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Delta flies distant third
January 10, 2001: 3:33 p.m. ET

AMR takeover of TWA leaves Delta far behind, snags Continental merger
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NEW YORK (CNNfn) - Regulatory and financial problems will make it difficult for Delta Air Lines to compete against its bigger rivals and the airline will face serious challenges to any large acquisitions it may attempt, analysts said Wednesday

Atlanta-based Delta (DAL: Research, Estimates) will have significant difficulty with a second attempt to buy Continental Airlines Inc., analysts said -- a move they will undoubtedly explore in the face of AMR Corp.'s purchase of TWA and certain US Airways assets Wednesday. Two years ago, Delta failed in its attempt to purchase Continental, which then sold a small equity stake to Northwest.

Delta currently faces falling financial prospects. The airline lowered its fourth-quarter outlook last Friday to 55 to 65 cents a share, well below Wall Street forecasts of 81 cents a share, due to heavy flight cancellations. Delta also is battling a continuing pilot shortage that has caused the airline to cancel thousands of flights since November.

graphic"Delta has had a pretty bad week," said David Jonas, senior analyst at Business Travel News. "They are facing not being seen anywhere."

Press reports emerged Wednesday that Delta would make a second try to buy Continental.

"We've always been in the position that we would monitor the industry closely and do whatever necessary to remain competitive," a Delta statement said.

Continental (CAL: Research, Estimates) declined to comment on reports the two airlines again are in discussions. Northwest (NWAC: Research, Estimates), which has a veto option over any mergers Continental may consider, declined to comment.

Delta shares closed at $48.38, Continental rose by $1.19 to $52.56, Northwest lost 19 cents to $28.81 Wednesday.

Delta ranks distant third

Delta Air Lines emerged as the odd man out Wednesday as American Airlines parent AMR Corp. agreed to buy Trans World Airlines Inc. for about $500 million. AMR (AMR: Research, Estimates) also agreed to acquire certain assets from US Airways (U: Research, Estimates) for approximately $1.2 billion, and to purchase a 49 percent stake in the newly created DC Air for approximately $82 million.

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The deal pushed Delta Air Lines to a distant third, with American securely in second place. In May, UAL Corp. (UAL: Research, Estimates) agreed to buy US Airways for $4.3 billion cash in May. United currently ranks first in the U.S.

Third-place Delta would have a tough go buying Continental, senior analyst Henry Harteveldt of Forrester Research said. "It is unlikely that Delta could afford to buy or there would be antitrust clearance to acquire Continental," he said. "Delta is in the midst of a real tough negotiating environment with the pilots and a softening economy."

Northwest Airlines, the No. 4 U.S. carrier, also could scuttle a Delta/Continental merger because of a veto option obtained in November. Houston-based Continental bought back 6.7 million shares owned by Northwest for $450 million. The deal gave Northwest the ability to block any purchase of Continental by another carrier.

"Continental has been very unwilling to be controlled by anyone," Jonas said. "Delta's getting the o.k. from Northwest and from Continental would be very tough."

Delta probably would have to shed assets in New York, such as its terminal facilities at Newark or Kennedy airport, to clear regulatory hurdles. Delta also may have to spin-off its shuttle service at LaGuardia that runs to Boston and Washington, Harteveldt said.

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Federal regulators might allow Delta to acquire a large rival as a way to further market competitiveness, analysts said. United and American will control about 50 percent of U.S. airline capacity if the American-TWA merger goes through.

"By allowing Delta to merge with Continental or Northwest, we would have three extremely large airlines accounting for 75 percent of market," Harteveldt said. "But it would be harder for American and United to dominate Delta if Delta were to merge."

AMR Corp. fell 25 cents to $38.69, US Airways gained $1.69 to $44.38, and UAL Corp. dropped 13 cents to $41.88 Wednesday.


Instead of an all-out merger, analysts speculate that Delta may opt for an alliance with Continental as a way to avoid antitrust issues. The two airlines could create their own frequent flyer program or Continental could partner in Delta's SkyTeam program where members should earn frequent flyer points.

"The ease with this is that Delta doesn't have to buy Continental," Harteveldt said. "There are no antitrust issues and a wider base of flights and destinations."

Another possibility is that Delta may buy a smaller carrier such as America West or Alaska Airlines. Such a purchase would involve fewer antitrust issues, analysts said.

Continental positive

Continental and Delta are intensely competitive and such a rivalry may be enough to scuttle any chance of a merger, analysts said.

"Continental doesn't like Delta at all," one analyst said off the record. "Continental doesn't look favorably upon whoever is trying to take them over. Their corporate cultures are different and the way they look at sales are very different."

Continental also is one of the few airlines that has grown recently and currently is building a New York hub. "Continental is not one of the big three but they are holding their own and trying to stay the course," Jonas said.

However, a Delta and Northwest tie up would be less cantankerous. Delta would gain access to the Pacific Rim, which it desperately needs. Both airlines also are partners in the WorldSpan reservation system, which would make logistics easier, Harteveldt said.

Northwest would give Delta hubs in Minneapolis, Detroit and Memphis in addition to key routes to Japan and China.

"There is very little overlap but the biggest challenge would be rationalizing flights in and out of Cincinnati and Detroit," Harteveldt said. "What Northwest really brings is immediate access to the Pacific Rim." graphic


Northwest to sell stake- - Nov. 6, 2000

United buying US Airways - May 24, 2000

TWA to be bought by American - Jan. 10, 2001