Plea For Synergy -- Or Well-Crafted Power Play?
By ANN Senior Correspondent Pete Combs
On Wednesday, we got the
bombshell: US Airways wants to buy up Atlanta-based Delta Airlines.
The offer stands at $8 billion dollars and was made public in a
carefully orchestrated announcement by Doug Parker and the
management at US Air. But was it a public plea, or a power
play?
By taking his offer of a buy-out public, US Airways CEO Doug
Parker, in essence, went over Delta chief Gerald Grinstein's head.
His offer of $8 billion dollars in cash and stock isn't aimed at
Delta management, or even at the board of directors.
"If, indeed... US Airways... could offer [Delta creditors]
substantially more than Delta can, it's probably gonna go through,"
says Mike Boyd, who runs an airline consulting business based in
Denver, CO. "Creditors don't care about the airline business. They
just want their money."
Boyd doesn't think a US Airways-Delta merger would be good for
consumers.
"It reduces competition substantially."
Consider, he says, markets like Charleston, SC, where no one
carrier has more than 40-percent of the market.
"Do this deal, one carrier has 70-percent of the market," he
says.
In fact, most industry analysts agree that consumers would lose
out on this deal. But Richard Aboufalia at the Teal Group in
suburban Washington says, maybe this is a deal whose time has
come.
"There needs to be some kind of restructuring," he says.
"Hopefully, regulators will move to the point where they say, 'Hey,
this is a solution and we should not stand in the way of... market
decisions.'"
Ever since the airline industry took a nosedive back in 2001,
many executives have predicted a wave of bankruptcies, mergers and
consolidations. There were simply too many planes in the sky with
too many unfilled seats. That drove prices down and sent airlines
like US Airways, United and Delta into bankruptcy. Now, industry
experts like Ray Niedl at Calyon Securities, comes the often
cut-throat process of consolidation.
"Industry consolidation would raise prices so that the airlines
can make a return on their product," he tells ANN.
Which makes you wonder what the government will have to say
about all this.
Boyd thinks the Justice Department, which oversees mergers, will
turn this deal down cold.
"Turning down mergers, they haven't done in the past -- at
least, not up until now. [But] a lot of communities are going to
get hurt pretty badly by this."
Ray Niedl agrees.
"I think they're going to be looking at the fact that there's
some overlay between the two carriers in the route system," he
says. "But more importantly, if they allow this merger, they know
this is going to set off an industry trend. I'm not sure regulators
and politicians are ready for that."
But Richard Aboufalia has a different point of view.
"Obviously, the health of the industry has been adversely
affected by overcapacity. Regulators and lawmakers are probably
going to look more sympathetically at this in an effort to redress
that problem through mergers," he says.
All three analysts agree on one thing: This is a well-thought
out play by executives at US Airways. Whether Delta's management
likes it or not, the Atlanta-based carrier is now in play.