The youthful, or at least soon-to-be formerly youthful Doug Parker (45) has always been an upbeat kind of fellow, and his optimism held him steer America West through its own troubles and into a merger with US Airways that has by all accounts been a strong success. Now Parker is attempting to smile his way through an even bigger deal: his unsolicited $8 billion offer to merge with Delta, a deal which, if completed, would likely create the world’s largest carrier once Delta comes out of bankruptcy reorganisation. US Airways, the new name for the merged America West/US Airways, was formed just 14 months ago, but now offers $4 billion in cash and $4 billion in US Airways stock to Delta’s unsecured creditors. Parker, who says he has the money lined up, says the 2005 merger created one of the industry’s best-performing airlines, largely because the old US Airways had the opportunity to reduce costs and capacity by using its bankruptcy powers to rid itself of aircraft leases.
“Our timing is driven by fact that Delta is in bankruptcy, a unique opportunity to realize value”, he said, promising that a merger would generate $1.65 billion in annual savings and benefits. “There are not many industries more fragmented then the one we participate in. In an industry this fragmented, we think there are opportunities for mergers”. More than half of the savings would be lost if Delta emerges from bankruptcy as a stand-alone carrier, because it would then have lost the power to reject leases and cut other costs under bankruptcy law, he said.
But some of the airline securities analysts on a conference call with Parker were outright sceptical, citing antitrust, labour, financial, and fleet-compatibility issues. Ray Neidl, the Calyon Securities analyst who has been eagerly predicting industry consolidation, put the chances of the deal going through in the 35-40% range, citing likely obstacles in Washington. While most analysts speculate about a possible chain-reaction consolidation wave, Neidl also cautioned that the bid increases uncertainty for the regional airline group overall. A deal “could put the growth outlook for new 76-seat flying with the regionals at risk. New management could halt the proposal for 50 incremental 76-seat aircraft that Delta has sent out”, he says. And a combined carrier could shrink hubs at Cincinnati and so harm Comair, and also hurt Charlotte (Mesa and others), Philadelphia (Mesa and others) and Salt Lake City (SkyWest).
But Parker thinks it can be done and he thinks that opportunities for savings dwarf the downside. He makes a detailed case for the savings in a presentation shown to analysts in the webcast and conference call. US Airways has made available a slide show outlining the benefits, and has also posted correspondence between Parker and Delta CEO Jerry Grinstein about the bid. Download the US Airways slide show: investor presentation, a letter from US Airways to Delta, and a response from Delta to US Airways.