Are more airline mergers in the air?

By MIKE MEYERS and SUSAN FEYDER
Sunday, November 19, 2006
US Airways' surprise $8 billion hostile offer Wednesday for bankrupt Delta Air Lines Inc. could be the opening salvo in a barrage of new industry consolidation.

Delta responded by saying it remains intent on emerging from bankruptcy next year as a standalone company; management emphasized that until February, it alone has authority to file a plan with the court detailing how it would operate as a solvent airline. That didn't stop investors and observers from seizing on the idea that US Airways' offer, whether successful or not, is the start of something substantial.

The bonds of Delta and Northwest Airlines _ which entered bankruptcy about the same time as Delta last fall _ both saw significant gains after news of the offer broke early Wednesday morning. Meanwhile, Northwest's common stock, which almost certainly will be rendered worthless by the end of its bankruptcy, almost doubled in value on the day, up 93 percent.

In making his bid for Delta, US Airways CEO Doug Parker is hoping to enlist Delta's creditors, offering cash and stock totaling a 40 percent premium over the past 30 days' average trading price for Delta unsecured bonds.

Is Northwest vulnerable to the same maneuver?

A number of analysts say the answer is yes _ for the right price.

"If the folks at US Airways get some traction with the creditors, the other network carriers begin to look at each other differently," said airline analyst Patrick Murphy at Gerchick Murphy Associates in Washington, D.C. "Their ears will be flickering. Their tales will be wagging. They'll be sniffing around."

The advantage to any suitor is that Northwest is in bankruptcy," said William Swelbar, researcher at the MIT Global Airline Industry Program. "That's the place where things can get done and negotiations can take place."

Not everyone believes Northwest is vulnerable to an unwanted takeover, however. Airline analyst Michael Boyd, based near Denver, said the reputation of the carrier's executives could scare off anyone they don't want in the room.

"These are people who don't cook their meat before dinner," Boyd said "You don't mess with them. You leave them alone."

Among those considered most likely to be interested in Northwest are AMR Corp., parent of American, and Continental, with a longtime code-sharing agreement with Northwest. (Delta and Northwest have long been considered potential merger partners, although their financial woes had seemed to preclude that happening anytime soon.)

"AMR and Northwest together would be far and away the largest airline," said Philip Baggaley, a credit analyst with Standard & Poor's.

For Continental, Northwest would add substantially to foreign routes, particularly in Asia, where Northwest has a leading presence among U.S. carriers.

"They've been playing footsies for years," said Barbara Beyer, president of Avmark Inc., an aviation consulting firm in Arlington, Va.

United also has talked of being interested in making acquisitions, if necessary, to remain No. 2 in the industry.

Any of the potential deals would immediately stand a better chance of getting regulatory approval if the US Airways-Delta merger were allowed to occur, making it the new No. 1 player _ dominant along the East Coast and with the largest number of profitable transatlantic routes.

In making his bid for Delta, US Airways' Parker essentially is making a preemptive strike, attempting to gain strategic assets while they might be had at a reasonable price, rather than waiting to compete with a reinvigorated Delta, or Northwest, once they emerge from bankruptcy. Delta has fewer unionized workers and so presumably would be easier to assimilate than Northwest.

Observers were divided on Parker's chance for success.

"A lot depends on how creditors react to the proposal," said Michael R. Stewart, bankruptcy lawyer at the Minneapolis firm Faegre & Benson. He said the process isn't easy. He once represented a firm intent on buying a company in bankruptcy. It made a bid, then a rival appeared. The bankruptcy judge ended up holding an auction in the courtroom and Stewart's client was outbid.

Beyer, who once worked for a creditors' committee in the bankruptcy of Pan American Airways, said airlines have learned that bankruptcy court is a venue for getting bargains by dealing with creditors who only want to get as much as they can out of bad debts.

"You end up picking up the exceedingly valuable assets for chump change," she said.

Boyd pointed out that US Airways still is finishing the arduous process of digesting its 2005 acquisition of America West _ trimming fleets, combining two sets of employees, reservation systems and other complex details. If US Airways wins Delta, he said, the result could be a weaker competitor.

"For some time, they'll be splashing in the merger mud," Boyd said.