Plea For Synergy -- Or Well-Crafted Power Play?

By ANN Senior Correspondent Pete Combs

On Wednesday, we got the bombshell: US Airways wants to buy up Atlanta-based Delta Airlines. The offer stands at $8 billion dollars and was made public in a carefully orchestrated announcement by Doug Parker and the management at US Air. But was it a public plea, or a power play?

By taking his offer of a buy-out public, US Airways CEO Doug Parker, in essence, went over Delta chief Gerald Grinstein's head. His offer of $8 billion dollars in cash and stock isn't aimed at Delta management, or even at the board of directors. 

"If, indeed... US Airways... could offer [Delta creditors] substantially more than Delta can, it's probably gonna go through," says Mike Boyd, who runs an airline consulting business based in Denver, CO. "Creditors don't care about the airline business. They just want their money."

Boyd doesn't think a US Airways-Delta merger would be good for consumers.

"It reduces competition substantially."

Consider, he says, markets like Charleston, SC, where no one carrier has more than 40-percent of the market.

"Do this deal, one carrier has 70-percent of the market," he says.

In fact, most industry analysts agree that consumers would lose out on this deal. But Richard Aboufalia at the Teal Group in suburban Washington says, maybe this is a deal whose time has come.

"There needs to be some kind of restructuring," he says. "Hopefully, regulators will move to the point where they say, 'Hey, this is a solution and we should not stand in the way of... market decisions.'"

Ever since the airline industry took a nosedive back in 2001, many executives have predicted a wave of bankruptcies, mergers and consolidations. There were simply too many planes in the sky with too many unfilled seats. That drove prices down and sent airlines like US Airways, United and Delta into bankruptcy. Now, industry experts like Ray Niedl at Calyon Securities, comes the often cut-throat process of consolidation.

"Industry consolidation would raise prices so that the airlines can make a return on their product," he tells ANN.

Which makes you wonder what the government will have to say about all this.

Boyd thinks the Justice Department, which oversees mergers, will turn this deal down cold.

"Turning down mergers, they haven't done in the past -- at least, not up until now. [But] a lot of communities are going to get hurt pretty badly by this."

Ray Niedl agrees.

"I think they're going to be looking at the fact that there's some overlay between the two carriers in the route system," he says. "But more importantly, if they allow this merger, they know this is going to set off an industry trend. I'm not sure regulators and politicians are ready for that."

But Richard Aboufalia has a different point of view.

"Obviously, the health of the industry has been adversely affected by overcapacity. Regulators and lawmakers are probably going to look more sympathetically at this in an effort to redress that problem through mergers," he says.

All three analysts agree on one thing: This is a well-thought out play by executives at US Airways. Whether Delta's management likes it or not, the Atlanta-based carrier is now in play.

FMI: www.delta.com, www.usairways.com