US Airways last month proposed to merge with a reluctant Delta Air Lines in a bid to create the largest domestic carrier by available seat miles. Buyers said the proposed deal, valued at more than $8 billion, could strengthen the long-suffering airline industry, but also voiced concerns about higher prices, fewer frequencies and declining corporate receptiveness. However, with several approval hurdles yet to be surmounted, a newly merged aviation colossus is far from a foregone conclusion.
Delta executive vice president of sales and customer service Lee Macenczak in a memo to customers said the carrier would evaluate the proposal "as we are obligated to do," but echoed CEO Gerald Grinstein's sentiment that Delta plans to emerge from bankruptcy as a stand-alone carrier, assuring customers that Delta and its offerings remain intact.
"We are concerned that this particular transaction would not be in the best interest of our many stakeholders, including our customers, employees, travel partners, and the communities we serve," Delta's Macenczak said.
In a presentation outlining the proposal, US Airways CEO Doug Parker said the deal would create a number of consumer benefits, offering buyers a "larger full-service airline with the structure of a low-cost carrier" and more consumer-friendly pricing. In light of last year's merger with America West, Parker said business fares on average are 37 percent lower in nearly 400 markets and leisure fares are on average 24 percent lower in 350 markets.
Parker added that "enhanced Northwest and East Coast positions will lead the new Delta to better compete for corporate accounts," and become the number-one carrier across the Atlantic.
National Business Travel Association executive director Bill Connors last week said the corporate travel buyer response has been varied. "It's different for every company," he said. "If a company is in Atlanta, it's very different from their reaction if they're in Milwaukee in terms of how this thing will shake out. You don't need to be an economist to know that whenever there's consolidation, we get concerned about whether there will be choices and whether fares will go up. By the same token, the U.S. airline industry is still in a fragile state, and we need a strong industry, so discussions about consolidation are not unusual and certainly not surprising."
For travel buyers, a merger could mean reduced frequencies in some cities, higher air expenses resulting from reduced capacity and growing fares in certain markets as hubs are rationalized, according to a Business Travel Coalition analysis.
"I'm most concerned with the cost of travel going up. That would be the impact here," Lockheed Martin director of corporate travel Richard Wooten said. "Also, US Airways hasn't been very corporate-friendly. I'd think they'd want to get the merger with America West under their belt and have everything operating correctly, instead of trying to take on more."
Among potential positives for the travel management community, BTC said the merger could improve customer service, strengthen hubs, create a stronger U.S. competitor to international carriers and replace "a somewhat diminished US Airways name" with the Delta brand.
"In the end, we have to deal with it, whatever happens," said Interpublic Group manager of airline and vendor contract compliance Lasse Leskinen. "You have to look at who you have contracts with. In this case, we just switched from Delta to US Airways with the shuttle. What does that mean for us if this goes through? What will happen to pricing? Will it change again? At this point, there are more questions than answers. We can't worry about it until something actually happens."
Delta and US Airways have diverged in their approaches to the corporate market in the past year. Delta COO Jim Whitehurst told BTN in October that the carrier was refocused on corporate clients and had grown its salesforce, even amid cuts in other departments
(BTN, Oct 23). US Airways, meanwhile, has repositioned itself as a low-cost carrier and limited corporate deals
(BTN, May 15)."If they're in a position to strengthen the industry as a whole, then I'm for it," said Phil Dunphy, director of global travel at Pfizer. "The only concern I would have is US Air has basically walked away from the corporate marketplace. I don't even know who to reach out to for help. So I am concerned about my deal, but we'll cross that bridge as it comes."
To move the proposal forward, US Airways said it must "expeditiously" work on due diligence, enter a merger agreement with Delta, file with the Department of Justice, submit a reorganization plan with Delta's bankruptcy court, gain approval from Delta's creditors and get the nod from US Airways shareholders.
