Even though Delta has been consistently cool, at best, to US Air's overtures, that hasn't deterred Doug Parker. The US Airways' chairman and chief executive said earlier this month that he was "fully committed" to the proposal to merge with Delta.

In a statement issued Tuesday, Parker said he had expected that Delta would file a standalone plan with the bankruptcy court. "This plan will provide Delta creditors with a benchmark against which to evaluate the competing proposals, and we welcome that comparison," he said.

"We remain a disciplined and determined bidder for Delta," Parker said, adding that "we recognize and appreciate the creditors' ultimate authority in this process."