Delta May Have Overpaid For Pieces of Pan Am
Dec. 06, 1991
NEW YORK (AP) _ Delta Air Lines was accused of pulling the plug on ailing Pan American World Airways after plucking off its best assets.
But some analysts believe Delta, too, was a loser in the deal.
The big winners are the nation's two largest airlines, American Airlines and United Airlines, who might see their third-place rival saddled with heavy costs that will make it harder for Delta to compete as strongly in other markets.
''They ended up having to pay more money and they also got tangled up with a tar baby,'' said Daniel Kaspar, an airline analyst at Harbridge House in Boston. ''They probably overpaid. In essence, that limits their flexibility to compete in other markets.''
Delta agreed this summer to pay $460 million for Pan Am's northeastern shuttle, which serves New York, Washington and Boston, and for most of Pan Am's trans-Atlantic service, including hubs in New York and Frankfurt, Germany.
But as Delta was bidding on pieces of Pan Am, rival offers started coming in from the competition, including American, United and Trans World Airlines.
Eventually, Delta wiped out all the other bidders by agreeing to buy what it wanted and also invest money to help Pan Am reorganize as a smaller carrier to be held 45 percent by Delta and 55 percent by Pan Am creditors.
That plan came unraveled this week, when Delta said it would pump no more money into Pan Am because bookings were plunging.
Some analysts have speculated that the other airlines may have done their last-minute bidding this summer just to force Delta to cough up more cash. At the time, analysts say, Delta was desperate to expand internationally, after watching American and United get lucrative routes into London's Heathrow Airport from TWA and Pan Am, respectively.
United has declined to discusss its bidding, but American's executive vice president for finance and planning, Donald J. Carty, said Thursday that his carrier was out to get assets and not to put pressure on Delta.
''We were trying to do a deal,'' Carty said. ''The fact that Delta chose to pay more for the deal was their choice.''
But asked about how American viewed the result, Carty said, ''You're always glad to see your competitor pay more.''
In addition to the $460 million Delta paid for the Pan Am assets, it later put up $115 million in financing to keep Pan Am in the air for about the last six weeks. Delta will try to get some of that money back, but acknowledges it may be gone.
Pan Am will try to raise money for creditors on Monday, when the rest of its international routes are put on the auction block in U.S. Bankruptcy Court in lower Manhattan. The auction had been scheduled for Sunday, but it was delayed.
Before the proposed reorganization of Pan Am was scuttled, Delta had also put up money hiring employees and promoting its deal with Pan Am, which will not be recovered. Delta says those expenditures show that it was not bluffing about trying to reorganize Pan Am.
If Delta had wanted to get only the assets from Pan Am, it would never have put up any more money after closing on the sales, the airline says.
Pan Am creditors, who are planning to sue Delta, see things differently.
They compared Delta's last-minute withdrawal to Northwest Airlines' sudden decision last month to pull out of an arrangement to buy Midway Airlines, which was also in Chapter 11. In both cases, the bankrupt carrier was dead within hours and the suddenly cold-footed suitor was accused of bad-faith bargaining.
Airline analysts said the cases were not as similar as they appear.
''The facts and numbers speak for themselves,'' said Kevin Murphy, who follows airlines for Morgan Stanley & Co. Inc. ''Pan Am's Latin American division had very poor bookings. No one can fault Delta for backing away from an investment gone sour.
''It looks like what you see is what you get. Delta acted in good faith. There's some question about whether Northwest operated in good faith.''
Northwest, in lawsuits that have already been filed over the Midway deal, insists it acted in good faith but was misled by bogus financial numbers provided by Midway.