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VOL. 123 | NO. 78 | Monday, April 21, 2008

Will Delta, Northwest Shareholders Have Their Day?

By HARRY R. WEBER | AP Business Writer

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ATLANTA (AP) - Weary shareholders and creditors of Delta Air Lines Inc. and Northwest Airlines Corp. could lose out - again - amid falling stock prices since the carriers announced their intent to combine.

A bidding war for either of the airlines started by another carrier or a private equity firm could help. But observers say that's not likely, given the risky business of investing in airlines these days.

Soaring fuel prices have hit all airline stocks hard, but especially Delta's and Northwest's after they said this week they do not plan to cut capacity further or close any of their hubs as part of the deal.

That approach may make it hard to realize their goal of "earning a return for shareholders who have committed their capital." Analysts predict Delta and Northwest will eventually have to cut more capacity.

"In an environment of $115-a-barrel oil, much more is going to need to be done to restructure the industry," said Calyon Securities airline analyst Ray Neidl.

The two airlines' shareholders and creditors, who include employees and big mutual funds, have suffered years of losses.

The shares that existed before Delta and Northwest filed for bankruptcy on the same day in 2005 were canceled when the two carriers emerged from Chapter 11 last year, wiping out any hope those holders would recover their losses.

Meanwhile, the airlines paid back fractions of the billions of dollars they owed creditors in their bankruptcy cases with new shares that have lost more than half their value in the last 12 months. Some creditor claims have yet to be resolved.

Now, Delta wants to acquire Northwest in a stock-swap deal that carries neither a cash payout nor the U.S. flight cuts Wall Street expected. The airlines are trying to sell the deal to the public, employees, the communities they serve, regulators in Washington and investors on Wall Street.

Ads promoting the deal ran in major newspapers Friday, a new Web site was created touting the global presence of the combined airline, and top executives at both carriers have been talking up the deal in recent days in major cities where they operate.

So far, investors haven't been convinced.

Delta shares have slumped roughly 17 percent since the late Monday announcement. The stock movement has shaved roughly $600 million off the value of the deal to Northwest shareholders, who would get 1.25 Delta shares for every Northwest share they own.

Delta Chief Executive Richard Anderson, who will head the combined airline, said during a stop in Salt Lake City on Friday that the companies view the combination as a long-term strategic move.

"I think it's difficult to predict movements in stock prices over the short run," Anderson said. "This isn't about a short-run combination. This is about the long run, and as we have the opportunity to talk to people on Wall Street on the buy and sell side, I think we'll be successful in showing people that the combination of the two carriers creates a much more durable enterprise and that we can do a much better job of providing returns over the long run."

The problem partly involves the delicate balancing act that the executives are trying to perform.

They must assure employees that job cuts will be limited and seniority will be protected. Communities must be assured they are not going to lose service and airline operations. The pitch to regulators: There will still be plenty of competition after Delta absorbs Northwest. Then there are shareholders, who need to be assured the deal will make them money at some point.

The carriers said they have no current plans to cut more U.S. flights beyond what they have disclosed separately. Analysts say that limits the cost savings or higher fares the airlines could reap from the deal. The companies didn't rule out further capacity cuts in the future if fuel prices continue to rise.

"They still have some flexibility. Not full flexibility, but some," said Standard & Poor's analyst Philip Baggaley.

Anderson gave the airlines more of that wiggle room during his comments in Salt Lake City.

"The two carriers have been the most responsible in terms of managing capacity," Anderson said. "Regardless of this transaction, we're going to continue this philosophy of adjusting capacity to demand as these fuel prices continue at these levels. That's the rational thing to do, and we'll continue to do that."

Neidl said in a note to clients this week that the airlines may have underestimated potential cost savings in their public statements to increase the likelihood of receiving regulatory approval.

Still, he estimates that, in the absence of cost savings, Delta's stock will trade around $8 a share, not far off its current level, after the combination is complete. He said cost savings could add between $3 and $8 per share to that value.

"Continued turbulent industry conditions will ultimately call for deeper cuts, which the new company will have room to implement in small hub restructuring or closures and fleet changes," Neidl wrote.

In an interview, Neidl said a third-party, either an airline or a non-airline, could enter the fray and make a bid for Northwest.

But he said he's currently not hearing any talk of that happening.

"The state of the airline industry right now, there are a lot of people who might be leery of putting money into it," Neidl said.

Delta has already made clear it doesn't like unsolicited bids for its airline, defeating a hostile $9.8 billion attempt by Tempe, Ariz.-based US Airways Group Inc. while Delta was in bankruptcy. Unlike Delta's proposal to acquire Northwest, a large portion of the US Airways bid for Delta was cash.

In the months ahead, regulators and shareholders will reveal whether they approve the combination of Atlanta-based Delta and Eagan, Minn.-based Northwest.

Currently, some large shareholders are standing behind the deal.

After the deal was announced Monday night, the president of hedge fund Pardus Capital Management L.P. - which owned 7 million Delta shares as of the end of 2007 - said he believes "a combination of Delta and Northwest will create a strong national carrier benefiting the major constituencies of both companies, including customers, employees, communities and shareholders."

The value of the shares held by Pardus fell from roughly $104 million on Dec. 31 to roughly $61 million on Friday.

AP Business Writer Paul Foy contributed to this report from Salt Lake City.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

PROPERTY SALES 81 201 16,108
MORTGAGES 40 104 10,026
BUILDING PERMITS 130 336 38,272
BANKRUPTCIES 28 56 7,528