Familiar face pushes merger: Hedge fund's point man tried to unite Delta, Continental

Gordon Bethune has a knack for popping up in Delta Air Lines' affairs, even though he's never worked there.

The blunt-spoken former Navy mechanic made his name 13 years ago when he led Continental Airlines' transformation from a twice-bankrupt basket case into one of the industry's best-run carriers.

Twice during his 10 years as Continental's CEO, he was involved in talks aimed at merging the two carriers. He was quick to give his views on why they didn't work out, once citing the then-Delta CEO's "stupidity" in insisting on controlling labor integration.

Late last year, Bethune appeared again on Delta's radar as a hired adviser to its bankruptcy creditors as they mulled a buyout bid from US Airways, getting paid $250,000 for every 10 days of work.

Now Bethune, 66, is once again in the middle of merger talk swirling around Delta. Pardus Capital Management hired him to help make its case that Delta and United Airlines need to merge as the industry faces record jet fuel costs.

Pardus, a New York hedge fund with stakes in both Delta and United, urged executives at the airlines in a mid-November letter to pursue a stock-swap merger that would create the world's largest carrier, with hubs in the world's two busiest airports, Atlanta's Hartsfield-Jackson and Chicago's O'Hare, and extensive routes to Europe and Asia.

In the weeks since, Bethune has pitched the idea to other investor groups, although it remains unclear whether any will line up behind the Pardus proposal.

Asked why the investment firm chose him, Bethune half-jokingly answered: "They looked for all the guys who have been successful in the [airline] business and they found only one: me."

Bethune has a point, said Mike Boyd, a longtime aviation consultant. "He's got more credibility than anyone in this industry, period," said Boyd, of the Boyd Group in Evergreen, Colo.

"He just tells it like it is," Boyd added. "The problem is, he tells it like it is."

This is how Bethune tells it: The industry has too many players to remain prosperous as the cost of fuel --- most airlines' biggest expense --- follows the price of oil skyward. He says the routes and hubs of Delta and United have little overlap that would cause job losses or political opposition.

Despite almost immediate expressions of opposition from Delta's pilots --- its only large union group --- and workers' vociferous opposition to the US Airways deal, Bethune thinks employees will ultimately support the merger because they would get stock in the combined airline and job opportunities would grow. He believes he knows how to address employees' worries, having won widespread worker support for his 1990s turnaround at Continental despite cutting thousands of jobs.

He says most of the job losses from a Delta-United merger would be confined to the airlines' regional carriers (such as Atlanta-based Atlantic Southeast Airlines and Delta-owned Comair in Cincinnati).

Delta's and United's executives have both "publicly talked about the need for consolidation," Bethune said. "It's time to do it."

Both Delta's and United's managements favor consolidation, and Delta's directors formed a committee to study that and other scenarios. But the carriers say no negotiations have occurred, and Delta says it's only interested in deals in which it's the surviving company.

Even if managements favor or oppose a deal, they have to step delicately. Top executives have lost jobs for floating a merger proposal without first clearing it with the board of directors. And while they have a legal and financial duty to investors who see mergers as a path to higher stock values, intense opposition from other constituencies has shot down many a deal that seemed pretty on paper.

Indeed, Delta's pilots union has already said it will fight Pardus' "poisonous vision" of a United merger.

If investors pressure Delta's management to look at a potential merger, "they're going to look at it," said Boyd, but he gives it low odds of happening anytime soon.

Continental did no major deals under Bethune, but he wasn't shy about engaging in talks --- or opining about why they failed.

Growing up in Texas, he dropped out of high school at 17 to join the Navy. He stayed in the service 20 years, finishing school and getting a college degree. He bootstrapped his way to the airline executive suite, starting as a maintenance manager at Texas-based Braniff. He once worked at Western Airlines with then-CEO Gerald Grinstein, who later became Delta's CEO. Grinstein gave him the nickname "Oil Can."

Under Bethune, Continental approached Delta in 1996, but then-Delta CEO Ron Allen wouldn't bite. Two years later, with Leo Mullin at Delta's helm, Delta made a merger bid that failed when Continental opted instead to sell a stake to Northwest Airlines and form a marketing alliance. It was then that Bethune said his job was saved by Mullin's "stupidity" regarding labor issues. Later, when given a chance to backpedal, he softened the term to "ignorance."

When Delta reacted to the Continental-Northwest link by seeking a similar alliance with United, Bethune quipped, "That's why ugly people always marry each other. ... There's no one left to talk to."

That alliance was later scaled back dramatically after Delta's pilots opposed it.

Bethune now says just the opposite when arguing that United and Delta should merge before some other airline steps in.

"It's like when you go to a dance and pick the prettiest girl and all the other guys get the leftovers," he said. "Why wouldn't you want to pick first?"

Bethune said he and a consulting firm hired by Pardus made presentations to roughly 100 investors and potential backers in mid-November in a New York meeting sponsored by Merrill Lynch. That was followed by smaller meetings in Boston with "a bunch of institutional [investors] like Fidelity," Bethune said.

The giant mutual fund company is Delta's third-largest shareholder, with a 14 percent stake. Pardus and dozens of other hedge funds own more than 50 million Delta shares, or about 20 percent, while institutional investors own most of Delta.

Bethune said Pardus is waiting to see what investors and the airlines' managements do. The firm says it isn't soliciting investors' votes or putting together an investor group to wage a proxy battle --- actions that would require disclosure filings with the Securities and Exchange Commission.

But the rising power of hedge funds and private-equity investors could be helping to change the dynamics in the top levels of the airline business.

Activist investors such as hedge funds flocked to Delta and other big carriers as they went through bankruptcy reorganizations. That effectively hit the reset button, pitching out much of their previous management teams, boards of directors and investor bases.

Many of Delta's current investors were also its bankruptcy creditors and got Bethune's advice on the US Airways bid last winter. US Airways' offer was "clearly a higher value" than Delta's stand-alone plan he said. But it came with higher risk, he added, because Delta's and US Airways' operations overlap extensively, which would have brought big job cuts and lots of political opposition and regulator scrutiny.

Since Delta emerged from bankruptcy in the spring, its market value has dropped substantially from management's earlier projections, Bethune said. As a result, he said, Delta's investors are "not really happy campers."


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