United States Airways jets sit in the foreground while a Delta aircraft (upper left) takes off at Reagan National Airport outside Washington in this August 13, 2004 file photo. U.S. Airways Group Inc proposed a US$8 billion takeover of bankrupt Delta Airlines Inc yesterday. - Reuters

NEW YORK, United States (Reuters):

United States Airways Group Inc proposed a US$8 billion takeover of bankrupt Delta Air Lines Inc yesterday after an attempt at merger talks failed earlier this fall.

The bid, which U.S. Airways said would create an airline with the most flights across the Atlantic Ocean of any U.S. carrier and rank number two in flights to and from the Caribbean region, could open the door to more airline mergers as well as prompt other offers for Delta.

"This is not value that either of our companies can create independently," U.S. Airways chief executive officer (CEO) Doug Parker said on a conference call. "If we wait for Delta to emerge from bankruptcy, it will be too late."

Delta, the number three U.S. airline with over 47,000 workers, said yesterday it intends to emerge from bankruptcy as a stand-alone carrier.

"We received a letter from U.S. Airways this morning and will of course review it," Delta CEO Gerald Grinstein said in a statement. "Delta's plan has always been to emerge from bankruptcy in the first half of 2007 as a strong, stand-alone carrier."

U.S. Airways shares shot up 13.4 per cent, while Delta jumped 10 per cent in mid-day trade, rose five per cent.

U.S. Airways, the number seven U.S. airline with over 35,000 employees, believes the combination will generate at least US$1.65 billion in annual savings and expects a transaction to close by the first half of 2007.

'SORT OF HOSTILE'

"This appears to be sort of like a hostile takeover," CreditSights analyst Roger King said. "U.S. Airways is appealing directly to the creditors."

Under terms of the offer, Delta creditors would receive US$4 billion in cash and 78.5 million shares in U.S. Air stock, with an aggregate value of about US$4 billion based on Tuesday's closing stock price.

The bid substantially undervalues Delta, but could still tempt its creditors, said Frank Werner, an expert in airline finance and management.

U.S. Air has obtained US$7.2 billion in committed financing for the deal from Citigroup.

With two major U.S. carriers, Delta and Northwest Airlines Corp, operating in bankruptcy, industry watchers have been expecting consolidation and said the offer could lead other airlines to jump into the fray.

"This is a very opportunistic offer ... My sense is that clearly U.S. Airways is underpaying compared with what Delta might get in an open market," Werner said. "It opens up opportunities for a United (Airlines), for example, to come in and top the offer."

United and Delta together could have a more expansive reach both domestically and internationally, while a combination with U.S. Air would have more overlap, analysts said.

"Merger synergies are much better with United," CreditSights' King said. "This is the right time but the wrong airline."

Parker and UAL's CEO Glenn Tilton, had previously approached Delta, which has been operating under Chapter 11 protection since September 2005, about a merger, but Grinstein was not interested.

Parker had broached merger talks with Delta in a September 29 letter to Grinstein. According to Parker, Grinstein had "declined to meet or even enter into discussions."

"Maybe US Airways did a preemptive strike here," Calyon Securities Ray Neidl said. "The big concern is government regulators, if they give the green light."

The offer is likely to be closely watched by the U.S. Justice Department. "In my view this is just sort of the first step in a long dance," Kenneth Jacobs, CEO of Lazard North America, said at the Reuters Investment Banking Summit in New York. "The limits on the consolidation are going to be the regulatory constraints."

But analysts said Parker, who in 2005 orchestrated the takeover of then-bankrupt US Air by America West, had the right credentials.

Parker said he expected Delta management to ultimately see a merger as a better alternative to remaining alone.

"We need to start working with Delta to do due diligence," Parker told Reuters in an interview earlier Wednesday, adding that he had not yet heard from the company. "What we believe will happen is that creditors see the value of this proposal."

Delta bonds soared after the offer. Its 8.3 per cent bonds due in 2029 rose 13 cents on the dollar to 53.375 cents, according to MarketAxess.

In midday trade, US Airways rose $6.81 at US$57.74 on the New York Stock Exchange, and Delta was up 15 cents to $1.62 in over-the-counter trading.

Other airline shares also jumped — including Airtran Holdings Inc., up 18 percent; JetBlue Airways Corp. adding 8 per cent; UAL Corp advancing 7 per cent; and Southwest Airlines Company gaining 5 per cent.