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SkyWest deal: St. George-based firm buys Delta's ASA

St. George-based SkyWest Inc. said Monday it has agreed to buy Atlantic Southeast Airlines from its parent company, Delta Air Lines, for $425 million in cash.

The deal will give Atlanta-based Delta, which is battling to avoid bankruptcy, money to pay down debt, the company said.

SkyWest said the deal makes it the nation's largest regional airline and provides an opportunity to further grow its operations and expand its footprint.

The sale, pending regulatory approvals, is expected to close in September.

Jerry Atkin, SkyWest chairman, president and chief executive, told the Deseret Morning News the two companies had been working on this deal for "quite a while," trying to come up with an agreement that would be workable whether or not Delta files for bankruptcy.

"We've had an important strategic relationship with Delta for some time in Utah, and we saw this as an opportunity to expand and strengthen the relationship," Atkin said. "We saw we could do it in a way that we could add value to both ASA and SkyWest, by operating them separately — by taking some of the best practices at ASA and the best practices at SkyWest and get them into both carriers to improve quality to our customers, and in terms of cost efficiency as well. This was a good business opportunity."

Though SkyWest saw risk both ways — whether Delta declares bankruptcy or not — Atkin said the agreement the parties settled on is viable and will enable SkyWest to become one of the nation's most competitive regional carriers.

For Delta Connection, it was a natural melding of two important regional players, said J.T. Fisher, president of Delta Connection Inc.

"ASA has really been our gem of Atlanta," Fisher told the Deseret Morning News. "It is the anchor tenant at our Atlanta hub, which is one of the largest hubs in the world. SkyWest has been our West Coast presence, to such a great degree. By doing this, (SkyWest) demonstrated that it is a top-quality management team, a top-quality operator in the industry, bar none."

And for Delta?

"As we continue to implement Delta's transformation plan, this transaction not only enhances our ability to operate our business as efficiently and cost effectively as we can, it also improves Delta's liquidity position," said Gerald Grinstein, Delta's chief executive officer, in a statement. "As Delta takes steps to secure its future as a competitive airline, we will continue to take a hard look at all of our operations and assets to identify opportunities to strengthen our financial position in the face of continuing market pressures and factors outside of our control, including fuel prices."

Delta said it will use proceeds from the transaction for general corporate purposes and to pay down $100 million it borrowed under its credit facility with GE Commercial Finance and other lenders.

The agreement announced Monday has been approved by the boards of directors of both companies. Upon closure, ASA and SkyWest Airlines will operate as wholly owned subsidiaries of SkyWest Inc. As a result, SkyWest said the transaction is not expected to result in any significant changes in flight schedules or locations served.

SkyWest will continue from its base in St. George, Atkin said. ASA will continue from its hub in Atlanta.

Atkin will continue as chairman and CEO of SkyWest and SkyWest Airlines, and he will assume those roles at ASA. Bradford Rich, SkyWest executive vice president and chief financial officer, will serve as executive vice president, CFO and treasurer for SkyWest, SkyWest Airlines and ASA. Ron Reber, executive vice president and chief operating officer at SkyWest, will serve as president of SkyWest Airlines. Bryan LaBrecque was named interim president of ASA.

SkyWest has flown regional routes for Delta since 1987. It currently serves 59 Delta Connection locations with about 480 daily departures, most out of Delta's Salt Lake hub.

Delta, the world's second-largest airline, bought ASA in 1999. Currently, ASA's 151-plane fleet operates more than 900 daily flights for Delta.

In conjunction with the transaction, Delta said it will form new operating agreements under which ASA and SkyWest Airlines will continue to serve as Delta Connection regional carriers through 2020.

The terms call for $350 million in cash to be payable at closing, representing $330 million of the purchase price and $20 million relating to certain aircraft financing deposits.

An additional $125 million, representing $95 million of the purchase price and $30 million relating to certain aircraft financing deposits, is payable to Delta upon the earlier assumption by Delta of the ASA and SkyWest Airlines Delta Connection agreements should Delta file for bankruptcy protection, or four years after the transaction closes.

Conversely, SkyWest would be entitled to retain $125 million if Delta were to reject its Delta Connection agreement with either ASA or SkyWest Airlines in a Chapter 11 proceeding prior to the fourth anniversary of the closing of this transaction.

Also Monday, Delta filed its quarterly financial report to the Securities and Exchange Commission, saying that even with the sale of ASA and other financing deals it is trying to work out, it could still be forced into bankruptcy. It noted that prior loan agreements with GE and American Express require it to maintain certain cash and earnings levels that it might not be able to maintain unless it can renegotiate parts of the agreements.

In the SEC filing, Delta also updated investors on its efforts to negotiate an agreement with a new Visa/MasterCard credit card processor. Its existing processing contract expires on Aug. 29.

In the filing, Delta said it reached a letter of agreement Monday to extend the current contract to Oct. 31 at the latest and to initiate a cash holdback for Visa/MasterCard receivables for tickets sold beginning Monday. The holdback would be at least $750 million if Delta keeps its current processor to the last possible moment.

That's the amount of a cash reserve that Delta said it would be required to set up as part of an agreement it is still trying to work out with a new processor. The reserve would be deposited with the new processor immediately upon start of the new contract, for tickets purchased using Visa or MasterCard but not yet flown.

The extension with Delta's current processor is still subject to final approvals.

Delta, hit by high fuel costs, has lost nearly $10 billion since January 2001.

Delta shares fell 22 cents, or 13.7 percent, to close at $1.39 in extremely heavy trading on the New York Stock Exchange on Monday. The close, Delta's lowest in at least 43 years, dropped the company's market capitalization to roughly $200 million. Standard & Poor's said that after the close of trading Thursday it will replace Delta with Public Storage Inc. on the S&P 500 index. Public Storage is a real estate investment trust based in Glendale, Calif. Heavy equipment manufacturer Caterpillar Inc. will replace Delta on the S&P 100 index.

In after-hours trading, following the ASA announcement, Delta shares surged more than 27 percent.

SkyWest stock rose 17 cents to close at $22.04 per share prior to the announcement and gained another 2 cents in after-hours trading.

Contributing: The Associated Press