Is the new Delta good?

I want my first entry to be about the Delta-US Airways merger. Or should I say US Airways-Delta, since US is the one taking over Delta.

According to Market Watch, US Airways has submitted a bid of $8.5 Billion to take over Delta Air Lines to its creditors (according to US Airways' site, however, their bid remains at $8 Billion). In exchange, "Delta creditors would receive $4.0 billion in cash and 78.5 million shares of US Airways stock with an aggregate value of approximately $4.0 billion based on the closing price of US Airways’ stock as of Nov. 14, 2006." US Airways has also said that the Delta brand will survive

Delta's CEO, Gerald Grinstein and the company's exectuve board has already reacted negatively to the merger, but US Airways' CEO, Doug Parker is persistent, approaching Delta's creditors. Delta is in bankruptcy (never a good sign) and US Airways' offer may be tempting to those who want to get paid sooner. Delta just reported an $88 Million loss for October, but a $52 Million profit for the last quarter.

But since Delta executives have refused the offer - twice, US Airways target is not to woo the airline itself, but the creditors, indicating a hostile takeover. While US Airways has expressed that the merger would be good for both of the companies and the creditors, Delta disagrees and wants to emerge from bankruptcy on its own.

This puts Delta in an interesting position. There may be a few outcomes:
- Delta creditors accept US Airways' bid, resulting in a 10% capacity reduction (but no cities will be eliminated, US press release says) and should save the new airline $1.65 Billion. Since both airlines have an east coast shuttle, Delta Shuttle and US Airways Shuttle, running hourly from Washington DC's Reagan, New York's LaGuardia and Boston's Logan airports, the new airline would sell one of the east coat shuttles. Airtran has already shown interest in that part. Anyone up for AirTran shuttle?
- Delta creditors could accept the bid, but the federal authorities could say no. This case is more probably, since the new carrier would have 20% market share in the US and a lot of cities in the east might see a 70% dominance in their market.
- And finally, Delta creditors could reject the bid, possibly resulting in shares for both airlines tumbling.

In any case, bigger is not always better. There are currently 6 "legacy" carriers, or the old-age airlines: American, Northwest, Delta, Continental, US Airways and ATA. The merger would reduce the carriers to 5. A merger between any of these possibly will happen, especially due to pressures from outside partners. For example, Air France-KLM expressed interest in some kind of Delta-Northwest merger. This may be important to Air France-KLM, since Northwest is a strategic partner of KLM and they might want to see a merger that's similar to Air France-KLM. Air France-KLM, Delta and Northwest are all part of the SkyTeam alliance, while US Airways is not.

According to Houston Chronicle, Continental's former CEO Gordon Bethune has expressed interest in having Continental acquiring United. He as well as Air France-KLM indicated that some kind of merger between legacy carriers has to happen.

Now, let's take a look how this may affect low-cost carriers. Airtran has already expressed interest in acquiring the east coast shuttle, while Southwest has expressed its interest in acquiring slots in some cities that the new airline would have to give up. JetBlue, has been relatively quiet, which is surprising, considering its enormous operations at Kennedy and Logan and may indicate that JetBlue may be left out of the assets deals. However, Neeleman did mention that the merger or any type of consolidation is good for JetBlue.

US Airways also did not consider one of the important assets of a merger: the loyalty of the employees. Under the new arrangement, US Airways will gain more than they will lose. The new company will have different unions, which may conflict with each other.

As one company, Delta and US Airways have too many overlapping routes. Their hubs are too close and some may have to shut down. A perfect example is US hub in Philadelphia and Delta's hub in JFK. Delta's international and especially the Atlantic network at JFK shuns US Airways's international network at Philadelphia International.

US Airways is just emerging from its merger with America West. In fact Doug Parker, was America West's CEO and initiated the merger. Now, a year later, the company wants to merge with another company. Question arises here - are they ready? I don't think so. They have yet to prove that they are profitable on a year-to-year basis, like Southwest and Continental have done.

All these factors may result either in a dysfunctional business or the two airlines may just go their own ways.