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Aviation History
1991
1991 - 2158.PDF
NEWS ANALYSIS DELTA MAKES A DIFFERENCE In the space of a few days, Delta increased its offer for parts of Pan Am from $260 million to $1.39 billion, sending Shockwaves through an industry more accustomed to caution from the Atlanta-based airline. CCA nything is a risk that puts .£~\.our reputation at stake," says Delta Air Lines chairman Ronald Allen. The airline's $1.39 billion Pan American World Air ways (Pan Am) purchase-invest ment deal has blown its reputation for conservatism, but, Allen insists, will not harm its reputation for financial solidity. Delta may have paid much more than it offered initially for a slice of Pan Am, but the final price may not be far from its estimate of the cost of becoming a major international carrier al most overnight. The carrier has walked away from deals before — it recently turned its back on plans to buy part of troubled Continental Air lines from ex-Delta number two Hollis Harris, for example. That it did not walk away when the stakes for Pan Am were raised, first by Trans World Airways (TWA) and American Airlines, then by United Airlines and finally by all three together sug gests that Delta had a firm idea of Pan Am's worth. The clincher has to be that the $1.39 billion deal involves only $621 million in cash, a figure comfortably within the $700 million that the airline has been accumulating quietly over the preceding months. Delta does not normally keep that much cash in hand. There can be no other expla nation for the swiftness with which Delta improved its offer, first from $260 million to $310 million when TWA bid more for the same assets, then to $904 million when United weighed in with more for Pan Am's Latin American routes, and finally to S1.39 billion when TWA, Ameri can and United joined forces to bid $1.3 billion for all of Pan Am, on the eve of the bank ruptcy court hearing to approve Delta's deal. The real cost to Delta, how ever, lies in its commitment to invest in a restructured Pan Am in return for a 45% stake in the Miami-based airline serving Latin America. In addition to injecting $205 million in cash into Pan Am, Delta has agreed to relieve the airline of some $769 million in liabilities. Shock at Delta's unaccus tomed boldness and concern at the airline's acquired debt have obscured the benefits to the Atlanta-based carrier of the asset purchase and the investment in Pan Am. "We felt we had to take significant. Delta has bought it self into second place, behind American, among US airlines on the North Atlantic and has ac quired hubs at New York and Frankfurt. "We could not get a gateway in New York just through internal growth," points out Allen. Frankfurt is vital be cause with it comes Pan Am's onward rights, many unused, to destinations as diverse as Bom bay and Moscow. Delta highlights the near-term "The final price may not be far from Delta's original estimate of the cost of becoming a major international carrier." a very long, careful evaluation of what we could get in a deal with Pan Am, and we feel we did," says Allen, adding: "This fills some very big voids." Delta is already strong domes tically and the $113 million it has paid for Pan Am's Washing ton-New York-Boston shuttle will consolidate its position as the USA's third largest airline. Delta hopes to begin operating the shuttle by 1 September. The $197 million paid for Pan Am's transatlantic routes is more advantages of gaining more routes to Western Europe on the eve of the 1993 Single Market; and the longer-term prospect of access to Eastern Europe. There is a further advantage which accrues from Delta's part nerships with Swissair and Sin gapore Airlines (SIA). The carrier co-ordinates schedules with these airlines so that Swis sair's flights into Atlanta and SIA's into Los Angeles connect smoothly with Delta's domestic services. Acquisition of Pan Am's routes to Zurich will allow smooth Swissair connections onwards to Africa and the Middle East. On the other side of the globe, Delta's plan to establish a mini- hub at Taipei, Taiwan, in 1992, will lead to Delta passengers transferring easily to Singapore Air Lines flights. Delta, planning to increase onward flights from Frankfurt, foresees virtually "seamless" global travel via the three linked airlines. Delta believes that its involve ment in a scaled-down Pan Am will operate in a similar manner, with the airline feeding traffic to Pan Am's Miami hub for flights to Latin America and vice versa. Pan Am will retain services to Miami from Los Angeles and New York where schedules will be co-ordinated with Delta's. Conceived to make Delta's asset purchase palatable to Pan Am creditors, who saw survival of the airline as the only way to recover their money, investment in the scaled-down carrier could prove a shrewd move. "A re organised Pan Am is viable, and we will move ahead as quickly as possible," says Allen. Whether Delta would consider majority ownership of Pan Am is "a question for the future", says Allen. His airline is pursuing quality, not size. Delta is content to be "one of the world's four largest airlines" — with Aer- oflot, American and United — but delighted to have fewer pas senger complaints than any other US airline, for the 18th year running. Few airlines could be better placed to make the most of "Pan "Am. Delta, along with American and United, has just posted traf fic figures suggesting a major division is opening up between the "big three" and other US major airlines. Delta's Pan Am deal has widened that gap. BY GRAHAM WARWICK IN ATLANTA D 20 FLIGHT INTERNATIONAL 21 - 27 August, 1991
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