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Old 02-18-2008, 07:17 PM   #1  
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Thought this was a good read. Nothing really new is said in the article.


On a cold morning in January 2007, Gerald Grinstein, chief executive of Delta Air Lines (NYSE:DAL) , sat before a roomful of US senators in Washington to denounce US Airways' hostile bid for his company. It was, he said, an "anti-competitive" transaction that would lead to higher ticket prices and fewer routes - and even "threaten the future stability of our nation's transportation industry".
A year later, Mr Grinstein's successor, Richard Anderson, asked his board of directors for their support to pursue a merger with two other rivals, Northwest Airlines (NASDAQ:NWAC) or United Airlines. Either accord - and any other airline deal that follows - would promise to give the combined company impressive global reach, financial heft and, yes, opportunities to raise ticket prices and eliminate less profitable routes
What changed in these past 13 months was the emergence of a nemesis far more threatening to Delta and its peers than an overzealous rival from the Arizona desert: $100 oil. On the day Mr Grinstein testified before the Senate Commerce, Science and Transportation committee, the commodity traded at just $55 a barrel. Sweeping consolidation, conceded the chief executive of US Airways as he withdrew his bid, would probably have to wait until a steep downturn sent a few carriers wobbling back to bankruptcy court.
Oil, which touched $100 last month, ended last week at about $95, while the Amex Airline index has plunged 36 per cent in the past year amid concerns that the carriers would lose money. "The world is not the same," says Gordon Bethune, the former chief executive of Continental Airlines, who now advises a top investor in both Delta and United. "At $100 oil, the status quo doesn't work."
For US airlines, which consume more than 19bn gallons of jet fuel a year, the rise threatens to end the revival of an industry beset earlier this decade by terrorist attacks and recession. If the US economic slowdown begins to sap demand for air travel this year, carriers will struggle to pass higher fuel expenses on to their customers through fare increases. In addition, the biggest US airlines will soon face greater competition on international flights from their counterparts overseas, as Open Skies accords free up routes.
The confluence of those challenges has emboldened airline executives to go public with their support of industry-wide consolidation, softened labour leaders' opposition toward mergers and recaptured the imagination of investors optimistic that this really could be the year the big US carriers pursue deals that - on paper at least - always looked so promising.
Will it happen in 2008? The industry has come close before; US Airways' bid for Delta was just one of numerous attempts to trigger a wave of deals. But with at least five of the six legacy US carriers in negotiations, many executives, employees, bankers and investors are convinced they will see at least one agreement this year. "Consolidation may indeed be at our door," wrote Lee Moak, chairman of the Delta pilots' union, in a letter to members.
Delta opened talks with both United and Northwest last month. By late January, and with Delta's negotiations with Northwest gaining momentum, United executives began to weigh reigniting discussions with Continental, another legacy carrier, people familiar with the matter said. Continental in turn has held preliminary talks with American Airlines.
According to these people, Delta and Northwest may reach an agreement as early as this week and have scheduled board meetings on Wednesday; United and Continental, meanwhile, held discussions a year ago in response to US Airways' hostile bid for Delta and the two carriers have kept in touch. Those talks gained steam this month, the people said, though Delta remains the likely catalyst.
True to Mr Grinstein's Senate testimony, the Atlanta-based Delta did emerge from bankruptcy protection as a stronger and more profitable airline. The carrier enjoys a higher market capitalisation than most of its peers and its hub in New York's John F. Kennedy International Airport would be a prize for any carrier with global ambitions.
What is more, most of Delta's peers may be either too big (American) or too small (US Airways and Northwest) to act first. American also faces an increasingly bitter stalemate with its pilots' union over a new contract; in a recent statement, a labour leader said the group remained "adamantly opposed" to any merger.
Then there is the "golden share" agreement that Continental signed a decade ago after its merger with Northwest fell through. The accord gives Northwest the right to block most deals Continental pursues. It also means Continental is likely to wait to see how Delta's talks with Northwest progress before it strikes its own deal; if Northwest reaches a definitive agreement first, Continental can buy out the golden share for $100.
The logic behind these potential deals is not all that different from others attempted by past generations of airline executives ever since President Jimmy Carter deregulated the industry in 1978. A merger or two would squeeze excess capacity from the market and help surviving carriers deploy their planes to more profitable routes. Large corporate clients might consolidate their travel accounts with one to two global carriers, giving survivors a bigger slice of the most lucrative passengers. "Fewer players would be helpful to the industry's financial returns," Morgan Stanley analysts wrote last month in a note to clients. "It's hard to argue otherwise."
Those motives have not been lost on some of airline mergers' most ardent critics, including Jim Oberstar, the Minnesota Democrat who chairs the US House Transportation Committee. "Hell, no," Mr Oberstar said last month when asked of his views on airline consolidation. "They're not in the public interest."
