A fund with holdings in United and Delta airlines is pushing for a merger between the two carriers.
In a letter to Delta Air Lines, hedge fund Pardus Capital Management urged Delta to merge with United in a stock-for-stock deal.
Atlanta-based Delta said it had already formed a special board committee to analyze strategic options, including potential consolidation deals. Both carriers denied a report that they already were in talks.
A deal between Delta, the No. 3 U.S. airline based on revenues, and United parent UAL Corp., which holds the No. 2 spot, would create the world’s largest airline and probably spur other airlines to consider deals.
Chicago-based United is the largest carrier at Denver International Airport. Denver is United’s second-largest hub, while Delta has a hub in Salt Lake City. Under the hub system, airlines route many of their flights into a few key cities, which passengers then connect through.
If Delta and United were to merge, Denver could come up against Salt Lake City to continue as a hub for the combined carrier.
“For one carrier to have both (Salt Lake City and Denver hubs) will be difficult,” said George Hamlin, managing director at Airline Capital Associates in Fairfax, Va. “Which one survives would depend on a number of things, including which carrier is in charge.”
Based on economic factors, Denver is a much larger hub than Salt Lake City and would probably survive, Hamlin said, “but I don’t think that’s something you can say gratuitously will happen.”
Alan Sbarra, principal at consultancy Roach & Sbarra said a merger is apt to result in “some tweaking” in Denver but because “Denver’s such a strong local market, I don’t see that being affected too much.”
In the letter, dated Tuesday, Pardus Capital Management said a Delta- United combination is the most attractive, compared with other alternatives, and presents about $585 million in synergies.
The letter also reviewed the possibility of Delta combining with Northwest or Continental airlines but said United is “the most attractive and practical combination.”
The Associated Press reported Wednesday that United and Delta have been discussing a merger that would keep the United name and corporate headquarters in Chicago. Delta and United, however, denied the talks.
“We make decisions in the best interest of United, and we don’t comment on … hypothetical transactions proposed by others,” said United spokeswoman Jean Medina.
Pardus holds 7 million shares, or 2.6 percent, of Delta’s outstanding stock and 5.6 million shares, or 4.82 percent, of United.
The letter was specifically focused on opportunities for Delta, however, and told Delta management: “We believe it is imperative that you seek to enter into a merger transaction with another carrier, given the rapid rise in fuel prices and the increased risk to the business as a stand-alone entity.”
“Further, the equity and credit markets appear increasingly concerned that fuel costs and other macro-economic factors could once again drive U.S. airlines toward financial insolvency,” the letter said.
Pardus asked to present its research to Delta management.
Delta said in a written statement that it believes “the right consolidation transaction could generate significant value for our shareholders and employees and that strategic options should be evaluated.”
Although the airlines have been reporting profits, “their stocks are getting hammered, so if someone were to come and cash them out, that would be very good for investors,” Sbarra said.
The Pardus letter said the hedge fund had consulted industry experts, including former Continental Airlines chief executive Gordon Bethune.
“UAL provides an impressive Pacific presence, Los Angeles and San Francisco hubs and Heathrow slots,” the letter said. “Matching UAL’s assets with Delta’s European presence, evolving hub at JFK and Southern tier launch point for Latin America would create the service breadth to win more business and international travelers.”
Pardus said it would support Delta leading the combined company, with United chief executive Glenn Tilton serving as non-executive chairman “for the next year or two to help facilitate integration.”
Pardus said a deal with UAL would be complex and that it could take several years to integrate operations.
A merger between Delta and United also could raise antitrust issues and other complications.
“The antitrust division obviously is very interested in the airline industry,” said Department of Justice spokeswoman Gina Talamona.
Beyond their own operations, United and Delta are each members of different global alliances. Delta has partnerships with Northwest and Continental, said New York-based airline consultant Bob Mann, and “it’s not clear that those would survive a merger with United.” United is partnered with US Airways.
Revenue Net
American $22,563 $231
United $19,340 $22,876
Delta $17,171 -$6,203
Continental $13,128 $343
Revenue Net
Northwest $12,568 -$2,835
U.S. Air $11,557 $304
Southwest $9,086 $499
Sources: Hoovers, Nexis
