US Airways Folds Its Hand on Delta

The carrier's decision to abandon a longshot bid for the much-larger Delta cheered investors, who sent US Airways' shares up 5%

US Airways Group (LCC) CEO Doug Parker waged a scrappy fight to buy Delta Air Lines, but he finally walked away on Jan. 31 after failing to garner support from the bankrupt airline’s creditors. Now Delta can proceed with its plans to leave Chapter 11 this spring as a standalone carrier.

The decision removes any short-term impetus for consolidation in the U.S. airline industry, which expects to extend and deepen its financial recovery in 2007 if fuel prices do not spike. It also greatly increases the odds that another airline in bankruptcy, Northwest, will emerge from court protection this year as an independent carrier.

Parker expressed plaintive disappointment in a press release Jan. 31. "We would have created a better and more financially stable airline that offered more choice to consumers," he said.

After previous overtures went nowhere, Parker made a hostile, public takeover offer for Delta on Nov. 15 amounting to more than $8 billion. The next month, Delta filed a business plan with the bankruptcy court that valued the Atlanta-based carrier at potentially more than Parker had offered to pay. They also argued that US Airways' proposal would hurt consumers by stifling competition and reducing flight service, among other things. On Jan. 10, Parker raised his original offer by another 28% to $10.2 billion. The company also set a Feb. 1 deadline for Delta's creditors to press Delta to negotiate. Instead, they told U.S. Airways they could not meet the Tempe, Ariz. carrier's demands by that deadline.

Delta's creditors might have been challenged to agree. Their unsecured creditors committee includes representatives of the employees' union, suppliers such as the aerospace giant Boeing (BA), and the Pension Benefit Guaranty Corp., in addition to bondholders and other lenders. The interests of these various parties varied, making it more difficult for US Airways to line up a majority, Standard & Poor's credit analyst Philip Baggaley pointed out. (S&P, like, is owned by The McGraw-Hill Companies.) In more typical cases involving companies outside of bankruptcy, the shareholders are mostly institutional investors, Baggaley says.

In a press release, Delta CEO Gerald Grinstein expressed gratitude for what he described as his creditors' support. "This is a proud day for the thousands of Delta people, customers, communities, civic leaders and others who stood up for our standalone plan and said, emphatically, 'Keep Delta My Delta,'" Grinstein said. "Using the bankruptcy process the right way, Delta people have transformed their company's business model."

A day earlier, Delta had managed to win a total of $2.5 billion in financing from JPMorgan (JPM), Goldman Sachs (GS), Merrill Lynch (MER), Lehman Brothers (LEH), UBS (UBS), and Barclays Capital. "This is an important milestone in the successful implementation of our restructuring plan," Delta CFO Edward H. Bastian said in a Jan. 30 press release.

After the news investors bid up shares of US Airways by 5.4% to $55.98 at 4 p.m. EST on the New York Stock Exchange.

"We think the deal would have (grown earnings,) but are glad LCC management will again be able to focus on its core business," S&P analyst Jim Corridore.

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