Delta holds key to shape of US fleets

This year could see consolidation in the US airlines industry, with the fate of Delta Air Lines likely to prove pivotal, executives, bankers and investors say.

Delta recently emerged from bankruptcy protection unencumbered by financial agreements that restrict some potential deals, and is not as big as, say, American Airlines parent AMR.

As a result, it features prominently in most consolidation scenarios concocted by industry insiders and shareholders alike.

The Atlanta-based carrier is working with its bankers at Merrill Lynch and Greenhill to review potential mergers. Delta’s executives believe a merger would help the combined company save money and weather future downturns. But they are not convinced a deal is worth pursuing at all costs, given the challenges it would pose, from winning the approval of regulators and organised labour to combining complex operations, people familiar with their thinking said.

It may be months before the company decides whe­ther to proceed, they added.

“There has been talk from one corner or another,” said John Prater, president of the Air Line Pilots’ Association, whose 60,000 members include pilots at Delta, United and Northwest.

“Is there going to be consolidation? I think we’re going to see some attempts.”

Richard Anderson, Delta chief executive, fuelled merger speculation in October, when he said the company recognised the benefits of consolidation and planned to participate. His comments appeared to contradict Delta’s stance earlier in the year, when it fought off a hostile bid from rival US Airways.

“Delta has said previously that its board has formed a special committee to work with management to review and analyse strategic options to ensure Delta maintains its leadership position in the industry, including potential consolidation transactions,” the airline said in a statement.

“During this period we will not comment on any rumours or speculation regarding mergers or acquisitions.”

Some of Delta’s peers may have a harder time persuading antitrust regulators to approve any merger. Others would be challenged by existing relationships and financial arrangements. For instance, Northwest has the right to block a deal involving rival Continental Airlines.

Delta’s greater flexibility is not lost on the investors who built positions in the company last year.

Pardus Capital Management, a hedge fund with more than 2 per cent of Delta and a 4.8 per cent stake in United parent UAL has said a Delta-United merger represents the best possible combination of large US airlines.

Airlines are bracing for a difficult year. The International Air Transport Association predicted that industrywide profit will slump this year amid record fuel costs and an expected slump in demand for air travel.

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