Delta Air Lines, Inc. · NYSE:DAL
Delta Air Lines — Merger or Acquisition (December 2006)
45 slides from Delta Air Lines's merger presentation, Dec 19, 2006
Slide 1: Summary of Delta's Analysis of US Airways' Merger Proposal
Delta Air Lines Summary of Delta’s Analysis of US Airways’ Merger Proposal December 19, 2006
Slide 2: Safe Harbor
This presentation contains various forward-looking statements which represent the company’s estimates or expectations regarding future events. All forward-looking statements involve a number of risks and uncertainties that could cause the actual results to differ materially from the projected result
Slide 3: Executive Summary
Executive Summary • Delta’s plan for emerging from bankruptcy provides creditors with value superior to the US Airways proposal-DOJ is not likely to approve the merger -proposed combination is highly anticompetitive and would harm consumers and communities-Overwhelming labor and cultural issues put
Slide 4: Standalone Plan Creates Significant Value
Standalone Plan Creates Significant Value • In the past 15 months, Delta has delivered on its commitments-Created financial stability-Transformed business mode l • Plan of reorganization positions Delta as a strong competitor on a standalone basis • Performance achieved through best-in-class CASM pe
Slide 5: We are Delivering on our Commitments
We are Delivering on our Commitments …having significant impact Three pillars of Delta’s Transformation plan ... Closing RASM Gap • Right-size domestic capacity • Greater international mix • Improved operations and customer service 1 Repair Balance Sheet • Improved liquidity • Unsecured debt, fleet
Slide 6: We Have Achieved Great Progress Against Our Transformation Plan
Transformation progress…• Closing the revenue gap • Best-in-class cost structure • Top-tier operational performance • Award winning customer service • Highly engaged workforce…driving substantial financial improvement 9 months ended 9/30/06 YOY change in operating income(1)($M) 584 508 461 393 175 2
Slide 7: Delta's Plan Provides Creditors with Value Superior to US Airways Proposal
Delta’s Plan for Emerging from Bankruptcy Provides Creditors with Value Superior to the US Airways Proposal Labor Risk • Labor and cultural issues put merger at risk-Significant labor group integration challenges-Labor contract incompatibilities Regulatory Risk • DOJ not likely to approve the merger
Slide 8: DOJ Not Likely to Approve Proposed Merger Because it is Highly Anticompetitive
DOJ Not Likely to Approve Proposed Merger Because it is Highly Anticompetitive • US Airways and Delta hubs and networks highly overlapping • US Airways/Delta merger would substantially reduce competition and would create-Nearly 2,000 incremental city pairs with over 90% US Airways/Delta passenger sh
Slide 9: US Airways and Delta Hubs Completely Overlapping
US Airways and Delta Hubs Completely Overlapping Phoenix (PHX)New York (JFK) Philadelphia (PHL) Pittsburgh (PIT) Cincinnati (CVG) Charlotte (CLT) 256 miles 94 miles 227 miles Salt Lake City (SLC) 508 miles 368 miles Las Vegas(LAS) Atlanta(ATL) Delta hub US Airways hub
Slide 10: US Airways and Delta Have Overlapping Networks
US Airways’ domestic network US Airways/Delta’s combined domestic network Delta’s domestic network US Airways and Delta Have Overlapping Networks Source:US Airways merger proposal Regulatory Risk
Slide 11: Merger Would Create Nearly 2,000 Incremental City Pairs with More than 90% Share
Domestic International Total 1,402 8.8M $1.4B Number of city pairs Passengers per year affected Associated annual revenue 569 0.8M $0.2B 1,971 9.6M $1.6B Merger Would Create Nearly 2,000 Incremental City Pairs with More than 90% US Airways/Delta Passenger Share Note: All share calculations are based
Slide 12: Incremental Domestic City Pairs With More than 90% Passenger Share
Merger Would Create 1,402 Incremental Domestic City Pairs With More than 90% US Airways/Delta Passenger Share ALLENTOWN ALBUQUERQUE ALBANY NANTUCKET AUGUSTA ALBANY To ANCHORAGE ALTOONA WATERTOWN ATLANTA AUGUSTA AUSTIN ASHEVILLE SCRANTON KALAMAZOO HARTFORD BRADFORD BAKERSFIELD BINGHAMTON BANGORBAR HA
