U.S. Airways Proposes

Here we go again. Less than two months after the rumor mill had UAL's (Nasdaq: UAUA  ) United and Continental (NYSE: CAL  ) locking hands, U.S. Airways (NYSE: LCC  ) wants to marry Delta Air Lines, and it's willing to pay $8 billion for the wedding.

But would this be a happy couple? Investors seem to think so. U.S. Airways shares soared to the heavens on yesterday's news, up almost 17% for the day. Meanwhile, rivals basked in the reflected glory. UAL shares were up 9%. AMR (NYSE: AMR  ) , parent of American Airlines, saw its stock climb 5%. Even Motley Fool Stock Advisor recommendation JetBlue (Nasdaq: JBLU  ) , which would have little to gain from a U.S. Airways-Delta combination, saw its stock fly 7% higher.

It's as though everyone believes the deal is already done. Not so fast, Fool. We already know that Delta doesn't want a merger. Over the summer, CEO Gerald Grinstein rebuffed efforts by U.S. Airways CEO Doug Parker to broker an amicable deal.

Now, Parker is going around Grinstein and appealing directly to creditors, offering them what he described to TheWall Street Journal as a "significant premium" over what they might expect as a result of a bankruptcy settlement. (U.S. Airways' bid includes $4 billion in cash and 78.5 million shares of stock, the Journal reports.) Grinstein, however, continues to insist that Delta will reemerge from bankruptcy in 2007 as a stand-alone carrier, according to press reports.

Still, there's logic to Parker's proposal. For example, while Delta is remarkably strong in the south through its top hub in Atlanta, U.S. Airways has a large presence in the northeast, thanks to a hub in Philadelphia and a significant operation in Washington, D.C. Both have large operations out west, with Delta in Salt Lake City and U.S. Airways in Las Vegas and Phoenix.

Moreover, cost-cutting isn't likely to be a problem, thanks to overlapping infrastructure. For example, both airlines have significant operations at New York's LaGuardia airport, as well as shuttle services catering to northeastern cities. And U.S. Airways' hub at Charlotte is only 200 miles distant from Atlanta; combining operations in that region would make sense.

All told, Parker told the Journal that a merger could produce $1.65 billion in annual savings if a deal could be completed while Delta is still in bankruptcy. That's a superb number, which undoubtedly enticed investors during yesterday's frothy trading session.

Nevertheless, problems remain. Parker's airline has yet to integrate operations between the old U.S. Airways and America West a year after that blockbuster merger was finalized. That's led to some labor strife. USA Today reports that, in February 2006, a massive fistfight broke out between U.S. Airways and America West employees at a union meeting. Disenfranchised pilots plan to picket at U.S. Airways' largest hubs today, the paper reports.

Wedding bells seem to be inevitable in the airline industry. But that doesn't mean U.S. Airways is ready to tie the knot that binds. Indeed, management is battling numerous internal spats as it gussies up for a trip down the aisle. Wouldn't marrying Delta for $8 billion just add to the chaos? I'd say so.

So, Doug, here's an alternative idea: Postpone the nuptials. Take some couples counseling with your unions. Then, after you've forgiven and forgotten, go dig up that $8 billion ring and court your bride-to-be. Delta's wedding dress might be a little wrinkled by then, but a deal would probably still make sense. And there would be no cold feet among the rank and file to ruin the reception. What do you say?

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Fool contributor Tim Beyers has 32 picks in his Motley Fool CAPS portfolio, including UAL, which he believes will outperform the S&P 500. He doesn't, however, have real money in the airline or in the stocks of any of the other firms mentioned in this article. Get an inside peek at all the stocks Tim owns by checking his Fool profile. The Motley Fool's disclosure policy is always first-class.


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