Bloomberg Article DL + AK M&A

[Kev3188]

This whole process will take a long time to play out unless the BOD at ALK recognizes that their business will be damaged and they agree to a merger.

Translation: "Resistance is futile."

Like I said awhile ago, if it comes to it, I hope the Eskimo goes down swinging.

DL's flying a little too close to the sun right now, IMO...

 

[metopower]

Dawg ...I agree with all you said. 717 will stay east until fleet is north of 40 or 50 aircraft if ever. Your reasons for Dl's move are the ones that have been told to me. It is not a want to it is almost a have to .If no move on Ak ,DL is hamstrung in two hubs with future limited options.LAX and SEA airports are NOT like other airports because of the real estate. Without AK ..DL would have to feed multi hubs to achieve what could easily be done in one. DL likes fortress hubs.

 

[robbedagain]

Meto if dl were to buy ALK how much would be divested if any? And would it be worth it?

 

[metopower]

I don't have any knowledge about that. But in my opinion it would be worth it. What could be lost? Gates? Routes?

 

[Kev3188]

My guess would be a little of all of the above.

All that aside, do you really want to go through another merger w/ people who have clearly said they want no part of one?

 

[WorldTraveler]

Good conversation.

1. Kev’s last point is perhaps the most key in this discussion. There is a lot of bad blood between AS and DL employees right now…. hostile mergers don’t work in service industries. Even if they both agree that a merger is in their best interest, AS and DL mgmts both have to convince their employees that a merger is the right thing…. And that is a long ways from happening. DL’s strategic needs won’t make a merger work unless everyone agrees it is the best thing to do.

2. Much of AS’ and WN’s growth on the left coast came as the network carriers, including DL, pulled back in the early 90s and then again post 9/11. Western flew a lot of the routes that DL is now restarting including west coast to Alaska and Mexico. DL is in the strategic position of needing to rebuild its position on the west coast after focusing on the east coast for the better part of two decades. DL is comfortable enough with its network east of the Rockies that it is now focusing on the west coast. AA and DL have both refocused their strategic efforts on the west coast so it was a given that the UA’s strength among the legacies and AS and WN’s strength among the LFCS (yes I know AS is really an LFC based on its costs as well as a legacy based on its history) would be challenged.

3. AS and DL had a pretty good thing going until about 6 months ago when DL decided they didn’t like the way AS was holding up their end of the deal. I doubt very seriously that either AS or DL are fully convinced that the agreement they have is irrevocably broken. It is still very possible that DL’s pressure could result in AS changing its strategy and in DL and AS both pulling back from their growth in each others’ hubs in return for the cooperation which would likely yield a better result for both.

4. Based on AA/US, there will almost certainly be divestitures required. In SEA, it may not make any difference given that DL needs enough gates to operate its widebody operation plus its own domestic operation that isn’t duplicated by AS. But in LAX, the DOJ required AA/US to divest 2 of the 3 gates that US operated - which seemed unfair to me but that was the reality. It is hardly worth merging to give away a number of the gates AS/DL just because DL could use more space but might not end up with it after all the DOJ is thru with the transaction.

5. Despite gaining no more gates, so far as we know, DL is still adding new service from LAX to BOS and DAL over the next year using its present gates so there is obviously some room to expand even within the present facilities. There really is not a huge strategic gap between DL and AA or UA from LAX. Pre-merger AA and UA’s size difference comes from serving smaller cities that will not significantly change the competitive balance whether DL serves them or not. DL’s biggest strategic difference other than LHR and ORD from LAX is in the transcon markets and even that could probably be added given DL’s existing gates. Yes, DL needs to grow at LAX but risking giving away gates or adding bulk that may or may not provide a strategic advantage isn’t worth it.

6. The current gate situation at either LAX or SEA is not set in stone forever. It is also possible that DL could buy out gate leases from other carriers, some of whom could move to the TBIT. You argue that money speaks, dawg, but don’t seem to believe DL could also spend money to buy gates. If the primary need for DL is to gain gates, I can assure you that DL could do it for far less than the $5B it would take to buy AS. Further, UA cannot sit on its present gates indefinitely without either flying routes – which will increasingly have to be done at losses given their cost disadvantage – or they will have to sell or have the airport repossess their gates.

