U.S. Air Aims to Jet Through Merger Process

Kirby: "We did not plan a $10 billion-plus offer only to have it fail to succeed on antitrust grounds."


US Airways (LCC:NYSE) has a simple strategy to deal with divestitures the Justice Department will likely propose in reviewing its planned hostile takeover of Delta(DALRQ:BB): Just say yes.

US Airways has already said it would be willing to divest one of the two Northeast shuttles, as well as gates at Charlotte/Douglas International Airport, potentially removing the roadblock posed by the effort to operate the nation's two primary Southeast hubs in Charlotte and Atlanta.

"We did not plan a $10 billion-plus offer only to have it fail to succeed on antitrust grounds," said US Airways President Scott Kirby in an interview in which he indicated that US Airways would be receptive to whatever the department proposed. "We would be prepared to deal quickly with the [DOJ] issues," he said.

There is no certainty US Airways' strategy will succeed. Even the airline's potential ability to move quickly through a regulatory review may not overcome the unwillingness of some creditors to support its bid. In particular, Delta's pilots union -- a major creditor with about $2.1 billion in unsecured debt, roughly one eighth of the total -- has mounted a fierce campaign in opposition.

Any delay is a setback with the market trading at an all-time high, airline shares soaring and Delta offering creditors stock that it values at $9.4 billion to $12 billion. US Airways has offered $10.2 billion in cash and stock. But Kirby said a deal can be implemented in four to six months, only a slight variation from Delta's assertion that it can emerge from bankruptcy in the first half of the year.

The Justice Department can provide initial feedback within 30 to 60 days, but reviews are extended because companies seek to negotiate the extent of their divestitures, Kirby said. "DOJ takes a long time because companies choose to let it take a long time," he said.

Regulators took 14 months to reject the proposed 2000 merger of US Airways with United(UAUA:NASDAQ). That is not a precedent, Kirby said, because, "The companies chose to have the process take 14 months because United got cold feet."

Washington, D.C., antitrust attorney Jim Dick, who worked four years in the antitrust division, said he would expect a three- to five-month review. "Given the amount of data the DOJ would be reviewing and the complexity, they will want to figure very carefully what they would like the combination to divest," he said.

It is likely that a first round of divestitures would include gates and other assets in Atlanta, and gates and slots at New York LaGuardia and Washington Reagan National airports, as well as the shuttle, Dick said.

"Then they would focus on Charlotte," he said. "I think they'd like to see Charlotte divested as a hub, but I don't think that anybody would take a large chunk of it. So I think it's a matter of paring back there."

On a conference call last week, Kirby said US Airways' estimate of $1.65 billion in merger savings includes "a negative synergy" for divestitures, but declined to quantify the amount. Divestitures would result not only in lost revenue but also, potentially, in reductions of flight hours for pilots at Delta and US Airways.

The Delta chapter of the Air Line Pilots Association remains "100% focused on killing this hostile merger and emerging as a standalone carrier," said chairman Lee Moak in an interview. "We will not be distracted."

Union leaders voted last week to spend $15 million to defeat the merger, in addition to $2 million already spent. The money will go for legislative lobbying, antitrust counsel and a public relations effort, Moak said.

He said the pilots' contract can prevent the merger because it denies US Airways the chance to achieve promised savings. In particular, the amount of flying by Delta pilots cannot decrease during a merger transition period until there is full operational integration, a period that would take years.

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