- The Washington Times - Wednesday, November 15, 2006

US Airways Group Inc. proposed an $8 billion takeover of bankrupt Delta Air Lines Inc. yesterday, although Delta says it has no interest in the offer.

The proposed entity, which would operate with the Delta name, would be the leading trans-Atlantic carrier.

The proposal is the latest move by US Airways Chief Executive Officer Doug Parker, who orchestrated the 2005 takeover of the bankrupt airline by America West Airlines and has pushed for consolidation in the industry.

“Consumers will have the advantages of a larger, full-service airline with the cost structure of a low-fare carrier,” Mr. Parker said.

With two major U.S. carriers — Delta and Northwest Airlines Corp. — operating in bankruptcy, industry watchers have been expecting a wave of consolidation and said a US Airways-Delta deal could jump-start the process.

Under the proposal, the combined airline would serve as many cities as US Airways currently does but with 10 percent fewer flights because some duplicate routes would be eliminated.

The merged company also would sell one of its shuttle operations that operate in the Northeast, mostly between Washington, New York and Boston, to eliminate the overlapping routes and to alleviate antitrust concerns.

But Delta’s management has said it is committed to leaving Chapter 11 bankruptcy protection in the first half of 2007 as a stand-alone carrier.

“We received a letter from US Airways [yesterday] morning and will of course review it,” said Delta’s chief executive, Gerald Grinstein. But “our plan is working, and we are proud of the progress Delta people are making to achieve this objective.”

The bankruptcy court has given the Atlanta carrier until Feb. 15 to file a reorganization plan.

“We will continue to move aggressively towards that goal,” Mr. Grinstein said.

Delta rebuffed merger talks with the Tempe, Ariz., company earlier in the fall.

A merger between US Airways and Delta, which has been operating in bankruptcy since September 2005, would give Delta creditors significantly greater value than under any stand-alone plan, Mr. Parker said.

Delta’s creditors would get $4 billion in cash and $4.67 billion in stock of US Airways.

“We just believe this is a better plan, and we want to get it on the table to the creditors,” Mr. Parker said. “We believe once they understand this alternative plan, they’ll prefer it.”

US Airways’ largest shareholder, PAR Capital Management, backs the offer.

“We enthusiastically support this transaction, which we believe offers the opportunity to build upon US Airways’ current competitive position,” said Paul Reeder, president of PAR Capital Management. “We have confidence in the US Airways management team … and the potential upside for US Airways shareholders.”

US Airways has obtained $7.2 billion in committed financing for the deal from Citigroup.

Domestic mergers are subject to U.S. antitrust laws and must be approved by the Department of Justice. The merger, if it were to go through, also would have to be approved by the Department of Transportation, the Federal Aviation Administration and the Securities and Exchange Commission, as well as the European Union.

Justice officials declined to comment on the proposal.

But some industry watchers doubt the Justice Department would approve the proposal.

“In some markets, they would create a monopoly position,” said Mike Boyd, a Colorado airline analyst. “This stuff [from Mr. Parker] about, ‘Well, we all know we need consolidation.’ Really? Mr. Grinstein doesn’t think so. The chairman of Continental doesn’t think so; the chairman of Northwest doesn’t think so.”

Ray Neidl, an equity analyst for the airline industry, agreed that the merger proposal wouldn’t be an easy sell to the Justice Department, saying the offer has a 30 percent to 40 percent chance of rejection.

A reduction in competition also would be bad for consumers, Mr. Boyd said.

“This is a bad deal,” he said. “Consumers lose big time. Whenever you lose a top competitor, consumers lose.”

A merger of US Airways and Delta would create a cumbersome system with eight hubs — far too many to be cost-effective, said analyst Anthony Tangorra, chief executive of Latitude Transport Advisory.

“There are other networks available out there that would be a better fit for [US Airways] and Delta,” he said.

Although Delta’s management is giving the proposal a cool reception, the airline could be forced into a merger if its leading investors push the matter.

“This appears to be sort of like a hostile takeover,” said CreditSights analyst Roger King. “Grinstein has made it clear that he doesn’t want to merge. But US Airways is appealing directly to the creditors.”

US Airways shares jumped 17 percent to $59.50 on the New York Stock Exchange after the announcement.

Delta added 5 cents to $1.52 in over-the-counter trading.

Mr. Neidl cautioned that the market’s favorable reaction to the proposal will be tempered in the near future.

“Investing around potential mergers is tricky at best,” he said.

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