Delta says it's open to merger

Hedge fund with big stakes in both airlines urges Delta to buy United; Delta says it has committee looking at possible deals.

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By Chris Isidore, senior writer

Delta Air Lines said it was already looking at possible mergers even before a hedge fund with a large stake in the company proposed a Delta-United Airlines combination.
Delta Air Lines said it was already looking at possible mergers even before a hedge fund with a large stake in the company proposed a Delta-United Airlines combination.

NEW YORK ( -- Delta Air Lines said Wednesday it is open to a combination with another airline and was looking at deals even before one of its major shareholders wrote to push it to make a bid for United Airlines.

The suggested deal, which is being proposed as an answer to soaring jet fuel costs, would create the world's largest air carrier. A Delta-UAL combination would also likely spark a round of industry consolidation and sharply reduce the choices for passengers, which experts said could lead to higher fares on at least some routes.

The openness of Delta (Charts, Fortune 500) to a deal is a stark contrast to its stance a year ago, when the Atlanta-based carrier fought off a hostile takeover from smaller rival US Airways Group (Charts, Fortune 500). At the time it argued consolidation would be bad for the airline, its customers and employees.

Pardus Capital Management, which sent the letter to Delta Tuesday, estimates that a deal between Delta and United parent UAL Corp. (Charts) would save $585 million a year in costs and give the combined carrier the breadth of domestic and overseas routes to attract more lucrative business travelers.

It said its analysis showed that even greater savings were available in a Delta-Northwest Airlines (Charts, Fortune 500) combination, but that combination would not have as strong a route system.

And the letter said the fund was worried that high fuel prices could drive airlines to another round of bankruptcy filings or at least eat up recent profit gains.

But industry consultant Michael Boyd said any combination in the industry would take more than a year to start producing savings. He said any airline combination is an expensive and difficult process, and that most financial gains from such deals only come from reductions in competition and higher fares.

Boyd said that while Delta and United are likely looking at possible deals, he doubts an acquisition will actually occur.

"Every airline CEO has got to be considering scenarios because United is in play. And they'd like to bring capacity down to charge more for what's left," Boyd said. "But will it work in the airline industry? Only on paper."

Pardus' most recent federal filings had listed it as having 3 million shares of Delta (Charts, Fortune 500), but its letter said it now owns 7 million shares, suggesting it has been buying Delta at the recently depressed share price. It also has 5.6 million shares of UAL (Charts, Fortune 500). Its holdings represent about 3 percent of Delta's shares and nearly 5 percent of UAL.

Delta issued statements denying a report that it has already held merger talks with United or any other airlines, but adding that its board has formed a special committee, headed by its non-executive chairman, to analyze strategic options. It also has retained financial and legal advisors to assist in this review.

"We appreciate receiving Pardus' views on the best course for Delta's future," said the statement from Delta CEO Richard Anderson. "We have been consistent in our public statements that Delta believes that the right consolidation transaction could generate significant value for our shareholders and employees and that strategic options should be evaluated. With oil at over $90 a barrel, this analysis takes on a heightened importance as we factor those prices into our long-term planning process."

United also issued a statement repeating its often-stated support for consolidation in the industry.

"We have said for the last four years that we believe consolidation is necessary for the industry, and others independently are reaching the same conclusion," said the statement. "We make decisions in the best interest of United, and we don't comment on the opinion of one shareholder, or the actions or hypothetical transactions proposed by others."

The United statement also dismissed the report that talks have already taken place with Delta.

"We do not respond to wholly inaccurate statements made by people who claim to have knowledge when they clearly do not," said the statement."

Importantly, the Delta pilots union issued a statement saying it would not oppose a combination. Opposition from pilots has been a barrier to proposed airline deals in the past.

"Many analysts have suggested that airline industry consolidation is inevitable. The Delta pilots are not opposed to a rational and sensible consolidation scenario," said a statement from Lee Moak, a Delta captain and the head of the Air Line Pilots Association unit at the airline. "The 'right' merger opportunity could draw our support and result in a successful merger. However, we are not interested in a transaction just for transaction's sake."

Moak said that the pilots could only support a deal if it is included in merger discussions from the beginning of the process.

"Any consolidating event which involves the Delta pilots will not happen without our active participation and consent," he vowed.

Even if Delta made a successful bid for United, it would need approval of antitrust regulators in both the United States and Europe before it could go through. And such a proposal, even if it had the support of regulators, could run into problems in Congress.

Members of Congress threatened the industry with reregulation when US Air was still trying to buy Delta. It didn't take long for some past critics to object to reports of Pardus' letter.

"The airline industry has had serious operating problems recently, and I think those problems will not be solved by mergers to create larger and fewer airlines," said a statement issued late Wednesday by Sen. Byron Dorgan, D-ND, a member of the Senate subcommittee on Aviation Operations, Safety and Security. "The hedge funds may have an interest in value for stockholders, but I am much more interested in providing value to air travelers. And I think that more consolidation in this heavily concentrated airline industry is not a solution to what ails this industry."

United, the No. 2 carrier, behind only AMR Corp. (Charts, Fortune 500) unit American Airlines, saw its share close up 1.5 percent Wednesday, while Delta, the nation's No. 3 carrier which emerged from bankruptcy earlier this year, saw shares climb 4.5 percent.

AMR saw shares close slightly lower as did the major low-fare carriers, such as Southwest Airlines (Charts, Fortune 500) and JetBlue Airways (Charts). But other major carriers that could find themselves in play if consolidation takes place gained Wednesday, with Northwest shares up 5 percent and Continental Airlines (Charts, Fortune 500) up 1.5 percent.

Pardus' letter proposes the deal as a merger, with Delta offering 2.395 of its own shares for every UAL share, which represents zero premium for UAL shareholders based on the 30 day average of the two companies' share prices. But it suggests that Delta management would be the ones to lead the combined company.

Jet fuel prices have soared about 24 percent since Labor Day and are now 55 percent higher since January, when Delta fought off a hostile takeover attempt by US Airways Group (Charts, Fortune 500), arguing that such a combination would run afoul of antitrust regulators and not be a benefit to the airline, its employees or its passengers.

A spike in jet fuel prices in September 2005 sparked bankruptcies at both Delta and Northwest Airlines (Charts, Fortune 500). Most of the U.S. airline industry has filed for bankruptcies since the Sept. 11 terrorist attacks.

Since Delta fought off the US Air bid, it has gotten a new CEO, Anderson, a veteran of Northwest and Continental, who has spoken far more positively about the benefits of industry consolidation. UAL executives have long been on the record in favor of mergers in the industry.

"United has been talking about merging with anybody and everybody but you and me," said Boyd. To top of page

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