Creditors for bankrupt Delta Air Lines today told US Airways that they would not consider a merger proposal that US Airways first floated in November. As a result, US Airways broke off its pursuit of Delta and the domestic commercial airline sector, which appeared to be poised for game-changing consolidation, is left with the status quo.
Though the decision to consider or derail this particular transaction was in the hands of Delta's Official Committee of Unsecured Creditors, the proposed merger collected many doubters in recent weeks, including trepidatious U.S. senators who questioned both carriers' CEOs and other industry leaders last week during a hearing on aviation industry consolidation. Such skepticism--stemming in part from a decidedly uninspiring airline merger track record--suggests that any attempt at consolidation by major network carriers will be intensely scrutinized and difficult to pull off.
Despite pledging not to furlough any employees, eliminate hubs or drop markets from the would-be Delta-US Airways network, US Airways chairman and CEO Doug Parker last week did not have a sympathetic ear in the U.S. Senate Committee on Commerce, Science and Transportation. "The inevitable will happen," said Sen. Olympia Snowe (R-Maine). "We are going to lose service, which also will result in higher prices."
"It would seem that some of the routes will be eliminated," Sen. Trent Lott (R-Miss.) told Parker. "I don't see how you could do otherwise. I do not think it makes good business sense in a merger arrangement to do otherwise."
As expected, Parker and Delta CEO Jerry Grinstein disagreed on whether the proposed merger would have resulted in severely reduced competition and higher fares. Parker said the industry would have remained "highly fragmented and highly competitive," even if the proposed merger had been successful. "The market is bringing about positive change and it should be allowed to continue," he said.
In response, Grinstein said the merger would have been "blatantly anticompetitive"--even more so than the United-US Airways proposal rejected at the beginning of the decade--by commanding "over 90 percent passenger share in over 1,500 markets, affecting over 8.5 million passengers."
Mark Cooper, director of research for the Consumer Federation of America, sided with Grinstein. "The only way to stop this merger wave is to stop the first merger," he said during his testimony. "If you do not like the picture you see at the end, someone has to stand up and say, 'This one is anticompetitive.' "
The Bush Administration's representative on the panel, Andrew Steinberg, U.S. Department of Transportation assistant secretary for aviation and transportation affairs, neither advocated nor opposed the US Airways-Delta deal or consolidation in general. "The good news for consumers is that the very circumstances that have kept fares low in the past are now pervasive in the marketplace and should endure even if we see some restructuring, and even as consolidation unfolds," he said, citing growing low-cost carriers and loads of online price information. "Any merger results, by definition, in fewer choices, but we have seen over the years a tendency by the marketplace to respond, and for new carriers to come in."
Many predicted that a successful US Airways-Delta merger would have led to more major carrier pairings, perhaps American-Northwest and United-Continental. United CEO Glenn Tilton, though publicly mum on any specific acquisition targets, has been a frequent public advocate of industry consolidation.
Parker, however, suggested the window for airline mergers is closing. "If both Delta and Northwest emerge from bankruptcy standalone, I do not think you are going to see consolidation in the airline industry in this cycle," he said during Senate testimony. "Not until the next down cycle, when you will find the weakest of the airlines yet again in financial distress, will you see consolidation happen. We need to encourage an industry in which network carriers can be profitable and one that does not have this continuous cycle of coming back to you every five or six years and asking for help."
Meanwhile, continuing its efforts to emerge from bankruptcy this spring "as a strong, well-capitalized standalone carrier," Delta this week said it arranged $2.5 billion in exit financing from six large financial institutions. Deflating industry speculation, Grinstein told the Senate committee that Delta was not negotiating a merger with fellow bankrupt airline Northwest. "Delta does not need to be acquired to be saved," he said. "In many ways, the market has already helped restructure the airline industry, so it is not clear to me that consolidation is inevitable. Network carriers have traction now. They are performing well."
A bankruptcy court hearing on Delta's disclosure statement is scheduled for Feb. 7.
As for US Airways, "we are extremely confident in our own stand-alone plan," according to a statement from Parker. "Earlier this week, we announced a 2006 profit (excluding charges) of over $500 million, far and away the best performance by a network airline." The airline expects to enjoy "even higher" earnings this year.
Though it still is in the process of completing the US Airways-America West Airlines integration that began in 2005, the company, like its major carrier competitors, likely will at least consider new M&A opportunities. "If US Airways fails in this attempt, we would expect the airline to attempt another takeover in the next 12 months--of Delta or another airline," according to a research note from Calyon Securities analyst Ray Neidl. "The management team at US Airways is aggressive and realizes that the carrier needs more market mass if it is to be a long-term survivor."