What's Next For Delta?

I don’t think I said anything about picking apart any airline. The reason why a DL acquisition of UA is more likely to succeed than the often touted AA acquisition of UA’s Pacific routes is because DL can acquire more of UA than any other airline because of its relatively small overlap.

Delta is no longer the company that was on the verge of bankruptcy. Grinstein’s doom and gloom talk worked to extract a significant part, but not all of the concessions he wanted. Yes, the legacy segment of the industry, including Delta, continues to be mired in a deep financial crisis. However, everyone recognizes that the industry cannot survive as it exists now. As I’ve pointed out, I believe DL will have a hard time reaching its financial goals with its existing network and fleet. I’ve also pointed out that DL has a considerable amount of underlying wealth in its regional jet and efficient maintenance operations that other carriers simply don’t have in addition to its unmortgaged assets – something CO has none of. I also have suggested that consolidation in the industry could be facilitated by outside investors, a recognition of the fragile financial position the legacy carriers find themselves in.

If US fails, DL’s finances sure will improve an aweful lot. A US failure sure seems a lot more likely based on what I read on the US board. A US failure also hurts UA based not only on the lost revenue from the codeshare but also because of the hole left in UA’s network on the east coast. I don’t realistically expect DL to make any strategic moves as long as US is still around but if they fail and if DL is able to limit the competitive influx into DL’s key SE markets, moving forward strategically will begin to look a lot more likely.

Unlike US, UA still has considerable value based on its industry leading access to world and domestic markets. Instead of letting UA continue to erode, it makes a lot more sense to buy UA while it is still close to its pinnacle than for service to begin faltering to the point that the customer base is lost.

Fly, you may recall that early in your career DL acquired Western in its entirety and shortly thereafter acquired Pan Am’s transatlantic assets including a significant number of its employees. DL has a history of integrating airlines it has acquired much better than AA. The Western acquisition was considered one of the best while DL paid a high price for failing to recognize that things weren’t working as planned in the PA acquisition. I would bet that the only regrets DL has about he Pan Am acquisition is that they didn’t move earlier in order to get LHR access and that they didn’t more aggressively manage the acquisition in order to make Pan Am work for them sooner. You may also recall that DL’s acquisition of Pan Am came just months after Eastern’s demise. Strengthened domestic finances enabled DL to go shopping for new international routes.

Unless UA can pull together a viable business plan in the next couple of months, UA’s creditors AND employees may be best served by an acquisition. Based on the new pay rates UA is “asking†from UA employees, they would get a pay raise if they were to go to work for DL. DL may or may not kick its flight attendants in the teeth but they continue to enjoy better pay and benefits than do employees at competing airlines – exactly the same strategy DL has used for years. Ultimately, the creditors want someone to pay the bills. There is no reason to think DL could not integrate UA’s operation into its own and take over its aircraft and associated debt; more of UA’s current network might be maintained than DL’s.

If you can get the pass card and a little cash, take it. You might find that your UA pass card in time will get traded in for a DL card.

I wish you well this Thanksgiving and always.
Based on DL’s financial reports they have approx 400 RJs under their control, about 2/3 of which are operated by Comair and ASA. Yes, I think they are struggling a bit to place them all in the absence of DFW but they are using them to pick off the top O&Ds in the SE – a move they will continue to use to siphon off traffic from US and limit the ability of another carrier to set up a hub in CLT if US does fail.

I agree that many carriers could bid on UA assets. DL and CO are the only ones that could acquire UA in close to its entirety without triggering anti-competitive concerns and thus any acquisition will have to be of substantially all of UA unless you get into a bidding war – which AA is probably best positioned to win. The DOJ simply won’t allow AA to acquire UA’s ORD presence. DEN, SFO, and the beyond NRT assets, possibly, but that’s about all. UA knows they can’t sell itself off piecemeal and survive so unless piecemeal buyers are willing to offer prices bigger than what UA would get if it were acquired whole, no piecemeal deals will be done.
WorldTraveler said:
I don’t think I said anything about picking apart any airline. The reason why a DL acquisition of UA is more likely to succeed than the often touted AA acquisition of UA’s Pacific routes is because DL can acquire more of UA than any other airline because of its relatively small overlap.

