US Airways Wants to Super Size with Delta

Delta, Mergers/Finance, US Airways

dl-usDid I say that Frontier/AirTran deal was big news yesterday? Um, I take that back. Today’s news is much bigger than that. US Airways launched an $8 billion takeover bid for Delta this morning, and Delta management isn’t happy.

Here are the basics. US Airways says it will offer $4 billion in cash and another $4 billion (at today’s share price) in US Airways stock in order to take full control of Delta. Citigroup will provide the financing for the deal. After the dust settles, the new airline will be called Delta. While Doug Parker, current US Airways CEO, would run the new company, it’s unclear where it would be based (I’d bet Phoenix/Tempe). US Airways says all existing routes would continue to be served but the fleet would shrink by 10%. Somehow, that would require no layoffs at all. If you’d like to read more, including Doug’s very interesting letter to Gerry Grinstein, read the press release here.

My initial thoughts are that this is crazy. They have yet to merge workgroups or even reservation systems in the US Airways/America West merger, and this just seems like a nightmare in the making for integration. The fleets have almost no overlap at all. US Airways is primarily Airbus with some older model 737s and 767-200s while Delta is all Boeing (but no older model 737s or 767-200s). The only shared aircraft is the 757 but they have different engines (Pratt & Whitney on the Delta birds and Rolls Royce on the US Airways ones).

As for route network, well, there seem to be some things that would concern the anti-trust folks at the DOJ. Within the US, this would consolidate a lot of power in the northeast. One of the shuttles between Boston-New York-Washington would need to be sold, but other than that, there is probably enough competition where it could pass. I’m more concerned about the South, personally. There are really only two big hubs in the south – Atlanta and Charlotte – and the New Delta would control them both. There are a lot of communities that would see reduced competition from that, and I’m not sure how the DOJ will feel about it. Internationally, Delta and US Airways have a presence in Europe and the Caribbean, but they don’t have much elsewhere.

On the labor front, US Airways (and America West) are highly unionized while Delta is not at all except for the pilots and some other small groups within the company. That could be an epic clash of cultures that could turn even uglier than the US Airways/America West workgroup integration currently being negotiated.

It’s even more interesting because Delta has effectively rejected the offer and says it will emerge from bankruptcy on its own in the Spring, but I wouldn’t be so sure. This offer was made to the creditors, and they’re likely to jump on it. Right now, there’s a chance they could be wiped out in the bankruptcy proceedings or at best get pennies on the dollar. This deal would give 50 cents on the dollar, and that has to be very appealing.

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