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Hedge Fund Pushes Delta For Merger

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By JEFF BAILEY The New York Times

Published: November 15, 2007

NEW YORK - Pardus Capital Management, a New York hedge fund, has sent a letter to the management of Delta Air Lines asking it to seek a merger with UAL, the parent of United Airlines, in a deal that would create the world's largest airline.

Such a merger could prompt sweeping consolidation in the airline industry.

Gordon M. Bethune, former chief executive of Continental Airlines, is working with Pardus, the hedge fund said in the letter.

Consultants have identified $585 million in savings the two big airlines, currently No. 2 and No. 3 in the country behind American Airlines, could realize by combining operations.

Pardus said in its letter, sent Tuesday night, that it owns 7 million Delta shares, or about a 2.6 percent stake.

The proposal comes one year after a bid for Delta by US Airways that ultimately failed.

That offer raised hopes among investors that airlines, long reluctant to merge because of expected labor problems and other factors, would finally consolidate and make the industry more efficient.

The US Airways bid also, however, attracted opposition from Delta workers, who feared widespread job losses, and from some who expected that the deal would reduce air service in some cities both airlines served.

If the two were to merge, it would not have a significant effect on airline schedules serving Tampa International Airport, said Louis Miller, the airport's director.

Atlanta-based Delta, the No. 2 carrier at Tampa and United's low-fare carrier Ted, which ranks seventh in Tampa, serve different cities from the airport.

Delta and its regional carrier Delta Connection fly between Tampa and Atlanta, Boston, Cincinnati, Salt Lake City, Los Angeles, New York's LaGuardia and John F. Kennedy International, Pensacola, Tallahassee, Columbus, Ohio; Hartford, Conn.; and Raleigh-Durham, N.C.

Elk Grove, Ill.-based United's Ted flies between Tampa and Denver, Chicago's O'Hare and Washington's Dulles.

"A merger would be OK for Tampa," Miller said. "I don't see losing any nonstop destinations. Logistically it would work out because both fly from Airside E."

The recent rise in oil prices, pushing jet fuel to record levels, threatens to end the airline industry's nascent recovery and send carriers back into the red. That has led to increased speculation in recent weeks that mergers would again be seriously discussed.

Most airlines remain heavily in debt and highly vulnerable to fuel price increases or any economic downturn.

Karim Samii, president of Pardus, and Shane Larson, a principal, said in the letter to Delta's top executives and its chairman that "we believe it is imperative that you seek to enter into a merged transaction with another carrier given the rapid rise in fuel prices and the increased risk to the business as a stand-alone entity."

The hedge fund letter goes on to evaluate potential merger candidates for Delta, including Northwest Airlines and Continental Airlines, but concludes that United is the best fit.

Since then, the hedge fund consulted with Bethune, the former Continental chief, and with consultants at Simat, Helliesen & Eichner. It concluded that United and Delta together would offer the broadest network of routes to business travelers, and substantial savings.

Pardus recommended seeking a merger immediately and that Delta acquire United in a stock merger with no premium. Delta shares closed Wednesday at $19.52, up 77 cents, or 4.1 percent. UAL, the parent of United, was trading at $44.17, up 67 cents, or 1.5 percent.

Tribune reporter Ted Jackovics contributed to this report.

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