If cash-strapped Delta Air Lines [DAL] were to sell its two regional units, Comair and Atlantic Southeast Airlines (ASA), it would get about $800 million for an investment it paid $2.9 billion in 2000.

According to guidance prepared by two Wall Street analysts, each carrier would be worth $350 million to $400 million. The estimate of the Delta sale price was fixed by using industry matrixes assessing the post-spin off performance of Pinnacle Airlines [PNCL] and ExpressJet [XJT]. After these carriers were spun off, they continue to fly only for the former parent - a situation similar to the post-sale world for either Comair or ASA.

Last week at an investor forum, SkyWest Airlines [SKYW] CFO Bradford Rich revealed that his carrier - a Delta code-share partner - has had discussions with Delta about purchasing either or both of the regional units. Rich would not talk about specifics of a possible deal. However, Rich did note that without access to the books, SkyWest could probably achieve a 5 percent cost reduction if it were managing either of the Delta units.

"They have expressed their desire pretty specifically to us. We think we are in the best position of anyone to take advantage of this opportunity. When you look at their capital requirements over the next year, they need to generate capital. This is one way to do it. We are aware of their interest and we are looking at it," Rich said.

Delta has refused to comment on any of the talks. SkyWest is now backpedaling on Rich's remarks, contending they have been misinterpreted.

SkyWest has a fleet of 217 planes; Comair has 164 and ASA has 140.

SkyWest has the strongest balance sheet in the regional industry with $539.7 million in cash on hand. SkyWest has been looking at acquisition targets for a long while as the cash continues to pile up.

Delta, on the other hand, has $1.8 billion in cash on hand after burning $1.1 billion last year trying to stay afloat. Delta lost $5.2 billion last year, which includes writing off $1.9 billion in goodwill associated with the 2000 purchases of ASA and Comair. When it filed its 10-K report last week with the U.S. Securities and Exchange Commission (SEC), Delta said its expects "substantial losses" this year and it will not be able to fund its operations from its cash flow. It will need to consider asset sales to avoid bankruptcy in 2005.

The sale price of either Comair or ASA would be held down because of Delta's problems. "This may seem shockingly low, but it is the most a responsible bid could offer up front," said Robert Ashcroft, an analyst with UBS Securities. A sale could be structured to provide Delta additional payments over time provided the carrier stayed solvent, he suggested.

"The net up-front cash proceeds would be mostly chewed up within the space of two years," Ashcroft said. "In other words, we think this is an expensive way to obtain a modest amount of cash. We believe it's pointless unless both sides are strongly convinced that oil prices will drop, since if they don't, the incremental cash won't much offset the effect of higher oil prices."

Last year, Delta spent $2.9 billion on fuel costs. The carrier told the SEC that about $820 million was attributed to the higher than projected cost of oil. Under Delta's contracts, it has been paying the fuel bill for Comair, ASA, SkyWest as well as its other code-share partner, Republic Airways [RJET].

"An acquisition of this magnitude would require SkyWest to use up most of its cash and take on debt," said Ray Neidl, an analyst at Calyon Securities.

Compatibility has always been one of the keys factors as SkyWest reviews any possible deal.

"All I can say," Rich told those attending the Raymond James Institutional Investors Conference in Orlando, Fla., "we are not interested in growth for growth's sake. Anything we do in this area, we would be very careful and make sure it does not compromise our fundamental business model and operation."

A major incompatibility could be on the labor front. SkyWest has remained union-free throughout its 33-year history. Both Comair and ASA have unionized work crews. Comair's pilots just agreed to a two-year wage freeze, but will remain better paid than SkyWest's. ASA's pilots are still talking about a new pay scale two years after the last contract became amendable. "Pilot integration could be contentious," Ashcroft said. The majors would veto a three-way deal since the pilots would get too much power, he said.

"I think it is doable," Neidl told Regional Aviation News. "We are expecting consolidation in the regional sector and this would be the beginning."

While Delta wants to sell both regional units, Neidl believes ASA will be the first one off the block. "Comair still needs some work on the cost side."

>>Contacts: Bradford Rich, SkyWest, (435) 634-3000; Robert Ashcroft, UBS, (212) 713-4015; Ray Neidl, Calyon, (212) 261-4057.<<