Again I missed the part about how they might pay for such an acquisition?
mistified said:
Again I missed the part about how they might pay for such an acquisition?

Several weeks ago AMEX came thru for DL with $600 million, $100 million loan and $500 million advance purchase of SkyMiles.

I don't know this for certain, but it might just be within the realm of possibility that AMEX or someone else would loan DL the acquisition price to acquire from UA the rights to operate NRT and LHR.

After all, Bank One and the other UA lenders have taken those rights as collateral for their current loans to UA, so isn't it possible that DL could pledge those rights as collateral to buy them when UA finally gives up the ghost?
FWAAA presents one possibility. Another is that DL could find other investors willing to purchase UA investors. Finally, DL does have at least $800 million dollars in unpledged collateral available based on the results of their debt exchange offer and possibly more.

Further, just as there has been discussion about AMR unlocking some of the value in American Eagle, Delta could do the same thing with Comair and ASA. In the transactions with Amex, Delta valued its holdings in ASA and Comair at $2 billion.

Finally, keep in mind that United generates a significant amount of revenue for Visa. I'm sure Amex would thoroughly enjoy the opportunity to help Delta eliminate that revenue stream.
If UA were sold piecemeal it would solve a lot of problems for people. The empty corporate structure of UA would only have cash and debt after all assets are sold so the BK would be straight foreward. The buyer of the divisions Asia, LHR and hubs would take the employees but wouldn't be hindered by the debts of UA. NO one in there rihjt mind would want to take over the corporate parent of United.
If I read the DOT Q2 reports correctly, the new routes Delta/Song have started out of JFK to Florida and Western destinations are averaging RASM's a third lower than Jet Blue's, whose costs are much lower than DAL's. So tell me again WT how Delta is going to be in decent shape. Right now, I think its fair to say no legacy carrier is going to make it if fuel beween now and 2008 stays over $35.
Quite frankly, every legacy airline has a certain amount of money budgeted for "defensive" flying. I don't think anyone believes that DL has cracked the formula for what it takes to compete in low cost carrier markets but the NYC-Florida markets are the backbone of DL's network and they obviously have no intention of backing away from them. Yes, they need to figure out what it takes to make them work but they obviously have budgeted what is necessary to fight and make those markets work.

On the other hand, keep in mind the costs you are seeing today will fall by about 20% in a few short months when the cost cuts start to kick in and as DL grows its capacity with fewer resources, forcing unit costs down. All of the LCCs understand that you can't keep costs down if you don't grow. The ballooning of legacy costs over the past 3 years is largely because they have pulled back capacity while getting rid of the least expensive employees - a recipe guaranteed to send costs up. It is for that reason that US is taking the draconian step of attempting to rid itself of all vestiges of its legacy cost structure while DL and AA are taking the tact that they will reduce the total cost base and then grow the network based on the reduced costs (smaller workforce, fewer planes).

You will also notice that carriers of both LCC and legacy stripes are starting to pull out of some of the markets they ventured into and are finding are not working out. ie HP is pulling out of most transcon markets, AA is pulling out of some of the NE-Florida markets it jumped into alongside DL and B6.

In the larger picture, one or two carriers will start to fail in the near future. Even with falling fuel prices, the revenue picture is not improving. DL has got a wad of money in its pocket now and is implementing a number of cost concessions in the near future. Every other legacy carrier is asking for further concessions from labor (or laying off additional employees) while DL is moving into the recovery phase. Granted, DL may find itself in the position of having to go back for more concessions in a year but I suspect industry fundamentals will change, including failure of a major competitor or two which will help to stabilize the industry and turn DL's fortunes around.

Don't just believe me. Look at the improvement in DL's stock price over the past month - it's up over 100% and some analysts rate it as a buy.
flyhigh said:
I agree that the lack of a 100 seat aircraft is a big whole, but as noted, the new contract with the pilots includes payrates for the 737-700...so I imagine that whole will be filled.

For the record, the previous contract included pay rates for the 737-700.