Delta Air Lines ( DALRQ) has told its creditors that it will suffer if a takeover bid by US Airways ( LCC) succeeds and then triggers a new round of airline consolidation. The suggestion is part of Delta's continuing battle against the hostile merger proposal unveiled Nov. 15 by US Air, which has offered to pay Delta's bankruptcy creditors about $8.6 billion in cash and stock for their claims. Delta has said a more appropriate value is between $9.4 billion and $12 billion, a range US Airways maintains is excessive. The management team at Delta is resisting the deal on various fronts. It's lobbying politicians in Washington, working with its pilots union and other employees and, like US Airways, trying to convince creditors to back its plan of reorganization. A Delta spokeswoman declined to comment on the specifics of the discussions between the airline and its creditors. Part of Delta's argument is that a combination with US Airways could set off a consolidation wave that would leave the Atlanta-based airline in a weaker position, according to a creditor with knowledge of the carrier's efforts. For instance, in theory a Delta takeover could convince United ( UAUA) and Continental ( CAL) to merge. That could, in turn, make American ( AMR) go after Northwest ( NWACQ). Both of those potential mergers, if they were to occur, would produce airlines with a higher number of strong domestic hubs and with better international routes, particularly in Asia and Latin America, than a joined Delta and US Airways. Plus, if the Justice Department allowed a Delta and US Airways merger despite the considerable overlap between the two carriers, it would hardly be in a position to deny similar advantages to other airlines.
"Delta is saying, 'If we get approval
and our deal happens, it would trigger other deals,'" the creditor, who didn't want a name used, said in an interview. "They say, 'It would mean that DOJ has to let Continental-United happen, and then American-Northwest, and then we would be worse off than we are now. We would be the No. 3 carrier, and we would have major disadvantages on the international side.'" Delta managers also believe that if they were to be involved in a merger, other carriers with better international route systems would make more appropriate partners, the source said. For some creditors, Delta's strongest bargaining point may be that its own plan involves relatively rapid payment for claims. By contrast, the US Airways offer would mean a long wait while the DOJ reviews the bid. The department took 14 months to reject the 2000 proposal to merge the old US Airways and United Airlines, which had far less overlap than a US Airways and Delta merger would. US Airways' stock has risen since its effort to acquire Delta was announced, suggesting the market supports the deal. More often, a takeover bid leads to a decline in the stock of the acquiring company. Shares of US Airways shares traded Monday at $58.59, up from a close of $50.93 on Nov. 14, the day before the takeover effort was announced. The next day, the shares rose 17% to close at $59.50.
To an extent, Delta's arguments are supported by people who are uninvolved in the merger efforts. In an interview last week with Reuters, JetBlue CEO David Neeleman said the merger talks between United and Continental probably began in earnest only after news of the US Airways bid for Delta. He also speculated that a United-Continental tie-up is far less likely if the US Airways bid fails. Meanwhile, a recent report by CreditWatch analyst Roger King says that a deal with US Airways makes less sense for Delta than merging with either United or Northwest. The US Airways arrangement "would create an airline slightly larger than American and lacking the same Pacific exposure," King said. A merger with United would produce both international and domestic synergies, he wrote, because United is West Coast-focused while Delta is heavily involved with East Coast routes, especially in the Southeast. Though a merger with Northwest would mean strong positions in Asia and the Midwest, King wrote that it's "difficult to conceive of a successful combination since both managements proclaim independent status."