Slide 13: Incremental International City Pairs With More than 90% Passenger Share
Merger Would Create 569 Incremental International City Pairs With More than 90% US Airways/Delta Passenger Share ALLENTOWN NANTUCKET AUGUSTA ALBANY AMSTERDAM ANTIGUA WATERTOWN ATLANTA ARUBA ASHEVILLE SCRANTON BARCELONA HAMILTON HARTFORD BAKERSFIELD BARBADOS/BRIDGETOWN BINGHAMTON BANGOR BIRMINGHAM BI
Slide 14: Presumption of Market Power Under DOJ Merger Guidelines for More Than 9,500 City Pairs
Merger Would Create Presumption of Market Power Under DOJ Merger Guidelines for More Than 9,500 City Pairs Regulatory Risk Mergers That Create or Enhance Market Power Are Challenged By DOJ 8861,3131,4712,6251,9651,32101,5003,000100-200201-500501-1,5001,501-2,5002,501-4,000>4,000Number of highly conc
Slide 15: Overlapping Nonstop Domestic Routes, 12 Becoming Monopoly Routes
US Airways and Delta Have 31 Overlapping Nonstop Domestic Routes Regulatory Risk12 of Which Would Become Monopoly Routes Due to the Merger Overlapping & monopoly routes US Airways/Delta merger would directly reduce competition on these routes impacting 11.6M annual passengers and accounting for $1.6
Slide 16: Overlapping Networks Would Significantly Reduce Competition on Several Fronts
Overlapping Networks Would Significantly Reduce Competition on Several Fronts • In terms of passenger share, US Airways/Delta would be the largest carrier in several areas-Largest carrier along the entire East Coast and the Mountain West-Largest carrier in 23 states—more than any other carrier in th
Slide 17: Reduced Competition at Boston, LaGuardia, and Reagan National Airports
Merger Would Substantially Reduce Competition at Boston, New York-LaGuardia, and Washington-Reagan National Airports Combined Entity Would Have Significant Share Advantage Over Nearest Competitor BOS DCA LGA Note: Share position analysis based on passenger traffic; American Airlines represents US Ai
Slide 18: Far More Anticompetitive Than the Attempted US Airways/United Merger
Proposed Merger Is Far More Anticompetitive Than the Attempted US Airways/ United Airlines Merger Rejected by the DOJ After a 14-Month Investigation (1) Highly concentrated markets have a HHI of ≥1,800 (2)HHI = Herfindahl-Hirschman IndexSource:DB1B data YE 2Q 2006, YE 2Q 2001 and YE 2Q 2006; OAG 4Q
Slide 19: Low Cost Carriers Would Not Solve Competitive Problems
Low Cost Carriers Would Not Solve Competitive Problems • US Airways/Delta would be the largest carrier in 127 small communities-Reduction of service likely for these 127 small communities-Reduction in competition likely to result in increased fares or loss of service based on previous actions follow
Slide 20: US Airways/America West Merger Led to Reduction of Service in Small Communities
US Airways/America West Merger Led to Reduction of Service in Small Communities US Airways/Delta Merger Would Result in Even Greater Reductions(1) Based on OAG May 2005 and May 2006 data Note: “Small communities” as categorized by the FAA (small and non-hub airports) 5 26 66 97 0 20 40 60 80 100 120
Slide 21: Since Its Merger with America West, US Airways Has Raised Fares More than Competitors
Since Its Merger with America West, US Airways Has Raised Fares More than Competitors (1) Based on average fare increases for American Airlines, Continental Airlines, Delta Air Lines, Northwest Airlines and United Airlines Source: DB1B data -2Q 2005 and 2Q 2006 US Airways average fares increased nea
Slide 22: Low Cost Carriers Avoid Serving Small Communities
Low Cost Carriers Avoid Serving Small Communities(1) Measured by average daily departures Note: Includes all markets served by Southwest, AirTran, Frontier, and JetBlue; airport segmentation as per FAA classification Source:OAG 1Q 2000 and November 2006Despite significant growth in number of markets
Slide 23: Proposed Merger Would Likely Be Challenged by Regulators
