Delta Airlines (DAL) Reviewing M&A Options with AMR and U.S. Airways

Delta Airlines (DAL: Charts, News) is looming large in the headlines as reports circulate regarding its possible takeover of rivals American Airlines and U.S. Airways (LCC: Charts, News). American Airlines' parent company, AMR Corp., filed for bankruptcy in November, and Delta has hired Blackstone Group as its financial adviser for a potential bid to acquire the fallen icon.

American Airlines is the third largest airline in the nation. Meanwhile, U.S. Airways, the fifth largest carrier, is in the M&A market as both a potential suitor for AMR and a takeover target for Delta. Analysts believe that if Delta were to make an offer for either company, antitrust regulators may halt the deal, which would create the undisputed largest airline by traffic and market capitalization in the world.

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If Atlanta-based Delta, which bought rival Northwest Airlines in 2008, is successful in either acquisition, it would boost its lead as the largest airline in the world. Delta currently ranks second in traffic to United Continental and first in market cap. Delta's market cap of $9 billion is the biggest in the industry, rivaled only by United Continental - the result of the massive 2010 merger between United and Continental Airlines. The entire airline sector is currently out of favor, due to razor-thin margins and rising fuel costs, and Delta is taking advantage of depressed share prices to consolidate the market. Shares of U.S. Airways rallied 3% on Monday due to acquisition rumors.

However, Delta may not be the only buyer interested in acquiring AMR, which was sunk by high debt and labor costs. AMR hasn't posted an annual profit since 2008. Ironically, U.S. Airways has expressed interest in taking over American Airlines, noting that a merger would boost revenue and strengthen both companies' weak domestic route systems. Domestic flights from the larger carriers have been suffering at the hands of budget rival Southwest Airlines (LUV: Charts, News), which has become increasingly popular for its cheap, no frills travel with free domestic transport of checked luggage. Southwest, which is the fourth largest carrier in the U.S., acquired AirTran Holdings last year, adding to the pressure of industry consolidation. However, some industry peers are cautious of further acquisitions and consolidation. Southwest has cited oil at $100 a barrel as a danger to earnings growth through 2014, and United Continental is still struggling with acquisition indigestion, which has kept the company unprofitable since its massive merger.

Details were sketchy regarding Delta's rumored plans to acquire Tempe, Arizona-based U.S. Airways, which were first announced in recent Bloomberg and Business Week articles. Both Delta and U.S. Airways remained silent regarding the rumors. U.S. Airways CEO Doug Parker hinted at further industry consolidation on a call to analysts. "We can now decide whether it's best to operate as a stand-alone or to participate in further consolidation over time, and that's what we intend to do," stated Parker. He also noted that US Airways is "always interested in studying potential value-enhancing opportunities." Shares of U.S. Airways have outperformed all other airline stocks, soaring 61% year-to-date, while shares of Delta surged 28%. U.S. Airways is trading on higher expectations, with a trailing P/E of 27.5, while Delta is trading with a more reasonable 10.6. Both stocks, however, are far below their historical highs achieved prior to the 2008-2009 global financial crises.

Last week, Delta also beat analyst estimates, posting fourth quarter earnings of 45 cents per share, or $379 million, which comfortably topped expectations of 38 cents. Delta attributed its healthy profits, which were more than double its prior year quarter earnings of $158 million, to higher fares which offset rising fuel costs. Fuel costs rose 5% to $2 billion in the fourth quarter. The company also reduced trans-Atlantic routes due to declining demand for travel to Europe, which cut costs considerably.

Other News About DAL
Delta Profit Surpasses Estimates as Higher Fares Outpace Rising Fuel Costs
A look back at Delta's earnings.
Major Airline Mergers in the Works: Delta and US Airways
Is Delta about to reclaim its number one spot? Other Stocks in the News
United Continental narrows Q4 losses
United Continental is still unprofitable, but posts a smaller loss.
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Published on Jan 31, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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