Delta Creditors Man the Cockpit

It might hope to leave Chapter 11 as a standalone airline, but Delta faces limited options if its creditors want to take US Airways' cash and stock

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Despite its rhetoric about staying independent, Delta Air Lines will find it has relatively little sway when it comes to deciding its future structure.

As a debtor in bankruptcy, the nation's No. 3 airline confronts an $8 billion hostile takeover offer from US Airways Group (LCC) in the role of bystander wondering how creditors will respond. The smaller airline is offering to pay off those companies with $4 billion cash and 78.5 million of its own shares, which have surged this year amid a brighter outlook for the industry. That's likely to appeal to many of the carrier's unsecured creditors, eager to be paid and encouraged by the former America West Airlines' success thus far at integrating US Airways, which it bought out of Chapter 11 last year.

"Delta will face a lot of pressure from the creditors' committee to do this," says Jim Corridore, an equities analyst for Standard & Poor's. (S&P, like BusinessWeek, is owned by The McGraw-Hill Companies (MHP)). Even if Delta (DALRQ) continues to balk at the offer, as it did for a second time Nov. 15, US Airways will likely keep pitching creditors directly, and other bidders could emerge. Delta also could be forced to rework its own plans for emerging from court protection in the first half of 2007, potentially complicating the entire restructuring.

To be sure, the bid—funded with borrowed cash—faces several hurdles. The bankruptcy court will assess the offer, as will federal antitrust officials and US Airways' shareholders. Plus, the new Democratic majority in Congress could set a new tone for whether any industry consolidation commences and what configuration that may take.

Airline Sector Flies

Still, Wall Street relished the prospect of airline carrier consolidation, sending stocks throughout the sector higher on Nov. 15. US Airways' shares soared nearly 17%, to close at $59.46 on the New York Stock Exchange. The parent of United Airlines, UAL (UAUA) jumped 9%, to $39.99 on the Nasdaq, while Continental Airlines (CAL) gained 12.3%, to $43.08, and American Airlines' parent, AMR (AMR), rose 5.3%, to $32.33. Their discount brethren also gained. AirTran's parent, AirTran Holdings (AAI) and JetBlue Airways (JBLU)—both upgraded Nov. 15 by Bear Stearns (BSC)—rose 15.9% and 7.4%, respectively. Southwest Airlines (LUV) climbed 4.6%, to $15.94, while Frontier Airlines Holdings (FRNT) gained 5.2%, to $8.68.

US Airways Chief Executive Doug Parker has already arranged a financing commitment from Citigroup (C) to provide $7.2 billion in funds for the deal. Much of that money will go toward paying off debt that both US Airways and Delta owe General Electric Capital (GE), which leases aircraft. But even Delta's remaining creditors, which range from The Coca-Cola Co. (KO) to the aircraft engine maker Pratt & Whitney (UTX), will get a hefty share of their outstanding claims repaid under the current offer.