US Airways offers $8 billion for Delta after initial rebuff

US Airways Group Inc.’s $8-billion takeover bid Wednesday for Delta Air Lines Inc. would create the world’s largest carrier and potentially set off a wave of consolidation in the industry.

Delta, the nation’s third-biggest airline, responded coolly to the overture, saying it would study the offer but preferred to remain independent as it attempted to emerge from Chapter 11 bankruptcy protection.

That didn’t stop Wall Street from snapping up airline stocks. Shares of US Airways, the nation’s sixth-largest carrier, soared almost 17%, closing $8.57 higher at $59.50. Bloomberg News’ index of airline stocks gained almost 6%.

Travelers might not fare as well should the deal go through, some analysts warned.

Many airlines have already cut capacity by taking hundreds of airplanes out of service. In doing so, carriers have been able to fill 80% to 90% of the seats on existing airplanes, allowing them to raise fares. The average airfare is up almost 11% this year, according to the Air Transport Assn., the industry’s lobbying group.

With US Airways estimating that it could reduce capacity by 10% if it combines with Delta, fares could continue to rise.

“From a consumer standpoint, consolidation is not a good thing,” said Scott Hamilton, an aviation consultant with Leeham Co. in Issaquah, Wash. “To the contrary -- the more competition the better.”

But fare increases are likely to be limited because of the competition from low-cost carriers such as Southwest Airlines Co., JetBlue Airways Corp. and AirTran Airways.

“It’s harder for the legacy airlines to gouge us,” said Tom Parsons, chief executive of travel website Bestfares.com. He added, however, that capacity reductions would make it harder for families to find deals during peak holiday travel seasons.

Delta is the fourth-largest airline at Los Angeles International Airport in terms of passenger boardings and the second-largest at Ontario Airport. In recent months, Delta has announced major expansion plans at LAX, including adding 16 new routes to Mexico and Central America.

Tempe, Ariz.-based US Airways is the seventh-busiest carrier at LAX, getting a boost in the local rankings from its combination last year with America West Airlines.

Local airport officials note that a link-up of Delta and US Airways could result in US Airways’ moving out of its current home in LAX’s overcrowded Terminal 1. That would clear the way for its neighbor Southwest to get the additional gates and ticket counter space it has been seeking for two years and allow it to add more flights.

US Airways said it was appealing directly to Delta’s creditors after being rebuffed by its rival’s management.

“We thought about this opportunity for quite a while,” US Airways Chairman and CEO Doug Parker said in a videoconference with the airline’s employees. “They responded back that they didn’t think it was a good idea.”

Delta CEO Gerald Grinstein said in a statement: “We received a letter from US Airways this morning and will of course review it.” But, he added, “Delta’s plan has always been to emerge from bankruptcy in the first half of 2007 as a strong, stand-alone carrier.”

Parker said combining the two airlines could provide $1.65 billion in annual cost savings. He added that the bid was being made now because the projected savings could be shaved by half if it waited for Delta to emerge from Chapter 11. Under bankruptcy protection, the airline can cancel or renegotiate aircraft leases. Delta leases about 60% of its aircraft.

“We believe that the combination of US Airways and Delta ... is extremely compelling and will create significant value for each of our stakeholders,” Parker said. If approved, the combined airline would retain the Delta name, he said.

Combining the two airlines would create the world’s biggest carrier in terms of miles flown by passengers, with a fleet of more than 800 aircraft serving five continents. It would be the largest airline at 155 airports, mostly on the East Coast.

Analysts noted that US Airways is strong in the Northeast and Southwest, while Delta is powerful in the Midwest and South with big hubs in Cincinnati and its hometown of Atlanta.

Both carriers operate shuttle operations between Boston, New York and Washington that are popular with business travelers and politicians. To mitigate antitrust concerns, US Airways said it was willing to divest one of the shuttles.

Richard Aboulafia, aviation analyst at Teal Group Corp., said cultural differences and the carriers’ divergent aircraft fleets could hinder the prospects of the proposed combination.

In addition to America West, US Airways is a result of combinations involving Piedmont, Pacific Southwest and Mohawk, among others. Delta, founded in 1928, remains one of the oldest of the so-called legacy carriers.

“Delta is well known as having one of the more conservative cultures,” Aboulafia said. “They have a certain way of doing things that might not mesh with US Airways.”

Moreover, US Airways operates mostly Airbus aircraft, while Delta has remained loyal to Boeing Co., buying all of its aircraft from the Chicago-based company. How a combined company manages the merged fleets could weigh on any potential cost savings because they require different training and maintenance procedures.

If the deal is approved -- and there are several hurdles to overcome, including federal regulatory and U.S. Bankruptcy Court approvals -- it could set off a wave of consolidation in the domestic airline industry, analysts said.

Depending on how regulators react, the proposal could prompt other bids for Delta and “possibly set an industry trend for consolidation,” said Ray Neidle, an analyst for Calyon Securities.

But Hamilton, the consultant at Leeham, said the recent takeover of Congress by the Democrats could put a crimp in that trend. Although Congress doesn’t directly rule on airline mergers, he said, lobbying by unions upset about consolidation could spark hearings or other types of political pressure.

“I think it’s less likely that you’ll see a wave of mergers than it was on Nov. 6,” Hamilton said.

Nevertheless, he noted that Northwest Airlines Corp., strong across the Pacific, and Continental Airlines Inc., with its routes to Europe, could make a good match. Northwest also might find a partner in AMR Corp.’s American Airlines, which has extensive routes to Latin America and Europe.

Analysts said the takeover bid was the latest fallout from the recent travails of the legacy airlines. High labor costs, skyrocketing jet fuel prices and the drop in air travel after the 9/11 terrorist attacks combined to drive several major carriers into bankruptcy proceedings, including Delta in September 2005.

According to the Air Transport Assn., U.S. airlines have lost $35 billion since 2001, although this year’s round of fare increases may get the industry back in the black.

Under terms of the offer, Delta creditors would receive $4 billion in cash and 78.5 million US Airway shares, valued at nearly $4 billion based on Tuesday’s closing stock price.

US Airways said it had obtained $7.2 billion in committed financing from Citigroup.

peter.pae@latimes.com

martin.zimmerman@latimes.com

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The airlines at a glance

*--* Delta Air Lines US Airways Founded 1928 1939 Headquarters Atlanta Tempe, Ariz. Chief executive Gerald Grinstein Doug Parker Revenue (3rd) $4.7 billion $3 billion quarter 2006) Employees 47,000+ 35,441 Daily flights 4,067* 3,846 2005 passengers 119 million 31 million Total destinations 461 234 Aircraft 625 357 Bankruptcy Filed for Filed for history Chapter 11 Chapter 11 in 2005 in 2002 and 2004

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Number of nonstop destinations from LAX

Delta Air Lines: 17

US Airways: 6

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LAX ranking

Delta: 4th-busiest airline

US Airways: 7th-busiest airline

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Sources: Individual airlines. Graphics reporting by Scott Wilson