Delta Air Lines Inc. (DALRQ) - US Airways Group, Inc. (LCC)

Charts

Announced: November 15, 2006 - Unsolicited (Press Release)
Expected Close:First half 2007
Termination Date:
Terms: (Unsolicited) The proposal would provide
approximately $8.0 billion of value in cash and stock to Delta's
unsecured creditors. Delta creditors would receive $4.0 billion
in cash and 78.5 million shares of US Airways stock

Total Value: $10.2b
Website(s): DALRQ & LCC
Industry: Transportation

Pending

Bankruptcy Court

HSR

SEC

Shareholders

Completed

January 31, 2007 (12:40p) - LCC Offer Withdrawn

As anticipated, LCC has withdrawn its unsolicited offer for Delta.

Delta will move forward as a stand-alone company, and LCC will benefit in the long run from the publicity surrounding its futile attempt to engage Delta in a merger transaction.

January 25, 2007 (10:00a) - Senate Hearing Details

Reports out of Washington from yesterday's Senate Commerce Committee hearings indicate a great deal of skepticism (not surprisingly) from politicians, but the skepticism appears to focus more on airline industry consolidation as a whole, rather than this deal in particular. Of particular interest from a few Senators was the concept of "re-regulating" commercial airlines in response to increased consolidation and continued financial problems among the major carriers.

Perhaps the most significant facet of the hearing was the presence of many Delta pilots (in uniform) expressing their continued opposition to the transaction. The Delta pilot/seniority issue has been cited by this publication as a major issue in any potential combination, and quite likely the determining factor in Delta moving forward as a stand-alone entity despite LCC's efforts. Simply put, Delta pilots are unlikely to go along with any proposal from LCC due to the complex seniority structure in place among commercial airlines. The Delta pilots union is perhaps the strongest amongst all airlines at this time, and their influence cannot be overlooked in the overall picture.

Since the Senate Commerce Committee has no direct oversight in potential transactions such as this one, yesterdays (and any future) hearings are mostly symbolic. However, the open skepticism voiced by the politicians, in combination with consumer concerns and union opposition make it quite clear that there is little interest for this transaction outside of LCC. The company can put any spin it wants on the benefits of a DALRQ-LLC combination, but in the end it simply will not happen.

January 23, 2007 (9:20a) - DALRQ Creditor Status

According to published reports (originating with WSJ), DALRQ's creditor committee has become "skeptical" of this proposed transaction. There is currently no solid indication that the creditors will ultimately reject the unsolicited offer in its recommendation to the DALRQ Board of Directors, but the implications of today's reports strongly suggest this will indeed occur.

Given the overall dynamics of the airline industry, DALRQ's reorganization plans, and the suspect offer, creditor rejection of a merger with LCC (or any other entity) at this time would not be at all surprising.

Once again, as it becomes clear that DALRQ and its shareholders have virtually no interest in the unsolicited offer, LCC should soon back away entirely, content in the fact that it drew substantial publicity in the attempt.

January 22, 2007 (11:10a) - Status Report

Two relatively signifcant developments since last Thursday's update. First, DALRQ management has publicly stated that it intends to brief the Board of Directors on the increased LCC offer "soon" -- presumably this means within the next week or two. The briefing will bring no revelations, nor is it expected to result in an alteration of DALRQ's stand-alone plan as it moves towards the February 7 Bankruptcy Court hearing.

Second, the Senate Commerce Committee will begin hearings this Wednesday (1/25) focusing on the proposed transaction. To this point, reports indicate a less-than-enthusiastic overall consensus among Committee senators, both republican and democrat. Naturally, LCC plans to put the most positive spin possible on the potential combination, claiming beforehand that it will stress the changing competitive landscape of the commercial airline industry.

This argument is expected to fall upon relatively deaf ears.

Neither of these developments gives any positive momentum to LCC's unsolicited offer. By the time of DALRQ's February 7 hearing, it should be well distanced enough from LCC to essentially ignore its efforts.

January 18, 2007 (12:55p) - Status Report

More than a week after LCC's increased offer has passed with no direct response from the Delta Board of Directors. Instead, the company is moving forward with its reorganization plan as expected and will seek approval of the plan at a February 7 Bankruptcy court hearing.

