Bloomberg Article DL + AK M&A

[WorldTraveler]

DL and NW were not in BK at the time they merged.

DL emerged in the spring of 2007 with NW emerging a couple months later. The merger was proposed a year later and was effective in the late fall of 2008.

As for the impact of DL's expansion on UA on the west coast -Asia, dawg, go back and listen to the earnings transcript for UA for the 2nd quarter. They specifically noted increased competition to PVG as driving down yields. DL started SEA-PVG in the 2nd quarter of 2013 and said it was profitable right out of the box and has upgraded the route from a 767 to a 332 since. Unlike SEA-PEK which has operated with a suboptimal schedule due to PEK airport limitations, PVG operates with a good schedule and DL has seen how effectively how well they can compete in the west coast - non-Japan Asia market. DL's decision to add ICN and HKG was undoubtedly driven by the strong performance of SEA-PVG.

UA is the strongest US carrier to HKG. There will be 4 new flights added next year to all of the US - one each from AA and DL and two from CX. UA can't help but feel the impact of all of that increased capacity I a market where, once again, they will operate with the highest CASM.

It won't take too many years of competitive changes in a region where UA has been strong for UA to start feeling the impact.

DL's int'l growth at JFK, a far more competitive market than SEA, has almost entirely been down "in-house" except for the NRT flight proves DL can grow on its own.

 

[FrugalFlyerv2.0]

DL has undoubtedly done a pretty extensive valuation of ALK and knows what they are worth. There are clear strategic benefits but DL's own buildup of SEA eliminates many of the strategic contributions that WN would make.

You're almost correct:  ALK is worth what the market says it is worth, which may or may not be the same value $ that DL came up with ... ... ...

 

[metopower]

It is like divorce...it is expensive but sometimes it just worth the price.

 

[WorldTraveler]

meto,
you are right that the cost of fighting is sometimes enough to decide to just end things... but as with many marriages, there are pre-nuptial agreements or contracts that companies have to abide by in the process of walking away. AS and DL do have economic dependency on each other so they have to figure out how to survive without each other. DL's expansion at SEA including SEA's plans to build more facilities which likely means more DL gates seems to say DL is figuring out how to survive in the PNW and with its Asia strategy w/o AS.

Frugal,
I haven't said that DL's valuation of AS is less than the market... perhaps it would have been better to say that DL has determined AS' value TO DL - and if the value to DL including with whatever steps DL takes to grow internally or potentially via other acquisitions is less than the market value of ALK, then DL won't act.

I don't think anyone expects ALK to sell to DL for less than what they could get elsewhere or via their own internal growth.

DL continues to look to push its own valuation up, something it succeeded in doing with its strong RASM performance for December which was announced yesterday. Analysts expect continued strong revenue performance from DL and also noted that DL's fuel costs were lower than what they had previously expected which should continue to drive profitability. Some analysts raised their recommendations on DL's stock price.

 

[FrugalFlyerv2.0]

Frugal,
I haven't said that DL's valuation of AS is less than the market... perhaps it would have been better to say that DL has determined AS' value TO DL - and if the value to DL including with whatever steps DL takes to grow internally or potentially via other acquisitions is less than the market value of ALK, then DL won't act.

I don't think anyone expects ALK to sell to DL for less than what they could get elsewhere or via their own internal growth.

DL continues to look to push its own valuation up, something it succeeded in doing with its strong RASM performance for December which was announced yesterday. Analysts expect continued strong revenue performance from DL and also noted that DL's fuel costs were lower than what they had previously expected which should continue to drive profitability. Some analysts raised their recommendations on DL's stock price.

 
What I meant was that probably DL crunched the numbers and they could have concluded that ALK is not worth $5 billion - to DL.  On the other hand, if they were to make an offer for ALK, it would have to be more than $5 billion, cash and/or stock, at least right now.  If I was in charge, internal growth at SEA to the max that the facilities allow would be the preferred way to go.  It is much more manageable and easier in the long haul - unless DL needs immediately what ALK would provide.  Just my $0.02.

 

[metopower]

My post is not about divorce but about the cost..Alaska is worth the cost even if you pay too much initially.

 

[WorldTraveler]

Meto,
sorry I misinterpreted what you were saying.... help me understand why you believe AS is worth it, even if DL can grow internally... or perhaps you don't believe they can. I hear many DL employees say they would rather avoid another merger if they can.

Frugal,
I think we are on the same page.
I want to hear Meto's comments but I just don't think the strategic benefit is worth ALK's current market valuation. I would honestly rather see DL grow internally by pushing back current aircraft retirements, hiring more employees to push up the seniority of current employees, and increase competition on the west coast such that other competitors are weakened in the process.
To me, DL's success on the east coast shows that DL is capable of very patiently focusing on a long-term goal.
I also think that SEA will build what DL needs in order for SEA to be a true longhaul competitor to other west coast gateways. LAX may be more difficult but the market will win and DL will get what it needs if it is truly capable of running a better airline than others over the next few years.

