Nov. 15 (Bloomberg) -- US Airways Group Inc. made an unsolicited $8.67 billion offer for bankrupt Delta Air Lines Inc. that would create the world's largest carrier.

Delta's creditors would get $4 billion in cash and $4.67 billion in stock of US Airways, formed 14 months ago as it exited bankruptcy through a merger with America West Holdings Corp. Delta Chief Executive Officer Gerald Grinstein agreed today to review the offer even as he reaffirmed his aim to keep Delta independent.

The bid sparked a rally in airline shares, sending the Bloomberg U.S. Airlines Index up the most since May 2003 on speculation that more consolidation will follow. US Airways CEO Doug Parker has championed the idea of mergers.

``We believe this bid may prompt other bids for Delta and possibly set an industry trend for consolidation,'' Ray Neidl, a Calyon Securities analyst in New York, said in a report. ``However, Delta management remains hostile at this point to any merger, which could cause delays.''

Grinstein told employees in a letter Delta wants to remain independent when it emerges from bankruptcy in the first half of 2007, not a ``merged, acquired or otherwise consolidated airline.''

`We Remain Skeptical'

``While Delta is obligated to review this proposal carefully, we remain skeptical that it would make sense to deviate from our plan,'' he said in the letter.

Like Delta, Northwest Airlines Corp. also wants to exit Chapter 11 next year, and the two carriers' plans are helping fuel the industry's merger speculation. U.S. airlines this year may post their first collective profit since 2000, after more than $40 billion in losses from 2001 through 2005.

Shares of US Airways jumped $8.57, or 17 percent, to $59.50 at 4:01 p.m. in New York Stock Exchange composite trading, leading a surge by carriers including Continental Airlines Inc. and AirTran Holdings Inc. About 13.8 million US Airways shares changed hands, the most ever for the airline.

Delta's 7.9 percent notes maturing in 2009 rose 21.25 cents to 61.75 cents on the dollar, according to Trace, the bond price reporting system of the NASD. The yield fell to 26.67 percent.

Citigroup Inc. has committed $7.2 billion in financing for the proposed merger, US Airways said. Delta's unsecured creditors would own 45 percent of the combined company. The stock portion of the offer is for 78.5 million shares, so the value of that part of the transaction will change daily.

Biggest Carrier

A combined US Airways-Delta would retain Delta's name and vault past AMR Corp.'s American Airlines to become the world's largest carrier, as measured by miles flown by paying passengers. By that standard, Delta is the third-largest U.S. airline and US Airways is the seventh-biggest.

US Airways and Atlanta-based Delta both have U.S. East Coast networks, while Tempe, Arizona-based US Airways also has a West Coast presence. Delta has added more than 70 new international routes since 2005 under a plan to almost double overseas flying to 35 percent of the carrier's total.

The combined airline would be the largest in terms of passengers carried in the northeastern and southeastern U.S. and Florida, and second-biggest in the Southwest, US Airways said.

A merged US Airways-Delta also would have more than 18 percent of the U.S. industry's capacity, US Airways said. Any merger agreement must be approved by the U.S. Justice Department, US Airways shareholders and the court overseeing Delta's bankruptcy.

`Very Sensible'

``This would be a very sensible move, but fiendishly complicated,'' said Richard Aboulafia, vice president of Teal Group, a Fairfax, Virginia-based consultant. ``Complicated by issues of seniority, culture, fleet, route networks -- and that's just scratching the surface.''

Delta has major airport operations in Atlanta, Cincinnati, Salt Lake City and New York. US Airways has hubs in Phoenix, Philadelphia and Charlotte, North Carolina.

Both carriers run shuttle services in the U.S. northeast, and US Airways' plan calls for selling one of them, Parker said. The company hasn't decided which.

The US Airways shuttle has 14 daily flights between Boston and New York's LaGuardia airport and 15 between LaGuardia and Washington's Ronald Reagan airport. Delta operates 16 daily weekday flights between Boston and New York, and 15 between New York and Washington.

``We can put the two networks together and optimize them,'' Parker, 45, said in an interview. ``As we do that, we can actually fly to 100 percent of the cities we serve today with two networks, with 10 percent fewer airplanes. That's a lot of savings.''