Delta will most likely wait a few more days to at least give the appearance of considering the latest LLC offer, before issuing a very direct rejection. The February 7 hearing should give Delta the momentum necessary to successfully fend off LCC and continue its emergence from bankruptcy as a stand alone company.

January 10, 2007 (9:10a) - Offer Increased

LCC has increased its offer for DALRQ more than $2 billion, reaching the $10.2 billion level. This despite LCC's adamant claims less than two week ago that it would not increase its offer.

The revised offer is directed at DALRQ's creditors, who would receive $5 billion in cash and 89.5 million shares of LCC stock.

This publication has repeatedly stated that even at the $10 billion mark, DALRQ would soundly reject LCC. Although LCC's efforts can now be deemed legitimate, and perhaps respectable, it remains anticipated that Delta will ultimately move forward without a merger transaction with LCC.

DALRQ's creditors can be expected to give the new proposal some serious consideration, and it can not be ruled out that this will develop into quite a conflict within the company itself. But again, this publication remains convinced at this stage that LCC will be summarily rejected and persuaded to abandon its attempt to force a formal agreement.

The current offer expires on February 1, 2007.

December 29, 2006 (9:05a) - Status Report

U.S. Airways has publicly stated that it will not raise the offer for Delta at this time, and will continue to pursue a transaction under the current terms.

This publication continues to perceive the chances of U.S. Airways even reaching a formal agreement -- at the current level or significantly higher -- to be essentially nil. LCC's efforts are growing tiresome, and it is simply a matter of time before its own shareholders begin to pressure the company into pursuing a course of action that does not include a transaction with Delta.

December 20, 2006 (10:20a) - Status Report

Delta yesterday filed its reorganization plan with the New York Bankruptcy Court (Southern District) and, as expected, announced that it will move forward with its standalone plan. The company once again summarily rejected LCC's unsolicited offer, which currently values Delta at $8 billion. According to the reorganization press release, the company's value is estimated at $9.4 to 12 billion by The Blackstone Group.

Obviously, LCC's current offer falls well short of Delta's perceived value. Even if the unsolicited offer were to be increase to the $10 billion level, it is extremely unlikely that Delta will pay much attention. This publication currently sees virtually no scenario in which LCC will be able to lure DALRQ into serious discussions regarding a friendly transaction. While LCC claims to remain a "disciplined and determined bidder," it is more misguided than anything else. The efforts certainly give an overall impression of a company moving forward and establishing itself in a rapidly changing industry -- and this may be the underlying purpose for the continued merger overtures -- but that does not in any way lend validity to its offer.

At this stage, Delta and its employees clearly have no interest in any deal involving LCC and this is not expected to change any time in the near or distant future.

December 12, 2006 (11:15a) - Status Report

Delta's Board of Directors met yesterday to discuss the current LCC proposal. This is perceived as a rather insignificant event as Delta's response to LCC's unsolicited offer is essentially a given at this point. Delta is fully expected to issue a definite rejection of the offer with little room for doubt as to its intentions to resist any further actions or offers from U.S. Air.

More importantly, U.S. Air's own pilots have become extremely vocal in recent days in expressing their concerns over any potential combination with Delta. The pilots are distressed over job security and seniority -- an issue discussed on December 1 -- and particularly LCC's inability to successfully work out job-related issues within its own company since the UAIRQ-AWA merger. The general complaint, and it is an extremely valid one, is that the company can not hope to successfully absorb Delta's large pilot base into a LCC's pilots who are still fighting to keep their own positions as the integration process drags on.

In essence, LCC's unsolicited offer has now angered pilots in three camps. It is terribly difficult to conceive of any positive outcome where this particular issue is concerned.

Delta's rejection is expected within the next several days.

December 11, 2006 (8:15a) - Northwest Bid Speculated

According to a Financial Times report, Northwest Airlines may consider a competing bid for DALRQ. The company has reportedly hired M&A consultancy firm Evercore Partners Inc. within the last few days, for the purpose of exploring strategic alternatives as the company emerges from its own bankruptcy, which remains expected early in 2007. Northwest has neither confirmed, nor denied this report as of this update.

