Delta: We'll Chart Our Own Course

The Atlanta airline announced its plan to emerge from bankruptcy, spurning US Airways' takeover offer

Delta Air Lines' (DALRQ) CEO Gerald Grinstein on Dec. 19 announced a plan for the carrier to escape bankruptcy this spring -- and gave another brush-off to US Airways Group's (LCC) recent merger bid. But US Airways CEO Doug Parker isn't giving up yet.

After having made two overtures to no avail, Parker on Nov. 15 made a hostile takeover offer for Delta amounting to more than $8 billion. He was essentially saying he would pay Delta's unsecured creditors a 40% premium for their debts, with their support of such a deal.

Now Grinstein has released a five year business plan on Dec. 19 for Delta to emerge from bankruptcy this spring, including an estimate from his financial advisor, The Blackstone Group, that his company is worth between $9.4 billion to $12.0 billion. Those values would result in a recovery for Delta's unsecured creditors ranging from 63% to 80% of their allowed claims, Delta said in a statement on Dec. 19. (Those recoveries assume claims against Delta amounting to $15 billion.)

Delta's board unanimously rejected U.S. Airways' bid. "The Board concluded that Delta's standalone plan will provide the Company's creditors with superior value and greater certainty on a much faster timetable than the US Airways proposal," Delta said in the statement.

Delta added that US Airways' proposal would hurt consumers by stifling competitive forces. Meanwhile Delta would be forced to remain in bankruptcy longer, if US Airways' proposal went through and the Department of Justice had to review it for its impact on the market. The Air Line Pilots Association, which has a unit representing Delta's more than 6,000 pilots, has said Delta's pilot contract would prohibit the combined company from doing the capacity reductions that U.S. Airways wants.

Also, Delta warned that such a combination would burden the new company with a "precariously high debt load" of around $23 billion, the highest total debt load in the airline industry. US Airways' proposal relies on claimed synergies that are premised on flawed economic assumptions, Delta said in its statement, among other things.

Tempe (Ariz.)-based US Airways counters that a combination would generate at least $1.65 billion annually from things like improved efficiencies (the two airlines have many overlapping domestic routes.) "Factoring the synergy benefits into our offer, the current value of our proposal is significantly greater than the value of Delta's standalone plan," CEO Parker said in a statement Dec. 19. "We remain a disciplined and determined bidder for Delta."

With his new business plan, Grinstein is gunning for his company's return to profitability in 2007 and an increase in net income, after profit sharing, from around $500 million in 2007 to $1.2 billion in 2010. And he means to cut net long-term debt by more than 50% to around $7.5 billion in 2007.

Parker said he had always expected Delta to file a standalone plan with the bankruptcy court and that this will give Delta creditors a benchmark against which to evaluate the competing proposals.

Investors bid up U.S. Airways' shares 3.1% to $57.50 per share near closing time Dec. 19 on the New York Stock Exchange.

Standard & Poor's credit analyst Philip Baggaley says that Delta's proposed reorganization plan involves less risk than US Airways' merger proposal. "[The plan] would not face antitrust review by the Department of Justice, would not involve potentially difficult labor integration, and would not require the issuance of $4 billion in acquisition debt," said Baggaley in a Dec. 19 note. (S&P, like, is owned by The McGraw-Hill Companies.)

However, Baggaley noted, "Delta's stand-alone plan foregoes potentially significant merger synergies and, like US Airways' acquisition forecast, rests on assumptions, some of which appear overly optimistic."

Baggaley pointed out that Delta is assuming it will fully close its historical gap in revenue generation against peers, in spite of factors like ongoing improvements at its competitors. Also, Delta foresees further reductions in its nonfuel expenses, maintaining its lead as the lowest-cost of the legacy carriers.

Atlanta-based Delta filed for bankruptcy last September, after buckling under numerous challenges. Since then Grinstein has been racing against the clock to save his company. He's had to rebuild Delta's management ranks, after many of the former CEO Leo Mullin's hires opted to exit in anticipation of the airline's bankruptcy. He's fixed problems like the airline's money-losing Cincinnati hub, which with more than 600 daily flights was sending up too many half-empty planes (see BusinessWeek, 12/4/06, "Flight Plan"). As of Sept. 30, Delta had managed to reach 85% of its goal set out in Sept. 2005 to realize $3 billion in annual financial improvements by the end of 2007.

"Delta is well along in the process of a top to bottom transformation -- implementing changes that have made a vast improvement in our performance," Grinstein said in his statement. "Our plan for a fundamentally new and different airline is working and is creating real value."

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