Is Delta Nearly Done?

With each passing day, it becomes increasingly likely that Delta Air Lines, the nation's third-largest carrier, will soon be no more.

Blame US Airways (NYSE: LCC  ) . CEO Doug Parker, who in November proposed buying out Delta's creditors for $8.3 billion in cash and stock, this week upped his airline's bid by roughly $2 billion.

That leaves Delta's largest bondholders, which includes Boeing (NYSE: BA  ) and its pilots' union, in a tough spot. If they consent to the US Airways bid, thousands of layoffs and deep infrastructure cutbacks will be implemented, amounting to what Parker has said would be $1.65 billion in cost savings.

If they choose Delta's stand-alone reorganization plan, they'll exchange short-term gains for the promise of as much as $1.2 billion in net profit in 2010. That, management argues, would create an independent carrier worth between $9.4 billion and $12 billion.

But will creditors buy it? Maybe. UAL Corp.'s (Nasdaq: UAUA  ) United Airlines has certainly done well in the year since it emerged from bankruptcy. According to its latest quarterly filing with the Securities and Exchange Commission, the firm booked $190 million, or $1.30 per diluted share, in net income in the quarter ended on Sept. 30.

By increasing its offer, U.S. Airways is betting that creditors won't want to wait and see if Delta is capable of performing similarly, or that Delta can't afford to come up with a better deal to remain independent.

Smart move. Like all the other legacy carriers, Delta has already won huge concessions from its workforce. Bleeding them for more isn't likely. Meanwhile, investment returns in the airline industry have become notoriously short-lived. That's why some creditors have urged management to consider options outside of its own reorganization plan.

And they may be. The Wall Street Journal now reports that similarly bankrupt Northwest Airlines has begun merger discussions with Delta. Northwest won't confirm the talks but, if the Journal is correct, the negotiations could increase the options for both creditors and Delta.

For creditors -- which, remember, includes Delta's pilots' union -- there's the hope of a payout at least equal to what US Airways can offer. And for Delta, there's the hope of survival without having to lay off tens of thousands of workers.

In fact, that's likely to be the primary appeal of a Northwest-Delta combination. There's little operational overlap between the two carriers: Northwest's primary U.S. hubs are in the Midwest (Detroit and Minneapolis), whereas Delta is strongest in the south (Atlanta). Moreover, Northwest's European and Asian operations could add higher-profit routes for a combined airline.

Then there's bankruptcy. For all the complaints about United CEO Glenn Tilton, he kept the airline in hock for years, to the point where the courts became a tool for reshaping the carrier in ways that wouldn't have otherwise been possible. United is healthier today as a result of that foot-dragging. Unfair, you say? Maybe so, but it's worked.

Why couldn't Northwest and Delta do the same? Brokering a deal now and working out the kinks while still under the purview of the courts could allow for the freedom to negotiate everything from salary cuts to work rules. That way, were a deal to be completed, Northwest-Delta would emerge from bankruptcy fully formed and ready to compete.

But even if that's not on the table, it seems likely to me that, with all the options creditors have been given, the least attractive is an independent Delta. And that's sad. Delta is a proud carrier with an excellent tradition that goes back as far as any of its peers. Yet not even tradition can change the brutal reality that it participates in an industry that's been flying low for far too long. Creditors, rightly, are finally demanding higher altitudes.

Prepare for take-off with related Foolishness:

Fool contributor Tim Beyers has 31 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 on time for departure.


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