In general, a Delta-Northwest combination is perceived as somewhat more desirable for Delta for many reasons, but primarily for the significant lack of union/seniority issues present in the potential LCC transaction. A Delta-Northwest deal would be structured more as a merger of equals (presumably) and would be far more appealing to the DOJ in both the short- and long-term.

However, there currently does not appear to be any interest on Delta's side to enter into a transaction with Northwest, or any other airline for that matter, so the Northwest's interest, real or not, may be a non-issue at this point.

December 1, 2006 (8:15a) - General Analysis

Of the myriad of obstacles facing this proposed deal, the most problematic may be the seniority issue involving Delta pilots, a large number of whom would see their status -- and careers -- literally negated if the merger were to actually occur. Even as this deal is being contemplated, the seniority issues in the UAIRQ-AWA transaction have not been fully resolved and will only create further problems amongst the multitude of Delta pilots who currently have more seniority than the majority of U.S Air's pilots.

This is a critical issue in the world of commercial piloting, where seniority means everything and the loss of seniority literally can mean being relegated to low-paying and/or undesirable flight assignments. It is very difficult to conceive of a situation where Delta pilots would accept anything but absolute assurance of seniority, which will necessarily go against any future arrangements reached between U.S. Air and America West pilots. Despite its current financial situation, Delta continues to possess arguably the strongest fleet of aircraft (both in volume and quality), which essentially translates into a high number of Delta pilots in very lucrative positions. They can be expected to remain firmly opposed to sacrificing their seniority for the sake of a merger which for all intents and purposes is unnecessary at this time.

The antitrust issues are not as troubling as might be expected for a combination of this magnitude. Obviously, there are significant overlaps and route and/or slot divestitures would be required at quite a few airports. US Airways' argument that budget carriers such as Southwest, AirTran, JetBlue provide ample competition does have validity, to a certain extent. And as seen in the market share table below, the combine overall Delta-U.S.Air control of the market would just barely exceed 20%. So from a broad perspective, the combination would not adversely affect the domestic commercial air industry much, at least initially.

In terms of regional hubs, Delta has established Atlanta (58% market share), Salt Lake City (42%), and Cincinnati (39%) as its primary markets. (Salt Lake City will lose its hub status as part of Delta's restructuring). U.S. Airways' current hubs are Charlotte (55%), Philadelphia (38%), Pittsburgh (34%, changed to 'focus' status) and Phoenix (35%), via America West. At no major U.S. airport would the combined entity have a market exceeding 10%, which would most likely be the point of emphasis in discussions with the DOJ.

The competitive issues would center primarily on the middle and smaller regional airports and the code sharing agreement currently in place with routes to and from the smaller airports. But these are issue which could be resolved fairly easily if necessary. It is the combination of major airport routes, such as those involved in the failed U-UAL deal which draw severe antitrust scrutiny, and U.S. Airways clearly factored that into the equation.

This is not to say that the DOJ would take this combination lightly. In fact, with the airline industry showing a strong recovery, this deal would be ideal for the regulator to take long, hard look at consolidation among both high- and low-end carriers. In other words, if a merger agreement actually happens, this could easily become one of those rare cases where the the DOJ both educates itself and enforces antitrust conditions. Naturally, this would delay any deal beyond the four months it took to complete the U.S. Air - America West merger.

To this point, Delta has shown no interest in entertaining U.S. Air's unsolicited offer, and there doesn't seem to be any reason to expect this to change in the near future. Quite simply, Delta can emerge from bankruptcy as a stand alone and succeed without this deal. The benefits to Delta are minimal and may very well be more destructive than constructive in the short and long term. Thus, the face-to-face meetings currently in progress are not expected to generate any positive outcome for U.S. Air.

If, however, a formal agreement is ultimately reached, or if U.S. Air chooses to move ahead with a hostile takeover, the prospects for successfully completing a transaction must be considered very low. Airline deals in general are tenuous, and this one would have so many obstacles from the outset that it must be wondered why U.S. Air would want to go through the processes.

The chances of this transaction actually being completed are currently estimated at below 25%.

December 1, 2006 (8:15a) - Market Data / Timelines

Revenue/Market Share Data (year ending 8/06)

Timelines - Recent Airline Transactions