Delta's Future Just Got Trickier

US Airways' sweetened offer puts pressure on Delta to do a deal

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In the two months since US Airways Group's brash, young CEO Doug Parker, launched a quixotic $8.7 billion bid for bankrupt Delta Air Lines, many airline industry watchers felt that Parker's gambit was starting to lose momentum. For one, when Delta's own management team filed its business plan with the bankruptcy court in December, it valued Delta at potentially more than Parker had offered to pay. And his own comments to reporters in late December that he didn't intend to revise his original offer raised questions about whether the 45-year-old Parker had the stomach for a protracted takeover battle.

But now it's clear he does. On Jan. 10, Parker sweetened his original offer by another 28%, to $10.2 billion. That bold move is certain to appeal to Delta creditors, who in turn are likely to exert pressure on Delta's board to accept US Airways' (LCC) offer over that of its own management team. "There's no comparison between the two plans," says an attorney representing one group of Delta creditors, who will become shareholders when Delta emerges from bankruptcy. "Delta's plan makes all sorts of aggressive assumptions about the future. Most of the creditors just want cash, and US Air is offering more of it."

Still, even if creditors like to see cash on the table, US Airways faces a daunting obstacle course in Washington, where the Justice Dept. would assess competitive issues posed by such a large airline and key politicians have made disapproving noises about the consequences for consumers.

Northwest to the Rescue?

For its part, Delta officials said that while it would consider Parker's latest bid—which consists of $5 billion in cash, and roughly 90 million US Airways shares—the Atlanta-based carrier noted the higher offer "would increase the debt burden of the combined company by yet another $1 billion," to the highest in the airline industry. In a conference call with analysts, Parker said the debt burden would still be manageable, given the greater revenues of a combined Delta-US Airways. "This company is a lot bigger, of course, it has more debt and it makes a lot more money," he said.

And analysts believe that Delta may have a hard time going it alone. "This paints Delta into a corner," says Robert Mann, a New York-based aviation consultant. "The US Airways offer is going to be extremely attractive to the creditors committee."

To avoid the clutches of US Airways, Delta likely will have to seek another carrier to serve as its white knight, experts believe. The most likely candidate: Northwest Airlines, which according to The Wall Street Journal, has been in "recurring" talks with Delta about a possible merger in coming weeks. While Delta declined to comment on the report, industry experts believe that a merger-of-equals with Northwest—which like Delta is in bankruptcy proceedings—could represent Delta's best hope for avoiding Parker's bear hug. "Delta's only option now is to go find a partner of its own," says Mann.

The two carriers would be a good fit. Privately, Delta CEO Gerald Grinstein had been warning creditors that a Delta-US Airways merger would likely spur the remaining major carriers to strike deals of their own (see BusinessWeek.com, 12/13/06, "Consolidation Stays on the Runway").