7. DL doesn’t have to send 717s to the west coast in the next year but DL will still have half of the 717 fleet in service by next summer and the rest within a year; they have 319s on the west coast and most of the rest of DL’s mainline fleet touches the west coast. DL has a lot of opportunity to upgrade on the west coast from DCI to DL mainline including at SEA and the pilots would be ecstatic if it happens. While a robust hub would involve more destinations, DL can serve the largest destinations from SEA with more than enough capacity using a changing combination of mainline or DCI to fill its int’l flights.

8. Whether you want to believe it or not, dawg, DL’s cost advantage over UA and AA will absolutely play a role in reshaping the west coast. Yes, AA and UA will defend their strategic interests but no company can sustain a 10% plus cost difference against its competitors. DL is just beginning to refocus its efforts on the west coast so UA’s advantage won’t be lost overnight. No analyst believes UA will reduce its costs but instead will at best stop the significant growth in costs that UA has since the UA/CO merger – and they still don’t have labor integration agreements with all labor groups.

9. AS is a costly airline… its market cap at $5B is half of UA’s and WN’s despite being a much smaller airline than either. There are other mergers or acquisitions that make far more strategic sense for a lot less money. Let’s not forget that DL bought half of VS for $360 million and 5% or so in each of AM and G3 for around $100M. If DL has to spend $5B to acquire AS, even in stock, it will be far more costly than any other merger with a whole lot less strategic gain. The value of NW at the time of the DL-NW merger was about $3B. NW delivered far more strategically than AS ever could.

10. Finally, once again, no one on here who is arguing for a merger wants to accept that AS and DL have a long-term codeshare agreement that has minimum performance guarantees and penalties on both sides. DL simply does not need to duplicate everything AS does in order to build DL’s hub at SEA and AS will continue to have access to DL markets because of the agreement. AS will provide a major part of the feed DL needs to smaller markets from SEA. If both sides decide to walk away from the agreement and waive their right to penalties, then the situation changes but it is in DL’s strategic best interest to force AS to live up to the contract while DL looks at alternatives, one of which may be a mutual merger at some point. But there won’t be a hostile takeover and there won’t be a merger as long as there is a risk of losing key assets via divestitures that DL needs to gain in the merger.

Most importantly, this situation is not likely going to be resolved in the near future and so far AS and DL are well aware of the implications of each action that is occurring and are willing to take a slow, measured approach to resolve it to the way each side wants.

AS is not going to capitulate and DL will have to be creative in findings solutions to DL’s strategic objectives – which may or may not be solved long-term with AS, either in partnership or merger.

 

[eolesen]

Dawg, the difference with the AA hostile takeover was the creditors committee acts as the Board.

Outside of bankruptcy, the ALK board doesn't have to look at a takeover offer if it's not in the best interests of the shareholders, the employees or the Company. ALK has to look no farther than how the NWA merger went as a bellwether for what would happen to the existing ALK facilities. And that would most definitely enter into any decision to entertain an offer...

DL COULD try a hostile takeover, but that would only make things worse than they already may be between the employee groups, and it would invite other airlines to enter the fray, one of which might wind up being more palatable to the employees.

 

[WorldTraveler]

I'm sorry but the BOD of ALK is only responsible to the stockholders to deliver the highest value to them.... if someone else can pay a premium to what ALK is worth, then ALK has a fiduciary responsibility to deliver the highest value to the stockholders.

What any buyers of ALK do with what they acquire is not part of the decision and the buyers don't even have to disclose what they intend to do with what they buy.


Whether DL would cut AK's network or assets or not, that consideration is absolutely not part of the decision process that the board of any publicly traded US company makes. Private companies can consider those things but publicly traded companies have a first and highest priority to the stockholders.

 

[FWAAA]

I'm sorry but the BOD of ALK is only responsible to the stockholders to deliver the highest value to them.... if someone else can pay a premium to what ALK is worth, then ALK has a fiduciary responsibility to deliver the highest value to the stockholders.

I'm not convinced that is an accurate summary of the board's obligations under the Delaware corporate law when presented with a merger proposal.  