 

[metopower]

Gates...terminals that are compatible such as t5 and t6 in LAX. AA and UA lose feed and THOSE airlines have to grow internally . I don't want a merger either and internal growth is best for the employees . I just wonder if the logic is there as a business move.

 

[WorldTraveler]

As far the acquisition of gates and terminals, it still isn't known what the DOJ would allow DL to keep in a merger and AS is really not a very large gate holder at LAX. At SEA, the airport is already studying expansion plans to accommodate DL's growth. The price tag for the entire SEA FIS that is being mentioned is less than 10% of the market value of ALK right now.
Maybe DL could get enough facilities to make it worthwhile but I believe that if facilities are the primary reason, then the merger likely couldn't be justified financially.

If the intent is to eliminate competitors, then it could make sense but $5B is still about one-fourth of AA and DL's entire domestic revenues. Buying out competitors to eliminate competition rarely makes sense unless there is a fundamental business which that competitor operates that a company can buy.

AS plus DL would be the largest carrier on the west coast but the question again is whether the economics justify the acquisition instead of internal growth.

My gut says that DL's pilot hiring and plans to keep some older aircraft in service longer means DL intends to grow internally rather than acquire.... but I could be reading it wrong.

DL's expansion at SEA this summer with a couple dozen new domestic flights (even if on large RJs) as well as the new HKG, ICN, and LHR flights will provide an indication of how well DL can do without AS. My gut also says that DL won't make any long-term decisions about the west coast or AS until the results of what will be done this summer are known.

 

[metopower]

DL +ALK = all gates of t5 and t6 except for 3 UA gates . Real estate at LAX is key. Both terminals have or are newly remodeled and are in key locations. It comes down to what you get for your money. But it also has to do if it is a friendly takeover. If not then it is not worth it.

 

[WorldTraveler]

are you sure DL and AS control all but 3 T6 gates at LAX? How many does AS have exclusively? Agree about the strategic necessity to have gates at LAX.

It will have to be friendly. Right now that isn't happening.

I also think the bigger impact on other carriers on the west coast will be if DL and AS battle it out with other carriers for a summer or two.....

 

[robbedagain]

Even if Dl made a bid for Alk whose to say that may be UA or even an LCC cld bid for them too?

 

[metopower]

I believe they control 6 gates and share 3 delta gates as well. UA and AA do not have their mergers completed and do not have the money. And if a merger were to be on the horizon for ALK I don't think I would want to be in that mix.

 

[eolesen]

Both the UA and AA mergers are complete from a financial standpoint, so there's nothing that would stop them from pursuing ALK if there were to be a bidding war. The AA/US merger is proof positive you can engage in acquisitions even if all your workgroups aren't completely integrated.

There's also the foreign cash angle. ALK has deals with several international carriers who aren't friendly to DL.

What's to say that one of them wouldn't step forward and work to keep ALK independent, or perhaps more closely aligned to oneworld or Star?

 

[WorldTraveler]

if ever there was a carrier whose BK should have drawn foreign carriers out as bidders, it should have been AA but AA ended up restructuring on its own.

Foreign ownership laws keep foreign interest down.

As for whether a merger is complete or not, operationally DL is the only complete megamerger in the US. If ALK is going to consider whether a merger suitor will retain their network, a merger with anyone else who doesn't have their own previous mergers settled increases dramatically the chances that a downturn will force AS to be pushed to the side.
Every strategic reason AS might choose to resist a merger with DL apply to an even greater degree with AA or UA and then there are other reasons specific to each of those carriers as well.

Further, AS and UA are already the two largest carriers on the west coast. DOJ interest would be far greater. As for AA, there simply isn't the strategic interest to AA in an AS merger that there is to DL. AA has a small int'l operation on the west coast compared to DL and UA and AA/As or not isn't going to allow AA to build what it does not have. Further, AA's current results show that it significantly underperforms DL and UA from the west coast to Asia, esp. from LAX, and AS feed isn't going to change that.

ALK could run to another LFC to merge to avoid a merger with DL and remain independent but taking steps to remain independent against true market forces are more likely to result in strategic underperformance.

If AS is going to merge with anyone, DL presents the greatest potential to maximize AS network and retain as much of AS as current exists.

Meto,
if DL really could control close to two terminals at LAX, then the competitive balance at LAX among the big 3 really does change - but I still submit that UA will not hold onto what it has for long if cmopetitition on the west coast really starts pushing on them.