First American Airlines, Then Republic Airways and Now Delta Airlines
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Airline CEOs would do well to read Motley Fool more and listen to their investment bankers less.
In 2000, Delta Airlines (NYSE: DAL) acquired Comair in a deal valued at $2.3 billion. Delta Airlines just announced that it would be closing Comair, its feeder carrier, this fall. There has been no statement yet on the impact of this on the earnings from Delta Airlines.
Republic Airways (NASDAQ: RJET) bought Frontier Airlines for $1.1 bilion in late 2009. Since late last year, Republic Airways has been trying to sell Frontier Airlines. There have been no buyers, so Republic Airways is now talking about spinning it off. While Republic Airways spent $1.1 billion to acquire Frontier about three years ago, its market capitalization is now around $216 million: So much for the "synergy" from that deal!
Before filing for bankruptcy in November 2011, American Airlines attempted to sell American Eagle, its regional carrier. As with Repubic Airways and Frontier Airlines, there were no takers. That obviously went into Delta Airline's calculations to shut down the operations of Comair, although it would have obvoiusly preferred to find a buyer so that it could re-capture at least some of its $2.3 billion in capital outlays.
Rather than pay investment bankers millions in fees, management at airlines could have saved shareholders billions in lost equity by reading for free what Anand Chokkavelu of the Motley Fool wrote in The 100 Things I've Learned in Investing: "Mergers and acquisitions are overrated. Somewhere between 50% and 85% of mergers fail to boost value. The frequency of achieving promised "synergies" should be filed somewhere between unicorns and no-hitters."
Combining airlines can work, if it is done the Southwest Airlines (NYSE: LUV) way. Southwest Airlines buys on the cheap; it does not merge, it takes over at a very low cost. As an apposite example of this, it lost to Republic Airways in the bidding war for Frontier Airlines. Like legendary investor Warren Buffett noted, the winner in a bidding war is the loser.
Even leveraged buyout firm Kohlberg Kravis Roberts, which makes billions from buying and selling companies, refused to get involved in a transaction involving United (NYSE: UAL). In the book Merchants of Debt, Kohlberg, Kravis & Roberts passed on the United Airlines leveraged buyout back in 1989. From the book about the advisability of investing in airlines: "If ever a business was badly suited for leveraged buyouts - veering up and down depending on fuel prices, the economic cycle and even threats of terrorism. Capital spending needs for new planes were sizable every year, and they couldn't easily be postponed just to help service debt. A high-debt airline could be vulnerable to a cash squeeze or a loss of consumer confidence."
You want "a high-debt airline?"
From its acquisition of Comair and merger with Northwest, Delta Airlines has a dect-to-equity ratio of 11.86. That means that for every dollar of equity value, it took $11.86 dollars in borrowing for Delta Airlines. US Airways (NYSE: LCC) it trying to merge or acquire American Airlines and it is already larded up with a debt-to-equity ratio of 8.77. That will only get worse for US Airways if it does buy American Airlinesas it will have to, most likely, borrow heavily. By contrast, the debt-to-equity ratio for Southwest Airlines is a modest 0.48, and that is after the recent takeover of AirTran Airways.
There have been over 200 airline bankruptcies since deregulation in the United States in 1978. Every major legacy carrier in the United States has filed for bankruptcy at least once. US Airways has done it twice. It is impossible to know how many of the CEOs or CFOs of those airlines read Motley Fool, if any. However, it is obvious that way too many listened to their investment banks about the "synergies" that would result from mergers and acquistions involving other airlines. Delta Airlines and the closing of Comair is just another example of the billions eroded in shareholder value that transpires from listening to Wall Street rather than reading the Motley Fool.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.