 

[WorldTraveler]

I'm interested in hearing your perspective but I can absolutely assure you that a buyer of a publicly traded company doesn't have to say what they intend to do with it - and even if they do say, they can clearly change their plans based on economic changes.

ALK will not make a determination about whether to sell to DL based on any promises that DL may or may not make about what they will retain of AS.

It also doesn't change that if DL pays as much as they will for AS, they are going to keep the majority of it.

There is no evidence that DL would cut service in key AS monopoly routes.

You do realize that DL's fares to JNU for next summer are lower than AS' don't you?

 

[Glenn Quagmire]

I'm not convinced that is an accurate summary of the board's obligations under the Delaware corporate law when presented with a merger proposal.

That is precisely correct FWAAA (like I needed to tell you that).

The law and precedent is quite clear on this, as you already know.

 

[WorldTraveler]

I'm interested to hear the law and precedent regarding preserving networks and assets in a merger but the history of US airlines over the past decade to 15 years is the best evidence that there either isn't any requirement to preserve acquired assets or it is easily changed.

 

[topDawg]

I'm not convinced that is an accurate summary of the board's obligations under the Delaware corporate law when presented with a merger proposal.  

I don't think its a law, but I know, as well as you do, that if Delta gives a creditable offer any BOD will look into it. AS, UA, HA, AA, NK, doesn't matter. If DL offers 100 bucks a share AS is gone. 
 
 
the question would be will Delta pony up the cash to make a real offer...... 
 

Dawg, the difference with the AA hostile takeover was the creditors committee acts as the Board.

Outside of bankruptcy, the ALK board doesn't have to look at a takeover offer if it's not in the best interests of the shareholders, the employees or the Company. ALK has to look no farther than how the NWA merger went as a bellwether for what would happen to the existing ALK facilities. And that would most definitely enter into any decision to entertain an offer...

DL COULD try a hostile takeover, but that would only make things worse than they already may be between the employee groups, and it would invite other airlines to enter the fray, one of which might wind up being more palatable to the employees.

I know. I'm just using that as an example. Horton quickly changed his tune once he had pressure put on him. Same thing can be done for AS. 

 

[topDawg]

Dawg ...I agree with all you said. 717 will stay east until fleet is north of 40 or 50 aircraft if ever. Your reasons for Dl's move are the ones that have been told to me. It is not a want to it is almost a have to .If no move on Ak ,DL is hamstrung in two hubs with future limited options.LAX and SEA airports are NOT like other airports because of the real estate. Without AK ..DL would have to feed multi hubs to achieve what could easily be done in one. DL likes fortress hubs.

Everyone likes fortress hubs, as long as the market allows them. 9 times out of 10 its a "fortress" because of the small market. 
LAX, CHI, NYC etc are just to large to ever be a fortress. (not matter what CASM advantage DL has)  
 

Good conversation.

1. Kev’s last point is perhaps the most key in this discussion. There is a lot of bad blood between AS and DL employees right now…. hostile mergers don’t work in service industries. Even if they both agree that a merger is in their best interest, AS and DL mgmts both have to convince their employees that a merger is the right thing…. And that is a long ways from happening. DL’s strategic needs won’t make a merger work unless everyone agrees it is the best thing to do.

2. Much of AS’ and WN’s growth on the left coast came as the network carriers, including DL, pulled back in the early 90s and then again post 9/11. Western flew a lot of the routes that DL is now restarting including west coast to Alaska and Mexico. DL is in the strategic position of needing to rebuild its position on the west coast after focusing on the east coast for the better part of two decades. DL is comfortable enough with its network east of the Rockies that it is now focusing on the west coast. AA and DL have both refocused their strategic efforts on the west coast so it was a given that the UA’s strength among the legacies and AS and WN’s strength among the LFCS (yes I know AS is really an LFC based on its costs as well as a legacy based on its history) would be challenged.

3. AS and DL had a pretty good thing going until about 6 months ago when DL decided they didn’t like the way AS was holding up their end of the deal. I doubt very seriously that either AS or DL are fully convinced that the agreement they have is irrevocably broken. It is still very possible that DL’s pressure could result in AS changing its strategy and in DL and AS both pulling back from their growth in each others’ hubs in return for the cooperation which would likely yield a better result for both.

