Is Delta Grounding Comair to Take off with American Airlines?
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Delta Airlines (NYSE: DAL) has hardly attempted to cloak its interest in acquiring American Airlines, now that it is in bankruptcy. While the efforts of US Airways (NYSE: LCC) have certainly been more prominent, it was reported in The Wall Street Journal that Delta Airlines has hired the investment firm Blackstone to advise on the feasibility of a bid and how it should be structured. There has been no offer from US Airways yet, despite its stated intent, many times in public forums, to acquire American Airlines.
In other articles, Delta too has also been mentioned as a suitor. Along with Delta, JetBlue, Republic Airways (NASDAQ: RJET) and Alaska Air Group are also stated to be possibilities. United-Continental (NYSE: UAL) is still struggling to combine the operations of United and Continental and is in no position to take on another company. Focused on assimilating Air Tran into its operations, Southwest Airlines (NYSE: LUV) is not regarded as a buyer for American Airlines, either.
In a move that strengthens its hand for dealing, Delta Airlines recently announced that it was shutting down its regional unit, Comair. In 2000, Delta acquired Comair for $2.3 billion. A money losing operation, Delta Airlines is grounding it permanently. Ironically, the poorly performing regional carrier of American Airlines, American Eagle, helped put it in bankruptcy court. Republic Airways has been trying to rid itself of Frontier Airlines for almost a year now, too. Besting Southwest Airlines in the buying process, Frontier Airlines has proven to be a costly burden rather than a blessing for Republic Airways.
Delta Airlines has been doing much to better improve its capital structure, should it decide to bid for American Airlines. Any offers from JetBlue or Republic Airways for American Airlines would be coming from much weaker financial partners. Alaska Airlines is considered to be culturally incompatible with American Airlines. Acquiring American Airlines, however, would result in Delta becoming the world's largest air carrier, toppling United-Continental from that perch, at present.
Towards this end, Delta has signed a new pilot contract that lasts though 2015. In this agreement, Delta is allowed to modify its regional fleet, replacing more than 200 50-seat aircraft with Boeing 717's leased from Southwest Airlines, resulting in hundreds of millions being saved in future operating and maintenance costs. Also augmenting its core operations, Delta is now done with its LaGuardia expansion, the largest in 40 years, and has also completed increasing its presence at JFK airport.
In addition to aggrandizing its revenue base, Delta has also focused much attention on reducing its debt burden. At the end of 2009, Delta Airlines was $17 billion in debt. That has been lowered to about $12 billion. The goal for the second biggest air carrier in the country is to have $10 billion in net debt by 2013. This greatly improves not only the balance sheet for Delta, but also the earnings statement as interest costs have been reduced already by 11.16%. That figure will increase as the debt amount decreases for Delta.
As a result of its improving revenue operations and reduced debt burden, Delta's balance sheet and liquidity profile position are much better. There is $3.498 billion in cash, with another $1.8 billion in an untouched revolving credit line. Delta posted free cash flow of $31 million in the second quarter of 2012. The ceasing of Comair operations will upgrade cash flow even more.
Delta is reported to have conducted an anti-trust analysis, should it decide to bid for American Airlines. If American Airlines were to be acquired, there would be many benefits for the company. Along with the expansion work at JFK and LaGuardia, American would further Delta's presence into the lucrative New York City market. American would greatly aggrandize Delta's operations in Latin American, projected to be a major region for growth. It would also firmly set Delta as the #1 carrier in the highly desirable Trans-Atlantic market.
The improvements at Delta Airlines have not gone unnoticed by Wall Street. That will certainly facilitate the financing of a bid for American Airlines and raise the stock price of Delta, should that route be pursued. Already, Delta shareholders have been rewarded with a 23.55% increase in the stock price for the last 52 weeks of trading. Now trading around $9.13, the mean analyst target price for Delta Airlines over the next year of market action is $16.42.
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