U.S. News

Delta CEO Tells CNBC Proposed US Airways Merger Is Flawed


Delta Air Lines would not consider a takeover offer from US Airways as it's currently structured, Delta Chief Executive Officer Gerald Grinstein told CNBC Wednesday.

"The problem is not the price," Grinstein said of the proposed $10.5 billion deal. "The problem is whether it can be done and the cost of doing it."

Delta already has a plan in place to emerge from Chapter 11 bankruptcy on its own, Grinstein said, adding that this plan could allow the carrier to come out of bankruptcy by either late April or very early May.

In contrast, Grinstein said, the proposal put forward by US Airways and its chief executive, Doug Parker, calls for a longer period of bankruptcy for Delta.

"The truth of the matter is, [Parker's] plan called for us, that is Delta, to stay in Chapter 11 for an extended period of time awaiting Department of Justice approval. And in this vital business you can't put one of these companies on hold."

"Structurally, that deal can't make it," he said.

Grinstein also refuted speculation that Delta has entered merger talks with Northwest Airlines.

"We are not negotiating with Northwest Airlines," he said.

Grinstein said Delta has hired an investment banker to examine the numbers related to a merger with Northwest, but the companies have not exchanged the type of information that would typically precede a merger announcement.

Will Airline Mergers Fly?

"Whether we would consider that in the future is really a question that a new board of directors is going to have to address when you come out of bankruptcy."

Earlier Wednesday,US Airways Chief Executive Doug Parker told CNBC he believes a merger between his company and Delta Air Lines would be good for the airline industry.

"The best self-help measure since 2001 has been the merger of US Airways and America West," Parker said, in an interview on CNBC's "Squawk Box." "We believe if we just let the markets work, this will do what markets do: sort this out,” he said.

Congressional lawmakers are concerned the proposed merger between US Airways  and Delta  would trigger wider consolidation and hurt consumers by reducing service and increasing fares.

According to Parker, a merger between the two companies will not limit competition and drive up airline ticket prices.

"It is a very competitive, a brutally competitive, industry and it is going to stay that way," Parker said.

Parker's comments come as he waits to hear how Delta will respond to US Airways' latest bid, which expires on Feb. 1.

"We fully expect they will indeed endorse and support our proposal," he said. "If they choose not to, we feel very good about our standalone opportunities."

Debate on the Hill

The comments from Grinstein and Parker come on the same day the two chief executives jousted over the merits of a possible merger on Capitol Hill, where lawmakers questioned them about what the deal would mean for consumers.

Parker defended the proposed bid, telling the Senate Commerce Committee that lower costs and operational efficiencies would cut fares in "dozens of new markets" for passengers.

"We have put forth a fair and equitable proposal ... to make the combination of Delta and US Airways into a stronger, more competitive carrier than either carrier can become on its own," Parker said at the hearing on airline industry consolidation.

However, Grinstein said fares would not go down because the two airlines directly compete in many markets.

"The major loser in this proposed takeover is small communities," Grinstein said. "All indications -- and all past evidence -- point to price increases for consumers should this merger go forward."

Grinstein also said some 10,000 jobs would have to be cut for US Airways to achieve the gains it anticipates. The Delta chief opposes the takeover and wants Delta to exit bankruptcy this year as an independent carrier.

Parker said there would be no furloughs of front-line employees at either airline under the merger and airports currently served by the two carriers would be served by the combined carrier.

Democratic Sen. John Rockefeller of West Virginia raised the possibility of some form of federal regulation to protect service to small U.S. cities.

"The industry is far too changed and far too global for us to return to a completely regulated environment, however I am becoming increasingly convinced that some regulation may become an option to make sure small communities are not harmed by consolidation," Rockefeller said.

Rockefeller, who heads the Senate panel's subcommittee on aviation issues, did not elaborate.

Congress cannot block an airline merger, but opposition from a number of lawmakers or a mix of key members could complicate a deal, according to industry experts.

Since 2001, the airline industry has been hit with two dozen Chapter 11 bankruptcy filings, five liquidations, and $35 billion in cumulative losses, Parker said.

However, US Airways had a profit, excluding special items, for the first three quarters of 2006 and is expected to report a profit in the fourth quarter next week. US Airways merged with America West in 2005.