4. Based on AA/US, there will almost certainly be divestitures required. In SEA, it may not make any difference given that DL needs enough gates to operate its widebody operation plus its own domestic operation that isn’t duplicated by AS. But in LAX, the DOJ required AA/US to divest 2 of the 3 gates that US operated - which seemed unfair to me but that was the reality. It is hardly worth merging to give away a number of the gates AS/DL just because DL could use more space but might not end up with it after all the DOJ is thru with the transaction.

5. Despite gaining no more gates, so far as we know, DL is still adding new service from LAX to BOS and DAL over the next year using its present gates so there is obviously some room to expand even within the present facilities. There really is not a huge strategic gap between DL and AA or UA from LAX. Pre-merger AA and UA’s size difference comes from serving smaller cities that will not significantly change the competitive balance whether DL serves them or not. DL’s biggest strategic difference other than LHR and ORD from LAX is in the transcon markets and even that could probably be added given DL’s existing gates. Yes, DL needs to grow at LAX but risking giving away gates or adding bulk that may or may not provide a strategic advantage isn’t worth it.

6. The current gate situation at either LAX or SEA is not set in stone forever. It is also possible that DL could buy out gate leases from other carriers, some of whom could move to the TBIT. You argue that money speaks, dawg, but don’t seem to believe DL could also spend money to buy gates. If the primary need for DL is to gain gates, I can assure you that DL could do it for far less than the $5B it would take to buy AS. Further, UA cannot sit on its present gates indefinitely without either flying routes – which will increasingly have to be done at losses given their cost disadvantage – or they will have to sell or have the airport repossess their gates.

7. DL doesn’t have to send 717s to the west coast in the next year but DL will still have half of the 717 fleet in service by next summer and the rest within a year; they have 319s on the west coast and most of the rest of DL’s mainline fleet touches the west coast. DL has a lot of opportunity to upgrade on the west coast from DCI to DL mainline including at SEA and the pilots would be ecstatic if it happens. While a robust hub would involve more destinations, DL can serve the largest destinations from SEA with more than enough capacity using a changing combination of mainline or DCI to fill its int’l flights.

8. Whether you want to believe it or not, dawg, DL’s cost advantage over UA and AA will absolutely play a role in reshaping the west coast. Yes, AA and UA will defend their strategic interests but no company can sustain a 10% plus cost difference against its competitors. DL is just beginning to refocus its efforts on the west coast so UA’s advantage won’t be lost overnight. No analyst believes UA will reduce its costs but instead will at best stop the significant growth in costs that UA has since the UA/CO merger – and they still don’t have labor integration agreements with all labor groups.

9. AS is a costly airline… its market cap at $5B is half of UA’s and WN’s despite being a much smaller airline than either. There are other mergers or acquisitions that make far more strategic sense for a lot less money. Let’s not forget that DL bought half of VS for $360 million and 5% or so in each of AM and G3 for around $100M. If DL has to spend $5B to acquire AS, even in stock, it will be far more costly than any other merger with a whole lot less strategic gain. The value of NW at the time of the DL-NW merger was about $3B. NW delivered far more strategically than AS ever could.

10. Finally, once again, no one on here who is arguing for a merger wants to accept that AS and DL have a long-term codeshare agreement that has minimum performance guarantees and penalties on both sides. DL simply does not need to duplicate everything AS does in order to build DL’s hub at SEA and AS will continue to have access to DL markets because of the agreement. AS will provide a major part of the feed DL needs to smaller markets from SEA. If both sides decide to walk away from the agreement and waive their right to penalties, then the situation changes but it is in DL’s strategic best interest to force AS to live up to the contract while DL looks at alternatives, one of which may be a mutual merger at some point. But there won’t be a hostile takeover and there won’t be a merger as long as there is a risk of losing key assets via divestitures that DL needs to gain in the merger.

Most importantly, this situation is not likely going to be resolved in the near future and so far AS and DL are well aware of the implications of each action that is occurring and are willing to take a slow, measured approach to resolve it to the way each side wants.

AS is not going to capitulate and DL will have to be creative in findings solutions to DL’s strategic objectives – which may or may not be solved long-term with AS, either in partnership or merger.