Proposed Merger Would Likely Be Challenged by Regulators Conclusion • Proposed merger is anticompetitive because of-Overlapping networks-Significant reduction of competition on thousands of city pairs-Domination of more than 70 cities and 3 key East Coast airports • Proposed merger would be more ant
Slide 24: US Airways Has Significantly Understated the Labor and Cultural Risk
US Airways Has Significantly Understated the Labor and Cultural Risk of the Proposed Merger(1) Company analysis Labor Risk • Labor integration still not complete between America West and US Airways-Only recently started arbitration process for integrating America West/US Airways pilot seniority list
Slide 25: Merger Synergies at the Expense of Employees
Merger “Synergies” at the Expense of Employees • Impact on seniority and job security of the remaining employees would have serious consequences-Hostile workforce, potential job actions-Poor customer service-Inefficient operations Merger would result in the loss of ~10,000 jobs and ~180 aircraft Mer
Slide 26: Employees Opposed to a US Airways/Delta Merger
“This failure [to integrate US Airways and America West] calls into question their ability to successfully merge three airlines, continue to serve their passengers, deliver dividends to their investors, and maintain a motivated employee base .”John McIlvenna, America West Master Executive Council Ch
Slide 27: Proposed Merger Synergies Premised On Flawed Economic Assumptions
Proposed Merger Synergies Premised On US Airways’ Flawed Economic Assumptions • Merger benefits premised on reducing capacity of the combined airlines by 10% -As a result, total revenues will be less than the sum of the two standalone carriers-Assumes an unachievable level of fixed cost savings with
Slide 28: Merger Benefits Premised on Reducing Capacity of the Combined Airlines
Merger Benefits Premised on Reducing Capacity of the Combined Airlines Assumption Risk Combination Creates No New Revenue Sources...would drive a net revenue reduction Substantial capacity cuts... •~10% combined capacity reduction • Reduction of ~180 aircraft • Divestiture of shuttle • Reduction of
Slide 29: Total Network Benefits are Overstated and Not Sustainable
$935M Net capacity-related revenue reduction Capacity-related cost reduction Presence Total Network Benefits are Overstated and Not Sustainable US Airways’ claimed network synergies Assumption Risk “Capacity” synergies $777M “S-curve” synergies $158M • Vast majority of total costs assumed eliminated
Slide 30: Substantial Network Synergies Already Realized Through Transformation Plan
Substantial Network Synergies Have Already Been Realized Through Delta’s Transformation Plan Assumption Risk US Airways’ Model Discounts Recent Performance Mainline RASM performance (1) (3Q 06 vs. 3Q 05, % change) (1) SEC filings, Length-of-haul adjusted 17.1 10.0 9.4 9.2 9.2 9.2 8.4 6.2 3.7 • Delta
Slide 31: Increased Costs More Likely than US Airways' Projected Savings of $710M
30Increased Costs Are More Likely than US Airways’ Projected Savings of $710MDelta estimate ($M) 110 75 25-60 65 (400) -(600)* (90) -(325) US Airways’ estimate ($M)200150100350(90)710Cost category Information Systems Overhead Facilities Other Expenses Labor Total Cost Synergies Assumption Risk* Excl
Slide 32: US Airways Likely Understating One-Time Costs Exceeding $1 Billion
US Airways Likely Understating One-Time Costs That Delta Estimates Exceed $1 Billion Assumption Risk 240 1125 60 60 290 200 300 130 65 200 1,185 0 250 500 750 1,000 1,2501,500 IT transition Termination of credit card agreement Operations Labor Contracts/Other Contingency Total $M(1) • Delta assumes
Slide 33: Additional Negative Synergies Not Reflected in US Airways' Projections
Additional Negative Synergies Are Not Reflected in US Airways’ Projections • Merger combines two different fleets -Boeing and Airbus fleet-No common aircraft/engine combination between the two fleets • Increased fleet complexity would add six steps to the pilot training ladder Increased fleet comple
Slide 34: Merger Would Create a Mismatched Fleet