Delta has the "exclusive right to create a plan of reorganization" until Feb. 15, but the carrier said it expects to file the plan this month, leaving Delta's creditors to decide which they prefer. While specifics of Delta's reorganization and bankruptcy emergence plan were not available at press time, Parker guaranteed the merger offer would create better value for creditors, as well as its own shareholders. "This transaction would be nicely accretive to the US Airways shareholders and would provide a significant premium to Delta's creditors of 25 percent," Parker said.
Delta already has begun rallying its creditors' support, but an informal band of its bondholders formed to urge the bankrupt carrier to take the deal. "If enough of Delta's creditors can get together on the issue, they may be able to gain a critical mass, pushing Delta's management to accept the deal," Calyon Securities analyst Ray Neidl said. According to published reports, US Airways last week intended to propose the merger directly to Delta creditors.
"We do intend to meet with our creditor's committee and US Airways as we're required to do, but we're not releasing any specifics," a Delta spokesperson said.
"Delta does have a stand-alone plan that they're excited about and are planning on implementing," Parker said. "That's where their focus is. We have an alternative plan that we think is better."
Even if approved by creditors, the deal may struggle to pass muster with regulators, analysts said.
While Neidl noted that the domestic airline industry is "fragmented and primed for consolidation," he said, "We are not sure if the regulators and politicians are ready for major industry consolidation."
US Airways' Parker, however, said that he does not "anticipate any problems here that cannot be resolved" when it comes to regulatory scrutiny—which ultimately undid a US Airways-United Airlines merger in 2000. "The industry has changed dramatically since the Department of Justice reviewed the US Airways and United merger in 2000, with the growth of low-cost carriers, domestic coaches, international alliances as well as all the turmoil we've had with bankruptcies and the impact of 9/11," Parker said. He said the industry is fragmented and no carrier—including a merged and streamlined Delta-US Airways—has as much as 20 percent revenue share in the market. He said a new Delta would have about 18 percent marketshare by available seat miles.
"The Department of Justice has not challenged a merger in over 30 years where the leading firm has less than a 30 percent market share," Parker said. US Airways, however, noted it would have to make adjustments to satisfy antitrust authorities, namely the divestiture of some assets, including one of the Northeast shuttles. Calyon Securities said that potential buyers include American, Northwest or United.
"We see additional questions being raised with the combined airlines having two large hubs in the Southeast (Delta at Atlanta and US Airways at Charlotte) and two large international operations close to each other in New York (Delta) and Philadelphia (US Airways)," Neidl said.
Airline analysts diverged on the likelihood of the proposal materializing, but several noted a better than 50 percent chance of ultimate approval, according to reports and research notes. Neidl offered at best a 40 percent chance amid regulatory concerns, while JP Morgan's Jamie Baker said this merger—or a competing offer—is 80 percent likely.
At press time, no competing bids were offered, but some note the proposal points to an industrywide trend.
"We believe that this bid may prompt other bids for Delta and possibly set an industry trend for consolidation," Calyon Securities' Neidl said in a research note. "However, Delta management remains hostile at this point to any merger, which could cause delays."
Parker said the proposed merger offers $1.65 billion in annual synergies over two years in both cost-cutting initiatives and network operations—many which would be lost post-Chapter 11.
"We believe the opportunity to generate over half of these synergies could be lost if a merger is delayed until Delta emerges," Parker said.
Parker said a new Delta would "optimize our network of complementary hubs to maintain service to 100 percent of destinations but 10 percent of available seat miles."
He said the year-old merger with America West created $600 million in synergies. US Airways' integration with America West still is ongoing and has turned some employees off. "Employees at US Airways stated that management should focus on completing the integration of US Airways and America West before going after a third carrier to integrate," Neidl said. Parker said he expects it to be complete before any Delta integration would take place.
Meanwhile, US Airways is a member of Star Alliance, while Delta participates in SkyTeam, but Parker said, "Our view is this airline would be a strong and desired partner in either alliance. We'll end up in one of them, which one I don't know."