Delta May Spark Merger Mania

The prospect of airline deals is a little more realistic now that the carrier says it wants to take part.
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CHARLOTTE, N.C. -- Airline industry consolidation has moved a step closer to reality, now that

Delta

(DAL) - Get Report

has made clear that it wants to be a player.

"We do believe the right transaction, certainly for Delta, would add tremendous value," Ed Bastian, the carrier's president, declared last week, as he discussed mergers at a Wall Street investor conference. "We're looking at the question

in real time. It's a front burner issue for us."

Bastian also said, "Delta views itself an acquirer, not a seller." In tone, he went beyond statements made last month by Delta's new CEO Richard Anderson, who said, on his first earnings call, that the carrier is open to a deal.

With Delta in, three of the six legacy carriers are now publicly committed to pursuing merger possibilities.

US Airways

(LCC)

CEO Doug Parker, one of two leading advocates for consolidation, has presided over a merger between US Airways and America West, as well as a failed bid for Delta.

UAL

(UAUA)

CEO Glenn Tilton, the other supporter, regularly calls for consolidation, although so far he hasn't gotten anywhere despite approaches to

Continental

(CAL) - Get Report

, Delta and possibly others.

Parker offered fresh perspective on the issue last week, telling the same investor conference that US Airways may have a diminished role because it is the smallest legacy carrier.

"It's not as if we can force this to happen at this point. Being the sixth of the big six, we're not going to be somebody's first choice," he said. However, he added, "It's hard to marginalize $11 billion in revenue."

In Parker's view, pressure for consolidation comes from two sources -- high oil prices and an impending change in presidential administrations. "I am hoping that the combination of a lot of talk and an operating environment with $95-a-barrel oil brings this together," he said. Mergers benefit the entire industry, he said, because they lead to reduced capacity.

As far as Washington is concerned, Parker noted that with a new attorney general likely to take office in 2009 no matter who is elected, the current administration may be unlikely to rule on an airline merger during the latter part of 2008. "If you don't have

merger plans announced by year-end or shortly thereafter, it will be really hard to get something done," he said. "You would have to wait for a new team to come in January 2009."

In a dig at Delta's resistance to the US Airways takeover bid, Parker said everybody would be better off had the effort succeeded. "We offered $11 billion for a company now worth $7.5 billion. People are upset about it," he said. Also, the merger has reduced industry capacity by 4%.

The other three legacy airlines have revealed little about their positions on consolidation. For example, Continental CFO Jeff Misner noted "we're a little bit less vocal about things than others might be. We're just not going to hype things up."

Continental's maneuverability is somewhat limited because

Northwest

(NWA)

holds a stake in Continental and could block any merger efforts by its fellow carrier, Misner noted.

"If somebody starts stuff out there, we're not going to sit back and just do nothing," Misner said. "We have models on every conceivable paring that you could think of. We have thoughts and ideas and plans sitting there on the shelf."

But he added that "we don't have the ability to start dominos falling. We're not sure we want the dominos to fall. There's a whole lot of carnage out there in consolidation. It's a disruptive process."

In general, there are two ways in which airline executives talk about consolidation. Both can begin with the observation if someone were to create the U.S. airline industry today, it would not be so fragmented, with the largest carrier controlling just 15% of the domestic market.

Beyond that, one can either say that consolidation would benefit the industry, the shareholders and the employees, or make the argument that airline industry mergers have generally been failures -- producing headaches but little value.

The news is that now there are three carriers in the former category.