US Air & Delta: Eye-to-eye, and so far no one has blinked

One of the first rules of Wall Street is, "never count on something that may not occur," which translates roughly as, "Don't count your chickens before they hatch." US Airways' (NYSE:LCC) $8.5B attempted hostile takeover of Delta Air Lines (NASDAQ:DALRQ) was shifted to Wall Street's "serious questions remain" category after Delta's negotiators said they were unconvinced that US Airways' offer represented the best option for cash-strapped Delta.
After a day of talks between the two companies, Delta executives indicated late Thursday that they intend to emerge from bankruptcy status as a competitive, independent, and financially sound airline by mid-2007. Delta said Thursday that its October 2006 operating loss dropped to -$88M, compared to -$301M in October 2005. A nine-member creditor committee has the final review of any bid for Delta or plan for it to exit Chapter 11 bankruptcy. (Delta is allowed to present evidence in its behalf before the committee.)

US Airways' shares dropped $0.10 to $56.66 on the news in mid-day trading Friday. Delta was down $0.06 to $1.27. Delta filed for bankruptcy in the fall 2005, after sluggish air travel demand, rising fuel costs, and most importantly, high labor benefits or "legacy" costs made it impossible compete with lower-cost carriers. Moreover, airline sector overcapacity hurt all carriers, with airline sector analysts underscoring that the sector needed to substantially reduce the number of flights offered before any meaningful recovery could occur. US Airways' pitch to Delta had been viewed as part of that necessary downsizing in the sector, and that fact, combined with an incremental but continual rise in leisure and business travel over the last 4 years, pointed to a markedly healthier airline sector.

But now Delta, its corporate morale perhaps boosted by the sector's recovery, is signaling to Wall Street that it thinks it has the operational model to survive on its own. Other analysts view Delta's response as a posture -- a stance to generate a better offer from US Airways, or perhaps from another carrier.

Source: Blogging Stocks