Merger Would Create a Mismatched Fleet Merger would increase fleet complexity......driving increased crew training events and costs Short-haul domestic Long-haul domestic Transoceanic 737-200737-300737-300GMD-88MD-90737-800757-200767-200767-300767-300ER767-400MD-11767-300ER777-200MD-88MD-90737-80075
Slide 35: Required Slot and Gate Divestitures Larger than US Airways Suggests
Required Slot and Gate Divestitures at Key East Coast Airports Larger than US Airways Suggests Note: One slot refers to one arrival or one departure US -US Airways; DL -Delta Air Lines; AA -American Airlines; UA -United Airlines; NW -Northwest Airlines; CO -Continental Airlines; FL -AirTran Airways;
Slide 36: Going from Best to Worst an Additional Revenue Risk
Source: J.D. Power and Associates 2006Going from Best to Worst an Additional Revenue Risk Reservation Overall J.D. Power Ranking Cost and Fees Score In flight Service Flight Crew Aircraft Condition/ Cleanliness Boarding/ Deplaning/ Baggage Low Ranking High Assumption Risk Delta’s Top Rated Customer
Slide 37: Deal Structure Would Create the Highest Debt Load in the Industry
Deal Structure Would Create the Highest Debt Load in the Industry Financial Risk Reverses Restructuring of Balance Sheet 8.1 11.1 12.4 13.5 18.1 18.6 23.2 ProposedUS Airways /Delta Merger Delta 2005AmericanUnitedContinentalDelta Plan US Airways Adjusted Total Debt By Carrier(1)Adjusted total debt($B
Slide 38: US Airways Merger Would Unwind Delta's Progress and Result in Excessive Integration Risk
US Airways Merger Would Unwind Delta’s Progress and Result in Excessive Integration Risk • Merger would reverse improvements gained through Transformation Plan-Reverses international diversification efforts-Substantially increases fleet complexity and increases training pipeline • Merger would invol
Slide 39: SEC Filings Disagree with Statements That Integration Was On Track
Although Doug Parker Stated That the America West/ US Airways Integration Was On Track, SEC Filings DisagreeIntegration Risk • “We have encountered complications and difficulties in integrating some of the Company’s automated systems and have not completed those integration efforts, including effort
Slide 40: Extended Timeline for US Airways/Delta Merger Would Be Uncertain and Costly
Extended Timeline for US Airways/Delta Merger Would Be Uncertain and Costly 1Q07 3Q07 2Q07 4Q07 1Q08 2Q08 Additional activities required for Delta to emerge from bankruptcy under US Airways proposal 1. Due diligence and negotiation 2. Merger agreement 3. HSR/EU/DOT (1) filing 4. Bankruptcy court app
Slide 41: US Airways Would Be a Poor Strategic Fit for Delta
US Airways Would Be a Poor Strategic Fit for Delta Provides no “new” value • Highly overlapping networks create “synergies” by shrinking -therefore, combination does not offer new value to customers Unwinds progress made against Transformation • Reverses international revenue diversification strateg
Slide 42: Non-GAAP to GAAP Reconciliation
Non-GAAP to GAAP Reconciliation Appendix
Slide 43: Length-of-Haul Adjusted Consolidated Passenger RASM
Length-of-Haul Adjusted Consolidated Passenger RASM Month Ended October 31, 2005 Consolidated Passenger revenue (in millions) (1) 1,190 $ Available Seat Miles (ASMs) (in millions) (1) 12,941 Passenger RASM 9.20 ¢ LOH adjustment to industry average (0.58) LOH adjusted Passenger RASM (2) 8.62 ¢ Indust
Slide 44: Mainline Length-of-Haul Adjusted Passenger RASM
Mainline Length-of-Haul Adjusted Passenger RASM 2006 2005 Mainline passenger revenue (in millions) (1) 3,207 $ 3,022 $ Available Seat Miles (ASMs) (in millions) (1) 33,582 35,040 Mainline passenger RASM 9.55 ¢ 8.62 ¢ LOH adjustment to industry average- (0.47) LOH adjusted passenger RASM 9.55 ¢ 8.15
Slide 45: Net Debt
Net Debt(in millions)Long-term debt and capital leases14,082 $ Aircraft rent for the twelve months ended June 30, 2005647 $ Multiplied by 77 Implied aircraft debt 4,529 Total debt (1) 18,611 $ Less: Cash and cash equivalents (1,341) Short-term investments (330) Total cash and cash equivalents and sh
Delta Air Lines — Merger or Acquisition (December 2006) on 6ix