United, Delta speculation takes flight

All dressed up and no place to go? That's apparently what happened Wednesday to two of the nation's largest bankruptcy survivors after news reports using anonymous sources said Delta Air Lines Inc. and UAL's United Airlines were in merger talks.

Delta and United each denied taking part in merger discussions.

Yet the flurry of such news helped shares of both companies skyrocket. United shares gained about 13 percent and Delta about 7 percent in mid-day trading. After the denials by the airlines, shares settled down. United closed up a modest 67 cents to $44.17, or about 1.5 percent. Delta closed up 81 cents to close at $19.56, or about 4 percent.

"What a wild ride with United stocks. Any time there's speculation, there will be violent activity in these stocks," said Brian Nelson, airline analyst with Chicago-based Morningstar Inc. "But the timing is ill for a merger. The opportune time would have been when Delta was still in Chapter 11 and that time has past."

Chicago-based United, which has operations in Elk Grove Township, emerged from bankruptcy in February 2006. Delta emerged earlier this year. The entire industry continues to suffer from stiffer competition from low-cost carriers, soaring fuel prices and operating costs. Airline officials and analysts have said consolidation could be in the future.

But on Wednesday Delta CEO Richard Anderson said Delta would not speculate. "There have been no talks with United regarding any type of consolidation transaction and there are no such ongoing discussions," Anderson said in a statement.

United also said it wouldn't respond to "wholly inaccurate statements made by people who claim to have knowledge when they clearly do not," spokeswoman Jean Medina said.

"We make decisions in the best interest of United, and we don't comment on the opinion of one shareholder, or the actions or hypothetical transactions proposed by others," Medina said.

Some hedge funds have nudged the airlines to spin off assets or seek merger partners to capitalize on market share and efficiencies. One such hedge fund started the frenzy Tuesday.

Pardus Capital Management LP said in a letter on Tuesday to Delta's top management that it is "imperative" the company undertake a merger transaction in view of soaring fuel prices and increasing costs. Pardus also owned 5.6 million shares in UAL as of Sept. 30.

"Consolidation is needed to de-risk the industry and time is of the essence as now is the right regulatory environment," said Karim Samii, president of Pardus, and Shane Larson, a principal.

The hedge fund executives said they had determined since making a similar recommendation in a Sept. 7 letter that "the most attractive and practical combination would be a Delta and United Airlines combination."

It cited figures from a consulting firm estimating the benefits of such a pairing would be about $585 million, and it said a combined Delta-United would boast a broader network than any other combination.

As for the reports of Pardus, Anderson said: "We appreciate receiving Pardus' views on the best course for Delta's future. We have been consistent in our public statements that Delta believes that the right consolidation transaction could generate significant value for our shareholders and employees and that strategic options should be evaluated. With oil at over $90 a barrel, this analysis takes on a heightened importance as we factor those prices into our long-term planning process."

Also, on Oct. 12, 2006, then- Delta CEO Gerald Grinstein said he had received "feelers" from United about a possible merger.

Then earlier on Wednesday, Delta said in a statement its board established a special committee to work with management to review and analyze strategic options for the airline. Top executives have said recently they are trying to determine whether consolidation makes sense for Delta.

"United is perfuming itself for sale," said Mike Boyd, airline analyst and principal of The Boyd Group in Evergreen, Colo. "And you can take it to the bank that every airline has been burning the midnight oil with scenario planning."