Merger Odds Rising for Delta Air Lines

Some experts say there has never been a better time to fix the ailing industry through a few careful matchups.

Feb. 5--Norman Mineta was just thinking out loud when the U.S. Transportation Secretary mused last month about a merger between Delta Air Lines and Northwest Airlines, his spokesmen say.

And Delta Chief Executive Gerald Grinstein says the ailing Atlanta carrier is not laying the groundwork for a merger with anybody.

Yet the idea that a merger may figure into Delta's deliverance from years of financial turmoil isn't likely to go away that easily.

Some experts say there has never been a better time to fix the ailing industry through a few careful matchups. Others argue the industry is too weak, or question where Delta fits into the picture. What most agree on, however, is that the airline industry is overdue for consolidation.

"The stars are lined up," said Richard Aboulafia, a longtime aviation consultant with the Teal Group in Fairfax, Va.

"I will be very surprised if there is not a proposal" this year for a large-scale merger, Air Transport Association economist John Heimlich said.

Merger odds are rising, they and others say, for a number of reasons. For one thing, last year's marriage of US Airways and America West offered a template that could be followed by airlines now in bankruptcy court. Beyond that, experts and executives have long felt the industry cannot support consistent profits at six or seven mega-carriers, all trying to add seats in hot markets and competing fiercely on price.

Simultaneous Chapter 11 filings by Delta and Northwest last September fostered rumors they might pair up -- an idea Mineta said he wondered about when asked about it at an industry conference.

Despite denials by his spokesmen, some think Mineta was signaling that the federal government's attitude toward airline mega-mergers -- the DOT killed a US Airways-United merger in 2000 -- might be easing.

"If the secretary of transportation is looking at [merger possibilities], I would certainly hope Delta management is looking at it," said Lee Moak, chairman of Delta's pilots union. He added that Mineta's comment "sent a message to me to be prepared."

The Delta union recently activated a merger preparation committee and hired legal advisers to prepare for various scenarios. Pilots also approved paycheck deductions aimed at raising $1 million to cover the union's financial and legal work should a merger occur.

"The bottom line is the analysts have been stating that consolidation is inevitable," said Moak.

Not everyone agrees, however, and over the years talk has been cheap when it comes to mergers.

Combinations aren't likely to heat up for at least a few years, until more airlines have become profitable, said Mike Miller, a partner with Velocity Group, an aviation consulting firm in Washington.

"As long as airlines are as weak as they are, I don't see any mergers in the next two years," he said.

At the same time, he said, Delta could become a takeover target before then if its court-supervised reorganization starts to fall apart, as US Airways' nearly did. America West bought US Airways last year when many were predicting that the foundering airline wouldn't survive its second trip through bankruptcy.

The combined carrier will fly under the US Airways banner, although it still has the different brands for now. America West won $565 million in backing from private investors who were drawn to the idea of a combined carrier that married the buyer's western U.S. network with US Airways' brand recognition, its East Coast strength and its post-Chapter 11 cost structure.

America West's shareholders, US Airways' creditors and a federal agency that previously guaranteed loans to both carriers also have large stakes.

American or Continental could likewise finance acquisitions of financially weakened rivals with backing from hedge funds or other investors, say some industry people.

Eventually, Miller said, "someone is going to like you as a takeover target if you don't right the ship." It's still too early to tell what the outcome of Delta's restructuring efforts will be, he said.

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