Wednesday, November 14, 2007


A jump in airline stocks around 1 o'clock caused me to search the news. The Wall Street Journal put out a story at 1:11 that a hedge fund with ownership in Delta and United is pushing for a merger of the two. The company estimates the annual operating savings to be over $585 million. The company went on to suggest that a combination of CAL and NWA would also reap large rewards.

Because CAL is on a solid growth path, the management of CAL is happy to stay independent. However, if any other major combination goes through, CAL would probably act quickly to protect its turf.

Besides, I suspect that the $585 million savings is a bit of an exaggeration. All the major carriers have wrung out at least that much fat over the past several years. I expect cost to change direction and go up over the next several years. The good news is that revenues will go up faster than costs.

Record orders for new aircraft were once again set at the Dubai Air Show. These orders are for delivery in 2014. It is going to be a long time before capacity catches up with international demand. High demand and restricted supply will lead to high ticket prices and high profits. Mergers are not a necessary part of this story.

Please note that the hedge funds are pushing for a merger of equals trade, one where no cash is required. The surviving company will simply issue x number of new shares in trade for the outstanding shares of the company being bought. This type of combination is nice in regard to the tax angles. The risk are: 1) an incorrect relative pricing and, 2) a clash of cultures between the two carriers.

Again, the bump in prices was a result of speculation. It is nice to know that the investment community is now very interested in airlines. A few years ago, the consensus was that no one has or will ever make money buying airlines. We have reached the 90 degree turn but by the time this cycle is over the thought will have turned 180 degrees. Everyone will wonder why they had not bought airlines before.