NSU
Law and Ethics Classes
Case Study
Prepared by Professor F. Cavico
U.S. Airways unsolicited attempt, announced in November of
2006, to take over much bigger, though bankrupt Delta, would vault U.S. Airways
into the largest carrier in the
U.S. Airways chairman, Doug Parker, who was credited with
the successful acquisition of American west, said the newly merged U.S. Airways
– Delta airline would save $935 million by reducing overlap in flights, and
cutting capacity by 10%. The proposed new airline would keep the Delta name.
The merged airline would be the largest carrier in the
The offer to buy Delta, now still in bankruptcy, would give its unsecured creditors $4 billion in cash and 78.5 million shares of U.S. Airways stock. U.S. Airways has received a commitment from Citigroup to provide $7.2 billion in new financing for the deal. As for Delta’s shareholders, right now, its common shares are most likely to end up worthless when and if the carrier emerges from bankruptcy. In most bankruptcy cases, the debt holders end up with the new shares of the company.
The proposed merger, however, could leave consumers with
fewer flight options and higher ticket prices, according to some industry
experts, since the latest consolidation of the airline industry further reduces
the number of flights available to consumers. In South Florida, for example,
the combined company would control more than 40% of the flights from
The combined airline would have about 85,000 employees. Although the combined airline is expected to fly with about 10% fewer planes, no job cuts have been predicted yet. Labor unions could emerge as a complicating factor. Pilots, machinists, and flight attendants, all strongly unionized, could hinder plans by U.S. Airways to achieve cost savings. Another employment problem would be in the integration of the two airlines employees, since a huge seniority integration problem would emerge. U.S. Airways is still trying to work out seniority issues from its acquisition of America West.
Industry analysts predict that U.S. Airways $8 billion bid for bankrupt Delta will produce a merger wave in the airline industry, and one, moreover, that will allow the more established carriers better positioned to compete against the “discount airlines,” such as Jet Blue, Trans Air, and Southwest. Industry analysts have long said that the airline industry is still too fragmented, and thus is ready for even more consolidation. Wall Street investors have predicted that the deal, if approved, would curb discounts. Moreover, shares of American Airlines and Continental also surged, reaching their highest levels since the 9-11 terrorist attacks.
Actually, the shares of the discount airlines rose after the
announcement of the merger due to the talk of stronger pricing as well as the
speculation that other airlines would merge in order to stay competitive in an
increasingly consolidated market. Now, low-cost airlines, such as Southwest,
control a larger percentage of the market, carrying 25% of domestic passengers
in the
Whether the merger will succeed is a difficult question to answer. It is very difficult to buy a company when its management is opposed, and particularly so when the company is in bankruptcy court. Delta’s management is still opposed to the takeover; and it still runs the day-to-day affairs of the airline as it tries to emerge from Chapter 11 bankruptcy proceedings, which is expected next year. Delta’s Chief Executive, Gerald Grinstein, stated that Delta would review the merger proposal, but would still continue to pursue its goal to file its reorganization plan and emerge from bankruptcy in 2007 as a strong, stand-alone carrier. Yet because Delta is in bankruptcy proceedings, its creditors could have a say in approving the merger. U.S. Airways chief executive, Doug Parker, said that he believed the offer for Delta was a fair one, and that ultimately Delta’s management as well as its creditors will see that fact. U.S. Airways’ proposal, he said, was much better for creditors than Delta’s stand-alone plan. One of Delta’s creditors is American Express, which in 2004, purchased $90 million of Delta Sky Miles for use in a charge card it co-branded with Delta. The bankruptcy code requires that at least one-half of the creditors by number, and two-thirds by the value of their claims, approve the restructuring plan. It is up to Delta’s management to demonstrate to its creditors that it can come up with a better plan than U.S. Airway’s takeover offer.
Government regulators must also approve the merger; and are
expected to be concerned about the combined airline’s dominance in the
Northeast corridor. In order to help satisfy antitrust concerns, U.S. Airways
said it would sell Delta’s competing shuttle services in the Northeast. The
merge cold also face scrutiny by the U.S. Congress. The new head of the
Transportation Committee in the House of Representatives, Representative Jim
Oberstar from
Bibliography:
Cordle, Ina Paiva, “Flight Plan,” The Miami Herald, November 16, 2006, pp. 1C, 2C; Foust, Dean, “Now Boarding: Merger Mania,” Business Week, November 27, 2006, p. 36; Steighhorst, Tom, “Rival bids $8 billion for Delta,” November 16, 2006, pp. 1A, 9A; Trotman, Melanie, and Perez, Evan, “Hostile Bid for Delta Signals Airline Merger Wave May Begin,” The Wall Street Journal, November 16, 2006, pp. A1, A11.
Questions for Discussion: