Analysts expect airline deals
ATLANTA -- Wall Street analysts are still putting stock in Delta and United combining or merging with other carriers, even as the nation's No. 2 and No. 3 airlines deny they have talked about a deal.
"Delta's refutation of current merger talks with any other airline, including United, only means no formal meetings have taken place thus far," Bear Stearns airline analyst Frank Boroch said in a research note. "It doesn't change Delta's recognition of consolidation's benefits nor Delta's board decision to set up a strategic committee and hire advisers in new CEO Richard Anderson's first 10 weeks on the job."
Goldman Sachs analyst Robert Barry wrote Thursday his firm believes the demands from investors for consolidation will intensify as rising fuel costs and other pressures continue to threaten airline profitability.
Barry said "all airline management teams and boards have been discussing consolidation, ad nauseam, for months if not longer."
On a day when crude oil prices remained above $93 a barrel and stocks were down overall, Atlanta-based Delta Air Lines Inc. shares rose 1.6 percent Thursday to $19.84, on the heels of a 4 percent increase a day earlier. But shares of United's parent company, UAL Corp., fell 2.1 percent to $43.26.
An official with knowledge of the situation told The Associated Press on Wednesday that United and Delta have been discussing a combination that would keep the United name and the corporate headquarters in Chicago, with Anderson possibly being the surviving CEO.
The official, who spoke on condition of anonymity, stood by the assertions after Delta and United issued strong denials.
Anderson was in Washington Thursday and Rep. Lynn Westmoreland, a Republican from Georgia, told him at a congressional hearing that he felt "blindsided" by reports of a possible Delta-United combination. Noting that he represents more Delta employees than any other member of Congress, Westmoreland asked Anderson to explain.
"I have not talked to (United's Chairman and Chief Executive) Glenn Tilton or any other executive at United Airlines since the last time I was in the industry four years ago," Anderson said, adding that no discussions are ongoing or planned. Anderson, a former Northwest CEO, was named to the top job at Delta in August.
Three Delta directors reached by the AP -- John Brinzo, Paula Rosput Reynolds and Walter Massey -- declined to comment on the possibility of a Delta-United combination.
Delta's pilots union said in a statement Wednesday it is not opposed to consolidation but wants to be an active participant in any discussions.
William Greene, an analyst at Morgan Stanley, said an issue the airlines have to consider is that the regulatory window may be closing and that they need to act fast if there are going to be any mergers in the industry.
"We think pressure to 'do a deal' sooner rather than later is growing," Greene said in a research note Thursday.
There are plenty of cost savings to be reaped from a merger of two major airlines, from reducing the number of available seats to downsizing or eliminating overlapping hubs and routes. Delta has a hub in Salt Lake City and United has a hub a few hundred miles away in Denver. Some observers have speculated one of the hubs could be at risk if United and Delta combined.
Delta also has a hub in Cincinnati, while United's main hub is 250 miles away in Chicago.
The greatest obstacles to a Delta-United combination would be dissent from unions, whose members' job assignments typically are based on seniority, and the difficulty getting regulatory approval.
After news of recent talks between Delta and United surfaced Wednesday, Sen. Byron Dorgan of North Dakota, a Democrat on the Senate Commerce Committee's subcommittee on aviation operations, safety and security, issued a statement saying "there will be substantial resistance here in the U.S. Congress to a merger between two of the largest three airlines in America."
Earlier Wednesday, it was disclosed that Pardus Capital Management LP, a hedge fund that owns 7 million Delta shares, had written a letter to Delta that called on the airline to consider combining with United. Pardus also owned 5.6 million shares of UAL as of Sept. 30.
As then-chairman and CEO of Texaco Inc., Tilton was at the helm when his company agreed to be acquired by Chevron Corp. in 2001. Now chief of Chicago-based United Airlines, Tilton has said there are merits to mergers in the airline industry.
After presenting a five-year plan last month to UAL's board of directors, he said the plan "contemplates the eventual consolidation of the industry and United's role in that process."
The board at Delta, meanwhile, said Wednesday it has established a special committee to work with management to review and analyze strategic options for the airline.
When Anderson was named to replace Gerald Grinstein as Delta's CEO, there was immediate speculation that Delta and Northwest might eventually combine since Anderson used to head Northwest and there would be obvious synergies. Anderson tried to dispel such speculation, telling employees that he hadn't come to Delta to facilitate a deal with Northwest.
But with all airlines struggling with sky-high fuel costs, "as far as consolidation goes, it has to happen, it's going to happen," said Terry Trippler, an airline industry expert in Minneapolis.