CVG767A

Airlines
Dealing For Delta
Mark Tatge, 12.20.06, 6:00 AM ET



Chicago - US Airways CEO Doug Parker is pushing airline consolidation. He’s bid $8 billion for bankrupt Delta Airways. But has Parker, in effect, put his airline and the rest of the industry in play?

Once merger mania takes hold, it may be difficult to stop.

So far, United Airlines wants Continental Airlines (nyse: CAL - news - people ). Continental wants United. AirTran (nyse: AAI - news - people ) wants Midwest Express. American would like Northwest Airlines’s Asia routes. (Why not just buy the whole airline?).

AirTran wants Midwest Airlines. Southwest Airlines (nyse: LUV - news - people ) would love leftovers. This leaves only Frontier Airlines (nasdaq: FRNT - news - people ) and foreign carriers who want in the U.S. And Washington wants new capital to be pumped into the ailing airline industry.

By the time it is all over, the U.S. could end up with two major airlines offering coast-to-coast service. Who knows what they will be named at this point. There will most certainly be fewer seats to fill and higher fares.

The one bet you can be sure about: It’s doubtful the US Airways moniker will survive. The name’s a dead one, even if Parker gets his wish and wins Delta Air Lines (other-otc: DALRQ - news - people ). US Airways is a victim of bad service, gouging customers and two bankruptcies, a legacy most airline travelers would like to forget.

So where does Parker stand? Delta CEO Gerald Grinstein said no, again, Tuesday.

In rejecting US Airways' offer, Grinstein cited labor and cultural differences, and the belief that the combined carrier would carry a high debt load and never clear anti-trust regulators.

Grinstein says he's convinced creditors will get a better deal if Delta restructures and emerges from bankruptcy next year.

That may be true. Delta's bankruptcy reorganization predicted an impressive cost per available seat mile of 6.73 cents (before fuel) in 2007. Optimistic, maybe. But if Grinstein hits that target, Delta would have lower seat mile costs than United, American and Continental. The airline’s enterprise value (debt plus equity) is estimated at $18 billion to $20 billion.

Delta would generate earnings before interest, taxes, amortization and rent (EBITDAR) of $2.9 billion, going to $3.9 billion in 2010, according to Calyon Securities analyst Ray Neidl.

Not to mention that if Grinstein is going to sell, Delta could fit inside any number of carriers, including Continental, Northwest or United.

Parker wants Delta on the cheap. He has offered creditors $4 billion less, about half of it in US Airways stock. Who wants US Airways stock?

Sure, its been a high flier the past year, but America West (nyse: LCC - news - people ) and US Airways remain a dysfunctional airline. The two carriers still haven’t worked out their culture and pay differences, not to mention the combined airline’s soiled image with travelers.

Which brings us to why Parker is pushing so hard for Delta. With the stroke of a name change, Parker could wipe out years of bad memories. Delta may be suffering, but the carrier has a reputation for coddling customers.

So if Delta gets bought, watch out. Even Parker won’t be able to stop the dominos from falling. Even US Airways-Delta might end up getting sold, sending Parker packing.

9999

I would be interested to see if Southwest wanted any of the 'scraps' (for lack of a better word). I have been reading that 'Nuts' book and they seem to be more into profitability at the expense of a larger market share. I doubt they would be interested in flying anything other than the 737 as well.

This merger talk is certainly interesting to watch play out. I am going to be interested in what actions Frontier will take as well.

LuvJockey

The only "scraps" Southwest wants are gates and 737-700's. That's it.