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US Airways goes after Delta merger

US Airways goes after Delta merger

   US Airways, which recently merged with America West Airlines, announced it has made an $8 billion offer for bankrupt Delta Airlines that would create one of the world’s largest airlines.

   US Airways said it would use roughly $4 billion each in cash and stock to buy Atlanta-based Delta.

   The combined airline would operate under the Delta name, following the same branding strategy that America West used in taking the US Airways name after it acquired the airline in September 2005. US Airways is now the fifth-largest U.S. domestic carrier, and if the deal goes through would overtake American Airlines as the largest U.S. carrier.

   A merger would impact freight forwarders and shippers who use US Airways and Delta, which is a large provider of belly capacity with $121 million in cargo revenue in the quarter ended Sept. 30.

   The joint company “will be a more effective and profitable competitor in the current fragmented marketplace, with the ability to better meet the continuing evolution of the airline industry,” said Doug Parker, US Airways chairman and chief executive, in a statement.

   US Airways publicly released its proposal to put pressure on Delta CEO Gerald Grinstein and the Delta board after they ignored a private letter in September regarding a merger, suggesting a hostile offer.

   Tempe, Ariz.-based US Airways estimated that the merger would produce $1.65 billion in annual savings from reduction of redundant operations, including overlapping routes, airport facilities, systems and overhead, as well as lower distribution costs and renegotiated contracts with vendors. US Airways said that it would reduce capacity by 10 percent to match seats with passenger demand and improve yields. Company officials said they would continue to serve all destinations in the Delta and US Airways networks, but with fewer planes.

   The acquisitive airline warned that half of the cost benefits could be lost if a deal is delayed until Delta emerges from bankruptcy.

   “The board of directors and management team of US Airways believe that a combination of Delta and US Airways presents a significantly greater value for Delta’s creditors, customers, employees and partners than a plan to emerge from bankruptcy on a standalone basis. We also believe that, unless we act quickly to pursue a combination through the actions that can be taken during Delta’s bankruptcy process, our respective stakeholders will not be able to realize what we believe are substantial economic benefits from such a combination,” Parker said in his offer letter to Grinstein today. Completion of any merger would take place after Delta emerges from bankruptcy.

   The stock portion of the transaction is based on the US Airways Tuesday closing stock price of $50.83, and would give Delta’s unsecured creditors a 45-percent stake in the new company. US Airways said it has lined up $7.2 billion in financing from Citigroup.

   The takeover signals a further escalation of consolidation in the U.S. airline industry, which until recently has been characterized by negative profitability as more low-cost carriers enter the market. Consolidation is taking place in European and Asian aviation markets, but few U.S. airlines want to succumb to their competitors. United Airlines CEO Greg Tilton has been pushing consolidation as a necessary ingredient for a healthy U.S. airline industry, and some analysts and media outlets have speculated about a United merger with Continental or Delta.

   Analysts have said that airline mergers, especially in the United States, are extremely difficult to successfully pull off because of the differences in corporate culture, mixes in pilot training, labor contracts and aircraft, complex frequent flyer programs and other factors. But so far the America West-US Airways merger has been quite smooth and resulted in quick profits, net of special items. In both cases, Parker has gone after companies emerging from bankruptcy that have received huge wage concessions from their unionized workforces and pared back other costs to create a large network carrier with the cost structure of a low-cost carrier. And the landscape could be changing in favor of mergers now that airlines are returning to profitability.

   In the third quarter, US Airways Group said it had a net loss of $78 million (down from a $99 million combined loss in the same 2005 period), but a net profit of $101 million excluding special items. For the first three quarters of the year, US Airways is showing a $292 million net profit compared to a $276 million loss in the 2005 third quarter. America West and US Airways are still reporting their results as standalone operations for accounting purposes.

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