Speculation about consolidation took a step closer to reality with US Airway's $8 billion proposal to take Delta Air Lines out of bankruptcy.

Delta chief executive Jerry Grinstein quickly rebuffed the new unsolicited but not surprising cash-and-stock offer, as he had earlier in the summer after US Airways began privately approaching Delta about a potential merger that would create the largest US carrier. Grinstein claims Delta's official creditors committee supports his position that "it would not be productive to engage in this type of exploratory discussion".

But investors applaud the prospects of consolidation, bidding up shares in major US carriers. The US Airways proposal, which includes $4 billion in cash and 78.5 million US Airways shares, represents about a 25% premium to Delta's unsecured debt, says Calyon Securities analyst Ray Neidl.

US Airways chief executive Doug Parker says the deal would have to be done quickly to achieve the $1.6 billion in annual savings it is estimated to produce. Over half these savings ($935 million in network synergies and the rest in cost advantages) "could be lost if a merger is delayed" until after Delta emerges from bankruptcy.

Parker says that his own experience in using America West Airlines as a platform to take US Airways out of bankruptcy proved a merger could best be done in the bankruptcy process. American Antitrust Institute president Bert Foer says bankruptcy protection gives the America West approach certain advantages, such as the aggressive strategy that Parker has chosen of appealing to Delta's unsecured creditors publicly.

Parker claims a merger is a better way to get out of bankruptcy than a traditional stand-alone reorganisation that Delta says it prefers. United Airlines, which in the 1990s had approached America West about a possible combination, has seen slower unit revenue growth than US Airways, he says.

United chief executive Glenn Tilton has called mergers necessary, although the airline is reportedly mulling a buyout that would take it private. Some anticipate a knock-on wave of mergers, led by United. But JP Morgan analyst Jamie Baker says "no existing legacy is uniquely threatened" and so "the need for further consolidation is debatable".

Parker stresses the industry remains "extremely fragmented with no one participant having a 20% revenue share and the sixth largest participant half as large as the industry leader" American. Parker says such fragmentation demonstrates that no one carrier has market dominance, and that is likely to be a test for the regulators if the deal gets to Washington for antitrust review. Parker claims the merger would increase unit revenues, a vow that opponents would interpret as promise of higher fares and fewer seats.

Lawyer Marc Shechter of global law firm Howrey, a former Justice Department antitrust division airline attorney, says the case is "difficult to make and that antitrust (regulators) would look at it very carefully".

Likely political opposition in the newly elected Democratic Congress would make the regulators look even more closely, he says. Antitrust watchdogs quashed the proposed 2001 United takeover of then-independent US Airways in the context of enormous political opposition from Republicans as well as Democrats.

Source: Airline Business