US airlines consolidation may not be quick fix
By Justin Baer in New York (Financial Times)
Sunday Jan 20 2008 16:50
Consolidation in the US airlines industry may eventually achieve everything its proponents say, from slashing expenses to helping domestic carriers compete with their global rivals, but it could take several years of operational glitches and tough negotiations with organised labour before any merger can be called a success.
Airlines executives, who have touted the merits of takeovers as their best hope for enduring record fuel costs and a slowing US economy, look to the most recent deal - America West's 2005 merger with US Airways.
But the combination, which stitched together what industry insiders considered a second-tier airline with a legacy carrier under bankruptcy protection and near the brink of liquidation, has been plagued by reservation-system problems, poor on-time arrival performance and a still-simmering conflict between the two companies' pilots unions.
US Airways and America West provide a classic example of what can go wrong, said Bill Swelbar, a research engineer at Massachusetts Institute of Technology's International Center for Air Transportation.
Delta Air Lines (NYSE: DAL) is now in separate merger talks with both Northwest Airlines (NASDAQ: NWAC) and United Airlines, and Continental Airlines (NYSE: CAL) executives said last week they would move aggressively should the industry consolidate around them. United in turn is weighing whether to reignite negotiations with Continental if its discussions with Delta fail to end in an agreement, people familiar with the carrier's plans said.
Even if the carriers strike a deal or two and win the approval from antitrust regulators and labour leaders to proceed, they will face the daunting task of combining two complex companies. However, Doug Parker, US Airway's current chief executive and the architect of the merger, remains unapologetic. "I'd do it again in a second," he said in a recent interview.
"Anyone who goes through a merger is going to have those same difficulties. There are a myriad of systems, and putting those together is very, very hard. It's the right thing to do."
Despite trailing its five fellow network carriers in market capitalisation, US Airways is poised to report a 2007 profit of about $418m, according to analysts. That is more than United is expected to earn and within $10m of Delta's estimated total, analysts predict.
The combined company has rebounded from a brutal stretch in the first six months of 2007, when it finished last among the top domestic carriers in on-time performance, according to a US Department study. By November, US Airways' ranking had climbed to ninth.
But, unable to agree on how to rank the combined workforce by seniority, which helps determine pilots' pay and choice of aircraft they fly, America West and the old US Airways haven't merged their unions. Though the combined company has continued to operate with two separate pilots' groups, their dispute undermines employee morale and makes it difficult for management to negotiate new contracts.
Mr Parker said he remains optimistic the America West and US Airways pilots will merge their members into one union. Besides, say the advocates of consolidation, what has made this dispute unusually trying has been the differences in average tenures of the US Airways pilots and the smaller America West.
Delta, United, Continental and Northwest pilots may not confront the same challenges.
Nevertheless, airlines CEOs may need to wait a few years before their companies are integrated completely, Mr Parker said.
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