Summary
1. The $8.7 billion bait launched last week by the Tempe, AZ, based air carrier has landed on the rather icy shoulder of the targeted prey.
2. The cold reception shown by the bankrupt carrier’s Management to the unsolicited bid has turned the offer into a hostile uphill battle.
3. The already daunting task of successfully merging two large operating airlines may, in such unfriendly scenario, evolve into a nightmare of endless delays, losses, damages, collateral fights and unexpected expenses, costs, fees and other “battling write-offs” which might injure, beyond repair, one or both contenders.
Analysis
A brief and simple initial analysis on the pros and cons of the intended deal may help in making some guessing regarding the most likely outcome of the US Airways initiative.
Starting with the first (pros), the following items may be noted:
a) Delta’s unsecured creditors may value the $4 billion cash portion of the bid (the remaining 4.7 billion of the total figure is offered in 78.5 million shares of US Airways stock) as a “bird-in-hand” opportunity that would, otherwise, remain flying in the air.
b) The after-merged low cost structure of a low-fare carrier, promised by the US Air CEO Doug Parker, may also be envisioned as an appealing feature by creditors and stockholders. However this commitment may just turn, at the end of the day, into wishful thinking.
c) The same bidding executive has also projected $1.67 billion in annual cost savings for the after-merged carrier; one half of the estimated savings would be obtained by voiding labor contracts and aircraft leases through the bankruptcy court, but without any layoffs of line employees (pilots, flight attendants or mechanics) or further pay cuts by employees.
Leaving aside all the usual promises to consumers of lower fares, increased frequencies, better passenger services and similar marketing embellishments accompanying this type of projects, the cons are staggering in number and in substance:
a) The current US Airways’ Management has been, so far, unable to effectively integrate the business structures of the former America West and US Airways, despite the fact that there were not overlapping airlines and the latter was an almost-defunct carrier. To entrust a similar but, also, a vastly more difficult project to the same players, it would entail the degree of faith reclaimed by those boasting the power of moving mountains with just the power of their minds.
b) The proposed deal has to overcome Delta’s management resistance, win the backing of the bankrupt creditors and obtain the approval of the supervising Court. As a first step, Delta’s CEO has sent a communication to all employees alerting them that “The history of mergers in the airline industry is almost always one of failure,”
c) The intended deal will have to survive congressional scrutiny. At that time, the hearings to evaluate the impact of the intended merger will likely be controlled by Minnesota Democrat J. Oberstar, as new chair of the House Transportation Committee who, back in the year 2000, opposed the United Airlines merger with US Airways commenting that “Mergers reduce opportunity for competition and thereby increase costs to travelers.”
d) Antitrust authorities, in particular, will have to be convinced that consumers will not be harmed by the reduction of competition. Not so long ago, the same authorities prevented United Airlines from acquiring US Airways in 2000 and vetoed an attempted merger between American Airlines and Northwest.
e) Then there are the unions from Airlines, Delta and US Airways, who know that a good portion of the savings that D. Parker is talking about will come out of their pockets and the efficiencies to be obtained will result from heavy cutbacks in their jobs.
f) On top of the above US Airways will have to win the backing of, at least, half of Delta’s unsecured creditors (among them firms such as Boeing, General Electric, US Bancorp and others) representing at least two-thirds of the value of outstanding claims, and be convinced that the bidder’s offer of cash and stock is better value than going along with Delta’s Management plans, and ending up with shares in an independent Delta when it comes out of bankruptcy.
g) As shown by an extensive and painful experience, even in the most friendly and best structured and managed airline mergers, the level and degree of confusion, work disruption, conflicting procedures, extra-costs and the myriad of unforeseen and unexpected human and organizational adverse factors popping-up for years, will negatively affect the –most of the times- unrealistically calculated levels of competitiveness, efficiency and profitability, anticipated during the courtship preceding the birth to the new entity.
My conclusion: US airways move, for the time being and with the scant data so far available, seems to be closer to a coin flipping exercise rather than to a straight bullseye shot. However time –and maybe other unexpected bidders- will have the last say.
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
