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United-Delta Merger In the Works?
Published by AirlineFanatic | Filed under airline stocks, legacy carriers
The New York Times is running a piece today about merger talk between the number 2 and number 3 airlines: United and Delta. The latest news was spawned by Pardus Capital Management, which owns about a 2.6 percent stake in Delta. According to Pardus, the combined airline would create about $585 million in savings, not to mention creating the world’s biggest airline.
The stimulus for this letter to Delta management seems to be the record rapid rise in fuel prices. Any money the majors may have been making over the past few years will be completely wiped out it seems by these huge price increases. Pardus obviously assumes that such a massive combined airline would then be able to reduce capacity to a degree that prices would rise considerably, and revenue along with them. This is a pretty good assumption, as one less major carrier would reduce the competition on many routes over night, and it would take low cost carriers a while to adapt.
The letter also analyzes potential other merger prospects, but still identifies a Delta-United union (which would be a pure stock transaction) as the best fit. A combination with Northwest would provide the best cost savings at over $1.5 billion annually, but would not result in a significantly larger network. I wrote a post a while ago on a Northwest-Delta merger and came to the same conclusion: don’t do it. Pardus also took a look at Continental and found that costs would actually rise $171 million a year.
We’ve known that Delta has been looking for acquisitions for some time now, but a letter from a larger shareholder such as Pardus may push them a little harder. That combined with the current price environment may mean we could see movement sometime soon on this. As always, the politics of labor unions and the airline industry will play a factor here, so we will have to wait and see.
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