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Airlines Jockey For Delta

 
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PostPosted: Thu Jan 11, 2007 6:34 pm    Post subject: Airlines Jockey For Delta Reply with quote

Mark Tatge, 01.10.07, 6:20 PM ET
Forbes.com
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Delta Air Lines is once again up for grabs.

US Airways chief executive officer Doug Parker fired a second blast Wednesday by upping his $8.5 billion offer by 20%, offering Delta creditors $10.2 billion in cash and stock.

But at market close on Wednesday, Northwest and United emerged as possible buyers for the bankrupt airline.

Both Northwest and United Airlines have both been in talks with Delta, reports Calyon analyst Ray Neidl who put out a note on the development late Wednesday. “These meetings have helped Delta’s creditors come to see a combination with Northwest as a realistic alternative to US Airways Group’s hostile takeover bid,” wrote the analyst

Under US Airway's latest bid, creditors would get $1 billion more in cash (for a total of $5 billion) and 49% equity share in the new Delta once it emerges from bankruptcy.

“This revised offer removes any conceivable doubt as to which plan offers more value to creditors,” Parker said during a conference call with analysts.

Vaughn Cordle, CEO of Airline Forecasts, a forecasting firm that specializes in airline industry analysis, said that this is a "sweetheart deal creditors will have difficulty turning down."

Unless, of course, Northwest or United come up with a better deal first. By talking to other airlines, Delta management could gain leverage with creditors and beat back Parker.

Creditors, trying to make sense of all this, have hired former Continental Airlines CEO Gordon Bethune to advise them on the offers.

Of the three merger possiblities, Northwest is a more likely suitor than United, given anti-trust concerns. A Northwest-Delta pairing might be more likely to clear regulators and could offer a better alternative to US Airways.

In December, Delta executives put out a position paper claiming a US Airways- Delta deal will never gain regulatory approval. The paper says the two airlines have significant overlap -- 31 non-stop routes on the East Coast, accounting for $1.6 billion in annual revenue.

But a Northwest-Delta combo could be another story. Northwest’s Minneapolis and Detroit hubs complement Delta’s south and east route structure. Northwest has powerful Pacific operations with a Narita (Tokyo) operation.

Delta, meanwhile, has limited overlap with Northwest, with major hub facilities in Atlanta, New York JFK, a strong route system on the Atlantic Coast, and a well developed Latin America system, but is weak in the western U.S.

It was Parker who put Delta in play in December with an $8.5 billion hostile bid.

Delta CEO Gerald Grinstein, who plans to retire once Delta emerges from bankruptcy, immediately rejected the bid. He says Delta is worth more as an independent airline, possibly as much as $12.4 billion.

But that depends how you slice the numbers. Delta offered creditors some very rosy projections in its bankruptcy plan. Delta predicts the market value of it equity post bankruptcy would be worth 63 cents for every $1 of sales or double that of its peer group. That’s horribly unrealistic, says Airline Forecasts’ Cordle, who estimates the major airlines equity value currently trade at 31 cents per $1 of revenue.

Delta is assuming it can slash debt 50% to $7.6 billion from $17 billion to $7.6 billion, reduce capacity and dramatically boost revenue. The airline’s projections call for 4% growth in 2007, four times faster than the rest of the airline industry.

Part of the revenue expansion is an aggressive growth overseas. Delta is copying what Continental, United and American have already accomplished – move a substantial amount of the airline’s seats overseas. By 2010, Delta hopes to nearly double its international capacity from roughly 20% to 40% of total seats sold.

That’s going to be a hard sell, especially if the economy slows, or there is another terrorism scare, depressing international bookings.
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