Airline Pilot Central Forums - Merger possibilities ?

Airlines could face new round of mergers
By Trebor Banstetter
McClatchy Newspapers
Tucson, Arizona | Published: 10.07.2006

FORT WORTH, Texas * A long-predicted wave of airline mergers might finally start in the months ahead, analysts say, as the major carriers position themselves to survive and grow.

American and Southwest airlines aren't likely to be swept up in any widespread consolidation, at least at first, analysts say.

But that doesn't mean they wouldn't be affected if rivals such as United Airlines, Delta Air Lines, or Northwest Airlines combine.

"Delta and Northwest are finalizing their bankruptcy reorganization plans," Susan Donofrio, airline analyst for Cathay Financial in New York, said in a recent report. "This is the inflection point historically when many airlines have concluded that a merger partner would be their optimal strategy."

Although airline insiders have been predicting major consolidation since 2001, there has been only one merger between two relatively small airlines, US Airways and America West. But a recent report that United has hired an investment banker to explore possible partnerships, and Chief Executive Glenn Tilton's statements that consolidation would be good for the industry, has many analysts talking up potential combinations.

"Now that United has basically come out and said they're shopping around, it's going to really start the race," said Alan Sbarra, airline consultant with the Roach and Sbarra firm in San Francisco. "Everyone has been waiting for this to happen."

At American, based in Fort Worth, union leaders are already preparing for a fight over the issue.

"I believe one of the greatest near-term risks that we must prepare for is the high probability of further consolidation within the airline industry," Ralph Hunter, president of the Allied Pilots Association, told union board members during a recent meeting.

Hunter said he had no specific knowledge of acquisition plans by American executives.

But, he stressed, "Mergers are never positive, and almost always harmful, to line employees."

On Sept. 25, Crain's Chicago Business reported that United, based in suburban Chicago, has hired Goldman Sachs & Co. to advise it on financial options that could include an acquisition or merger.

Tilton had previously told reporters that the airline was strong enough financially to weather a merger.

Analysts have also taken note of the successful partnership of US Airways and America West.

The combined airline, which kept the US Airways name and America West's headquarters in Tempe, posted a $305 million profit during the second quarter * better than American and second only to Dallas-based Southwest, the industry's most profitable carrier.

The Wall Street Journal has reported that Doug Parker, US Airways' chief executive, has approached Delta about yet another merger. Delta reportedly declined to pursue the offer.

Analyst Donofrio says likely pairings include Delta and Northwest, United and Continental, and discounters JetBlue Airways and Frontier Airlines.

"The ideal airline merger expands the route network, giving each airline access to new markets and reduces overlapping capacity," she said.

But few analysts expect American or Southwest to be buyers or sellers, at least in the initial wave. That's largely because both airlines are in better financial shape than their rivals, and have less to gain * and more to lose * by assimilating a struggling competitor.

"Southwest will be watching all of these developments closely, but I don't think you'll see them rush out and merge with someone," said George Hamlin, an airline consultant with Morton Beyer & Agnew of Arlington, Va.

And American, he said, "has successfully gone down a different path than the rest of the industry by avoiding bankruptcy."

The airline is unlikely to consider a merger with a weaker competitor, he said.
Still, both American and Southwest will be forced to take note if two or more of their competitors join forces.

A United-Continental merger, for example, would knock American out of its spot as the world's largest airline. It would also mean a competitor with a vast domestic network, dominance in Pacific markets and a strong presence on European routes.

Hamlin said a merger would also not likely result in substantial cuts in flights, which he said the industry still needs.

"You usually don't trim a lot of capacity by merging," he said. "There is a healthier way to trim the industry down to fighting weight."

Mike Boyd, a consultant with the Boyd Group of Evergreen, Colo., said the smartest course for American and Southwest would be to sit on the sidelines and watch merged rivals self-destruct.

"The total at the end of an airline merger is always less than the original sum of the parts," he wrote in a recent analysis commissioned by American's pilots union. "In most cases, it is much less."