Delta, US Air Said To Be Among Potential AMR Suitors

Merger speculation is one of the airline industry's favorite pastimes, and it started anew this week after the Wall Street Journal reported that Delta Air Lines, US Airways and private equity firm TPG were orchestrating separate bids for American Airlines' bankrupt parent AMR.

Such news reports are catnip to journalists, analysts and airline geeks, but are probably a hassle for the airlines involved, since they "never comment on rumors or speculation." Instead, they leave that up to the experts, so here we go. [more]

First, what are the chances AA is purchased? According to Wolfe Trahan analyst Hunter Keay, there is only a 20 percent chance that AA will exit bankruptcy as a standalone carrier. In other words, there's an 80 percent chance the carrier will be bought in some form. Dahlman Rose & Co. airline analyst Helane Becker in a research note called more likely a scenario in which "certain assets will be sold, rather than the entire company being purchased outright."

Who would make the best suitor? Becker points out that Delta already controls 30 percent of mainline industry capacity, with American holding 20 percent. Put them together and you have half the market, and a very tough time getting Justice Department consent "without major concessions," according to Becker. Keay sees "less resistance for a successful US Airways bid."

US Airways is motivated. The carrier's executives on numerous occasions have said that if there's another mega merger in the industry, they'd be a player. The carrier's stature in the industry has diminished since so many of its competitors have grown in recent years through M&A. "Until AMR declared bankruptcy, there were few opportunities for the company," Becker said.

Analysts suggested that both Delta and US Airways have complementary networks with American's. Keay even noted that both carriers overlap less with American than AirTran did with Southwest. Still, if push came to shove, then the advantage could fall to Delta, Becker noted. "We believe US Airways would be hard pressed to compete with Delta in a bidding war," according to Becker.

Meanwhile, if the full-on merger scenario fails to be realized, Becker noted that "Delta would be interested in certain assets American controls," particularly AA's Latin American operations. "If there were a bidding war for these assets, we believe Delta could easily muscle out most competitors," Becker claimed.

And then there's TPG. The private equity firm in 2007 purchased Midwest Airlines, but "lost a substantial amount of money when it eventually sold the company to Republic Airways," Becker noted. "Given TPG's rocky history, we do not view it as a real player for AMR, unless it joined with another private equity group or with an airline."