Spaceman Spliff

Sorry, Carl...

NEW YORK (MarketWatch) -- Delta Air Lines Chief Financial Officer Ed Bastian said Tuesday that he doesn't foresee the Atlanta-based carrier walking away from its merger agreement with Northwest despite the continued increase in fuel costs.


"To deal with the high cost of fuel and to deal with slowing demand on the U.S. side, we decided to combine forces with arguably the other strongest network carrier, both on the cost side and on balance sheet," Bastian said at a shareholder meeting. Last week, United parent UAL Corp. said they would not seek any merger deals because record-high fuel prices have made it unaffordable. The news followed a similar decision by Continental and dashed hopes of investors that the six so-called legacy carriers would consolidate to three or four to cut costs and raise ticket prices.


Delta has begun to trim costs by offering employees severance packages, of which more than 3,000 were accepted by the end of last week. Bastian said Tuesday that the voluntary packages represented the bulk of the job cuts, he said. Come fall, the carrier will revisit the strategy, and though it's likely capacity will be further pruned, more job cuts are unlikely.
Further, the carrier and new partner Northwest have entered the initial stages of integration, with teams from both carriers meeting to discuss where they can rein in costs while maintaining safety and reliability, Chief Executive Richard Anderson said during the meeting.

Delta shares recently traded at $6.04, up 3.4% for the day but down more than 40% from April 14, when its merger with Northwest was announced. That's raised speculation that Wall Street doesn't think now is the time for a deal.


"I don't know if it's possible to separate our share price [from] what's going on in the fuel market, and I don't look at the value of our shares as reflective of Wall Street disappointment of the merger deal," Bastian said.
Investor appetite for the airline industry is closely correlated with what is happening in the commodity market, he said, adding that "the airlines are going to remain out of favor" until fuel prices provide some indication of settling in. That said, high jet-fuel prices can be expected for some time to come, Bastian said.


Despite fuel-price pressures, Bastian said that a merger deal for Delta would still make as much sense now as it did in April but that he wasn't surprised some competitors -- notably U.S. Airways and United -- had abandoned M&A dreams for now because of fuel costs.

"There was a considerable view that other deals could be a possibility in this environment seeing as consolidation was what made sense for Delta," Bastian said. "That said, as oil has continued its run, I am also not surprised that other deals are pausing."

Bastian declined to comment on the possibility of a looming bankruptcy among the so-called legacy carriers, but he added that more failures in the industry are going to occur as oil prices rise. "I think it's logical," he said.

Superpilot92

There is way to much money behind this to walk, not to mention the fines that would be assessed if either side backs out. We just need to get this thing done asap so we can get the efficiencies asap.

acl65pilot

I think with the rumored issues at UAL, the DOJ may rubber stamp this thing before the end of summer.

iahflyr

I find this line rather confusing.

Aren't the high fuel prices an even more compelling reason to merge.

Scoop

Possibly, but only in the long run. It is estimated that the 1 time consolidation costs are 1 billon $, and they come due much sooner than the suppossed "efficiencies" start paying off. Al lthe while the company is burning through cash like a sailor on liberty in Singapore.

Scoop

Spaceman Spliff

I guess they figure the short-term costs are outweighed by the long-term payoffs. Hopefully those payoffs will extend to the pilot group. The costs certainly will.