Flying High?
Flying High?
By Steven Lord
Wednesday Nov 15, 2006
Dear American Capitalist reader,
Word on the street this morning is that USAir is buying Delta for a whopping $8 billion, paying half in stock and the other half in financing from Citigroup. Nothing like using other people’s money... And the old saying about getting bigger once you can’t get any better certainly applies with this one.
Delta may not even go for the plan. It is still in bankruptcy, and apparently has rebuffed merger proposals in the recent past. But they may not have much choice. When you are in Chapter 11, your creditors effectively call the shots, and the USAir deal would give Delta’s creditors much more value with far less risk than under an independent, newly emerged Delta.
The big thing from an airline industry perspective is the proposed 10% reduction in capacity. Too many seats on concentrated routes – like the East Coast where both Delta and USAir operate – has meant unprofitable operations for everyone for years, made up only via transcontinental flights. But the merger, if it happens, would be a step in the right direction.
This morning on CNBC, Carl Quintanilla asked me if I thought Delta stock, bankrupt as it is, was a buy now that USAir has put it into “play." I don’t think so – you would still be buying equity that will be worth practically zero should Delta pass on the merger ideas and emerge independently. So there is a lot of risk there, and although some people expect a bidding war to commence (most likely with Northwest), I think the sidelines is the safest place to be for now.
However, there is an airline that will benefit from any USAir/Delta merger, and that is Airtran (AAI). Airtran is a smallish low-cost carrier in the mold of Southwest, and it is concentrated heavily on the East Coast. It stands to gain the most traction from any reduction in capacity resulting from a merger of its two largest rivals. The airline is profitable, growing rapidly, has the second-lowest cost-per-seat-mile in the industry, and has been extremely successful adding routes to lesser-known cities. For an airline, finances are strong and it generates nearly $100 million in cash flow each year. If you are looking to play the round of consolidation in the airlines that may be beginning, consider hitching a ride with Airtran.
Best,
Steven Lord
Editor, Trend Investor