1) Delta doesn't have to ask its employees, or prove to its employees crap. They might do it, might, but they don't have to. (and when they do it, you only have one option. Just like with NW, you were only allowed to agree with it. Or hit the door) 
 
 
3) This AS pissing contest is way over blown. Delta simply figured out they could only compete with its own feed on its own planes. Part of it is cost/volume also. In key markets, LAX-SEA for example, DL was having a hard time getting the feed they needed.
 
4) IMO Delta would have to give up 2 gates in SEA....not a big deal, and two gates in LA, also not a big deal. Also i would expect at least one of the DCA flights would have to go, probably two. AA isn't really giving up gates in LA. They are giving up preferential right on two of the three gates. LAWA will be turning them into CUTE gates that AA will be able to use. 
 
5) Delta does have a little more room to expand in LA. They are also using the hangar for peak times again. The issue with this is it is temporary, again, LAX has a hard cap gate limit. LAWA doesn't want to count these as gates (which will have to be done at some point if Delta keeps using them). LAWA wants the rest of the gate cap for TBIT, heck its likely that if gates on T1/T2/T3 get taken due the moving the runways on the north side, that would also be added back to TBIT. That happens to be great for AA, not so much for Delta. Delta screwed up. They thought land locking AA was the best idea at the time of the merger. They didn't see AA getting TBIT gates. They should have moved into T2, and moved the T3 airlines over to T5/6. Then Delta would also likely be able to use TBIT like AA. Not they are locked into T5 with no real options for growth. 
 
6)  The issue in LA is who is going to move? you seem to be missing the point WT. AA is at T4, you think they are going to give Delta space to expand into AA markets? no. Or on the otherside, you have UA...same thing. Not only that but LAWA isn't going to be moving UA or AA into TBIT. (or AS for that matter)
You need to learn more about LAX, very clear your shooting from the hip and are wrong about most of it. 
 
The very very best thing that *could* happen for DL is get get a hold of some of the UA space at T6. IMO at best that would be two gate (61/63), but even then...I'm not sure UA has the space to give. UA's flight per day per gate avg. is in the 7 flight ball park. Thats pretty high for a non-LCC/WN airline. Not only that but the loss of two gates would make any expansion from UA very hard...... you can pretty much bet LAX-IAH/ORD/IAD would be some of the places added from these gates. Not good for UA. 
and AA isn't giving up space at T4. Not going to happen. 
 
Also UA has a long term lease(which it is renewing, for its space on T6/T7/T8.) I have yet to see anything saying UA has minimums to keep its space. As long as UA(and DL) pay, they can gate squat as much as they want. Delta has been very good at this in LA, FWIW. 
 
7) ugh. The company has made its 717s plans very clear. They aren't going west. period. ATL/DTW/NYC. Thats it. Done. Over with. 
 
Oh and the 88s don't go west. 
 
8) and you are skewing data as you always do. you have no idea what kind of terms and cost the OO/MQ flying for DL/UA/AA cost. You are also looking at network CASM but are forgetting that, as of now, UA/AA command higher fares in LA than Delta. You taking one small small thing, and makiing it into how Delta will take over the world again. CASM is a part, but it isn't nearly the part your making it out to be. 
 
9) I didn't say it would be cheap. 
 
10) I don't think anyone is arguing for a merger......do you know how much AS outsources? I'll pass. Delta does to much of that as is. No need for anyone to get any cute ideas. I am saying that its not nearly as solid of NO are your making it out to. 
oh and FYI, you do know that codeshare agreement doesn't last forever.

 

[topDawg]

I'm interested in hearing your perspective but I can absolutely assure you that a buyer of a publicly traded company doesn't have to say what they intend to do with it - and even if they do say, they can clearly change their plans based on economic changes.

ALK will not make a determination about whether to sell to DL based on any promises that DL may or may not make about what they will retain of AS.

It also doesn't change that if DL pays as much as they will for AS, they are going to keep the majority of it.

There is no evidence that DL would cut service in key AS monopoly routes.

You do realize that DL's fares to JNU for next summer are lower than AS' don't you?

the none core flying would be gone so fast it wouldn't be funny. 
 
Part of any merger is going to be the consolidation speech. SEA/LAX flying would be safe, PDX and the large P2P network would be gone. 
 
synergies and all that.