Annual Savings

US Airways estimated the annual savings for the two companies at $1.65 billion over two years. US Airways hasn't decided where a combined carrier would be based.

US Airways said it wouldn't have to shed jobs, relying instead on attrition and employee leaves to thin the workforce as the combined airline pares capacity by 10 percent. Delta has 47,000 employees and 469 planes in its main jet operations, compared with 35,425 workers and 357 planes at US Airways.

Pay for the employees would be based on the higher of existing labor costs between the two carriers, Parker said, at an incremental expense of about $90 million.

The pay plan ``is a big positive for employees,'' US Airways President J. Scott Kirby said in an interview. ``Our employees also would have the advantage of working for a larger, even more financially sound airline. We hope that will get negotiations on a fast track with each group.''

Grinstein, 74, responded to US Airways' initial merger offer in an Oct. 17 letter, telling Parker ``it would not be productive.'' US Airways disclosed the letter in a filing today.

Delta's Strategy

Since filing for Chapter 11 in September 2005, Delta has cut unprofitable flights, reduced labor costs in part by eliminating 9,000 jobs and shed aircraft.

Parker said the merger must be done before Delta leaves Chapter 11, or at least half of the savings would be lost. The offer is ``absolutely'' conditioned on completion in bankruptcy, he said.

By law, Delta has the exclusive right through Feb. 15 to file a plan to exit bankruptcy. By going public with its offer, US Airways hopes to convince Delta creditors that a merger is a better option, said William Rochelle, a partner at Fulbright & Jaworski LLP in New York who represents some creditors.

Creditors

``US Airways is not going to get to first base unless they can generate some significant degree of creditor support for the offer,'' Rochelle said in an interview. ``By simply making the offer public, Parker has thrown a ball up in the air. He'll see which team catches it -- the Delta team or the creditor team.''

Rochelle doesn't expect to see a battle in bankruptcy court over Delta, although there will be ``hard bargaining'' over any agreement that may be reached.

Parker said the combined airline would be ``a more effective and profitable competitor in the current fragmented marketplace.'' US Airways' offer is a 25 percent premium over the Nov. 14 trading price of Delta's pre-petition unsecured claims and a 40 percent premium over the average trading price for unsecured claims over the past 30 days, US Airways said.

If approved, the merger would be the largest in the airline industry, ahead of American's acquisition of Trans World Airlines Inc. for $2.8 billion in cash and assumed debt in 2001.

Parker said the merger with Delta would be completed in the first half of 2007 and eventually would boost US Airways' earnings per share by 40 percent.

US Airways still is completing its 2005 merger with America West. The airlines haven't fully integrated their labor groups or their computerized reservation systems and are still flying under separate operating certificates.

Operations Questions

``While this may look good on paper, the fact is Parker has yet to demonstrate for us he's capable of putting two airlines together, much less three,'' said Jack Stephan, chairman of US Airways' Air Line Pilots Association. ``He needs to address operational and labor issues going on in his own backyard first before he can tackle anything else.''

US Airways and America West pilots plan picketing tomorrow in Phoenix and Charlotte to protest lack of an integrated contract for pilots. A spokesman for Delta pilots didn't immediately return a call for comment.

The Machinists union also wants any merger efforts to wait until after US Airways finishes contract talks. The Association of Flight Attendants-CWA didn't immediately return a call for comment.

Airlines' History

The US Airways-America West combination followed two bankruptcy filings by US Airways and a previous trip through Chapter 11 for America West. In the merger, the airline's headquarters was moved to Tempe from Arlington, Virginia, and America West executives, including Parker, kept the top management jobs.

Maintaining the Delta name for a merged carrier would extend a brand that dates to 1928, when an investment group purchased a 4-year-old crop-dusting company and renamed it Delta Air Service after the Mississippi Delta region where it operated. The company began flying passengers the next year.

United, the world's second-largest carrier, in September hired Goldman Sachs Group Inc. to explore possible transactions, including mergers. United CEO Glenn Tilton has called for industry consolidation since February 2005.

To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

Last Updated: November 15, 2006 18:08 EST