Delta Air Lines keeps quiet on merger talk
Posted on Saturday, January 12, 2008
ATLANTA — Delta Air Lines Inc. officials were mum Friday on the outcome of a board meeting in New York at which executives sought permission to enter formal talks with two competitors about a possible merger.
Asked if the meeting in New York had been completed, board member Walter Massey responded, “I can’t talk about that.” He then hung up the phone.
A Delta spokesman also declined to comment.
According to two people familiar with the situation, Delta’s board was expected to be asked to allow formal talks between Delta and Northwest Airlines Corp. and UAL Corp. ’s United Airlines, with the idea that Delta would ultimately choose to combine with one of the two.
The people spoke on condition of anonymity because of the sensitivity of the talks.
It was uncertain Friday whether Northwest manage- ment would explore an alternative deal if Delta makes an overture to the Eagan, Minn.-based carrier, or if United would be interested in a Delta overture.
What is certain is that Delta’s action could begin a reshaping of the airline industry that would have a far-reaching effect on the flying public, affecting ticket prices, route structures and flight frequencies.
A Delta combination with Northwest or United would create the largest U. S. carrier by far, and others would feel pressure to form combinations of their own in response, perhaps transforming the current six large network carriers into a Big Three of aviation.
For Minnesota, it could mean the loss of Northwest Airlines as an independent firm, along with its headquarters, at least some of its jobs and its name. It also could mean an uncertain future for the size of Northwest’s major hub at the Minneapolis-St. Paul International Airport. Delta management already has pledged to maintain its headquarters in Atlanta and the Delta name in any deal.
News of the proposal to Delta’s board sent airline stocks soaring.
But mergers are highly risky in the airline business. Complex old computer systems do not mesh easily. Political opposition can crop up when service to a city or state is threatened with cuts. And labor unions, crucial to providing good service and a smooth operation, can effectively torpedo a deal if they choose.
Despite all that, the likelihood of a major deal appears more probable than it did last year because the cost of doing nothing could be another round of big losses, and even bankruptcies.
The Associated Press reported Nov. 14 that United and Delta had been discussing a combination between United, the nation’s second-largest carrier, and Delta, the third-largest carrier, that would keep the United name and the corporate headquarters in Chicago. Delta issued a statement at the time denying “published reports that it had engaged in merger talk with United.”
Since then, Delta has said little about the issue, except that its board is evaluating whether to enter into a deal to combine with another airline.
On Wednesday, the head of the Atlanta-based company’s pilots union said in a letter to rank-and-file members that a combination involving Delta may be close. The union has a representative on Delta’s board. The union chief, Lee Moak, did not return repeated calls Friday seeking comment.
One of the biggest factors driving renewed talk of consolidation has been the sharp increase in fuel prices, among the industry’s biggest costs. Jet fuel costs have surged along with the price of oil, which jumped 58 percent last year.
United, which increased its recently added fuel surcharge to $ 25 one way Friday, says every penny increase in the price of a gallon of jet fuel costs the industry $ 195 million annually.
United’s increase is only the latest attempt by major carriers to increase ticket prices. While many of the fare increases have been matched by competitors, getting the increases to stick over the long term has been tricky because of stiff competition.
As a result, Wall Street analysts have been pushing carriers to further reduce the number of flights they offer in an effort to boost revenue. A combination by two or more airlines would be a convenient way to accomplish that, analysts say.
“We believe consolidation would be beneficial to the industry, but only to the extent that it reduces overall capacity,” Lehman Brothers analyst Gary Chase said in a research report Thursday. “In our view, consolidation absent capacity reduction is nothing more than trivia.”
The clock is ticking to get any deals accomplished quickly. That is because industry observers say they believe a combination has a better chance of surmounting the considerable political and regulatory hurdles under the current administration than whatever might follow it.
“We have long felt that if a deal was announced by February 2008 it would be reviewed by the Bush [Justice Department ] and likely to be approved in 6 to 9 months,” Michael Derchin, an FTN Midwest Securities airline analyst, said in a note to investors Thursday.
A deal agreed to after February would mean the approval process would likely have to wait until the next presidential administration — and until a new antitrust chief is appointed, Derchin said.
“High oil prices, if perceived as a permanent change, are another powerful driver to getting a deal done sooner rather than later,” he said.
Derchin said the request that Delta simultaneously negotiate with two separate airlines is unusual, but it gives the carrier the advantage of keeping both potential partners “honest” during acquisition discussions.
U. S. Rep. James Oberstar, D-Minn., said in a Tuesday interview that he is skeptical of industry consolidation, because he’s worried that it will lead to fewer consumer choices.
“Airlines are rare assets. They are not just another department store,” said Oberstar, chairman of the House Transportation and Infrastructure Committee. While some people would like to see the United States served by three mega-carriers, Oberstar said that Congress should fight against the diminishing of competition.
Shares of Delta, which is scheduled to release its fourthquarter and year-end results Jan. 23, fell 50 cents, or 3. 1 percent, to $ 15. 48 Friday. Information in this article was contributed by Harry R. Weber and Adam Schreck of The Associated Press, Liz Fedor of the (Minneapolis ) Star Tribune and Jeff Bailey of The New York Times.
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