US Air(LCC) announced this morning that it plans to buy Delta(DALRQ). My friend at Flight Wisdom has a fine post summarizing the details, but the stock movements are a bit mystifying to me.
US Air is up 12.5% now, down a bit from its high of the day, but still a substantial jump. Clearly investors applaud the idea of an US Air-Delta combination. But there are many hurdles to such a deal. First, neither Delta nor the creditors have agreed to anything, Second, there are rumors that other buyers have expressed interest. Third, bankruptcy is a complicated process and there are no assurances that anything will happen. US Air has soared on vapor, and is likely to pull back as investors have a chance to reflect.
Delta’s movement is even more strange. Delta stock is also up over 10%, driven up by buyers excited at the prospect of an acquisition. Yet, there is almost no chance that Delta stock will have any value post bankruptcy. The creditors own the company. Game over for the stockholders. Period.
It’s strange to see this new era of speculation in airlines. Warren Buffett said in his 1992 letter to shareholders:
Investors have regularly poured money into the domestic airline business to finance profitless (or worse) growth. For these investors, it would have been far better if Orville had failed to get off the ground at Kitty Hawk: The more the industry has grown, the worse the disaster for owners.
Buffett later fomusly quipped that had he been there, he would have shot Orville down as a public service. Of course it’s possible to make money in airlines. But extreme caution would be prudent.
Disclosure: I hold no position in LCC or DARLQ