RockBottom

US Airways CEO hints more consolidation may be ahead

By DAN FITZPATRICK
Pittsburgh Post-Gazette
June 30, 2006

Could US Airways boss Doug Parker be thinking about a merger - again?

Fresh from creating the nation's fifth-largest carrier last fall with the union of the old US Airways and America West Airlines, the boyish-looking chief executive officer admits that consolidation is still on his mind. And he hints that the most attractive combinations for US Airways could involve the country's third- or fourth-largest carriers, Delta Air Lines and Northwest Airlines.

Both of those carriers are still in bankruptcy, and as US Airways learned in 2003 and 2005, both will be able to drastically reduce costs by giving unneeded airplanes back to lenders or renegotiating labor contracts - making either company more attractive to potential partners.

It "presents an opportunity that may not exist for a long, long time," said Parker, though he was careful to point out that no official talks are under way.

But as Delta and Northwest get closer to emerging from bankruptcy, they may look for a merger partner on the way out, as US Airways did in 2005, and if that happens "we will be there to talk to them," Parker said.

Talk of more mergers in the U.S. airline industry is heating up again as the major carriers recover from five years of extreme pain and more than $30 billion in losses. One good sign is that the newly-merged US Airways made money in this year's first quarter despite the soaring costs of oil and jet fuel, and several other carriers reported operating profits, too.

All mainline carriers are seeing the benefits of cutting unprofitable routes wherever possible, taking unneeded seats out of the sky and raising prices - even as demand from the traveling public remains strong.

But the times haven't been so good for the smaller discounters that gained so much ground in recent years.

JetBlue Airways, which again topped other airlines in customer-satisfaction scores from J.D. Power & Associates, has turned in two consecutive quarterly losses and scrapped long-haul routes in favor of shorter routes while delaying orders for 12 aircraft and announcing plans to sell five more. And Independence Air went out of business.

Still, even with the many cuts among major carriers and Independence Air's exit, some observers argue the industry needs more cutting and consolidation, saying it will make the remaining carriers healthier. "Basically, we still have too many seats, too many hubs and too many legacy carriers," said Ray Neidl, an airline analyst with Calyon Securities in New York.

Another factor fueling the merger speculation is the feeling that antitrust regulators in Washington, D.C., are more willing to consider new business combinations than they were just a few years ago.

So, what carriers are out there looking? United Airlines, which recently emerged from bankruptcy, Delta, Continental Airlines and US Airways are all interested in more consolidation, according to longtime Virginia airline consultant Darryl Jenkins, who advises carriers around the country.

American, the nation's No. 1 carrier, is not interested, he said, nor are Northwest or Alaska Airlines.

Because its route network is so different than most, Alaska is "one of the most attractive merger candidates," Jenkins said. But, "I think they are the least likely to want to merge with anyone else."

Among the others that may sit out any deal-making are Southwest Airlines and JetBlue, according to Jenkins.

Asked what carriers might not participate in the next round of consolidation, Parker mentioned American and Continental, saying their costs are not low enough.

However, both Delta and Northwest would fit well with US Airways' existing network, some said. Both would give US Airways a stronger international presence, with Delta strong across the Atlantic and to Latin America and Northwest owning prized routes to and from the Far East.

But Colorado airline consultant Mike Boyd claims Delta is not interested in a merger. " I know they are not," he said. "The chairman of Delta told me that they are not."

United, Boyd said, is the only carrier actively looking for a partner, now that it is out of bankruptcy. Senior management "is trying to shop the company," he said. But "that doesn't mean we need consolidation and it doesn't mean it will work."

Nor would a merger of Delta and US Airways make sense, he said, calling it a "major mess" bringing together fleet types and unions that are too different.

Still, Jenkins is convinced that Parker wants to build the nation's largest airline - through mergers - and that the union of US Airway and America West was just the first step.

Asked if his long-term goal is to create the nation's largest airline, Parker deflected the question by saying, "We want to be the nation's best air carrier and that doesn't necessarily mean the biggest."

(Dan Fitzpatrick can be reached at dfitzpatrick(at)post-gazette.com)