Excessive overlap in routes created by the merger of two carriers that service the same cities may also draw the ire of anti-trust regulators. Adding to the carriers' sense of urgency is the looming US presidential election. With no candidate emerging as a clear favourite to take office next year, airline executives and their bankers are betting their deals might get a friendlier reception in the final months of President George W. Bush's administration.
Few airline deals have been completed during the Bush presidency (by comparison, more than a dozen deals went through under Ronald Reagan). The two legacy carriers sold - US Airways and TWA - were both in bankruptcy court and on the brink of liquidation.
United's May 2000 agreement to buy US Airways, then still in good standing with creditors, collapsed a year later amid an extensive antitrust review. Advocates of consolidation argue that their case is stronger today. Back then, few low-cost independent carriers had become sustainable rivals to the legacy airlines. Now more carriers, including JetBlue Airways and AirTran Airways, have joined Southwest Airlines as proven competitors.
A merger between two heavyweights might lighten the competition on some routes and give smaller rivals the chance to deepen their presence at key airports. "Whoever merges, there will be a reduction in capacity, and there's going to be fewer seats flying around going on sale," says Stan Gadek, AirTran's chief financial officer.
"You'll take off some pricing pressure. And if you have Northwest get together with Delta, we'll be the beneficiary. There will probably be some requirements to divest assets, imposed by the Justice Department."
AirTran, Atlanta's second biggest carrier behind Delta, could add gates at the southeastern US hub, Mr Gadek says. Or as Gary Kelly, chief executive of Southwest, noted at a recent investor conference: "If they shrink, we'll benefit."
Any combination of the six major US carriers would also impact business relationships with their counterparts throughout the world. Airlines have built valuable alliances with foreign peers; although the degree of co-operation between the members of each group varies greatly, many agreements can help carriers serve passengers whose final destinations are smaller cities far from a country's international gateway. For example, a passenger in Paris could board a plane to New York or Chicago on a European carrier, then pick up a connecting flight from the airline's US ally for the final leg of their journey to, say, Fort Wayne, Indiana.
A deal between two US airlines in different global alliances could sever one carrier's ties with their international allies. This is one reason why Air France-KLM has said it would help to assure the merger of its two closest US allies, Delta and Northwest - including making an investment in the combined company. A Delta merger with United, which is part of another alliance, could weaken Air France-KLM's US partnerships.
Lufthansa recently bought stock in JetBlue, a low-cost airline with a valuable hub in New York. A spate of deals in the US is not expected to spur many foreign mergers; the US market remains fragmented relative to those in many developed countries, where one or two airlines often dominate.
Labour leaders representing pilots and other employees at carriers such as Delta and Northwest have said they are open to consolidation, so long as they have a seat at the table and a share of the benefits once the two companies have merged. "United pilots will not rubber-stamp any merger unless and until our interests are addressed," Steve Wallach, chairman of the United pilots' union, said last month.
Employees who made concessions during recent bankruptcies - Delta, Northwest and United have all filed for protection from creditors this decade - may push for higher wages. Higher labour costs would put yet more pressure for the combined company to deliver on promises of higher revenue and profits, especially if fuel expenses do not ebb.
"Combinations that eliminate domestic overlap should, therefore, improve shareholder returns the most," Morgan Stanley's William Greene and John Godyn wrote. "Unfortunately, the challenge with mergers that have substantial overlap is that the reduction in domestic capacity could make it difficult for labour unions and regulators to support the deal."
Any airline that pursues a deal will have to convince a number of constituencies, as well as its customers, that mergers will not cost thousands of jobs, weaken local economies and scale back service.
"With the airline industry, typically it takes a long time for benefits to outweigh the costs," says Nicole Crain, a professor of economics and business at Lafayette College in Easton, Pennsylvania. "Consolidation is not a panacea."
For example, America West's 2005 purchase of US Airways has been plagued by reservation-system problems, poor punctuality and a still-simmering conflict between the two companies' pilots unions. But it did earn more money than most US airlines last year, and there is no question the company will embark on this latest downturn in much better shape than either carrier would have been on its own.
"It's not going to be easy," Mr Parker said in an interview last month. "That doesn't mean you don't do it. Make sure your management team and employees are ready for 24 months of rough road ahead."
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Old 02-19-2008, 12:52 PM   #2  
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"It's not going to be easy," Mr Parker said in an interview last month. "That doesn't mean you don't do it. Make sure your management team and employees are ready for 24 months of rough road ahead."
Yeah..gonna be tuff on Mr Parker I bet...hope he can feed his kids at the end of the day.
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Old 02-19-2008, 04:15 PM   #3  
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"America West's 2005 purchase of US Airways" .........? Exactly how much money did Doogie and Scotch come up with to "Purchase" USAirways? ZERO..ZILCH..NADA...so if they had no money and they didn't spend a dime then how did they buy USAirways?...They didn't! USAirways then CEO Bruce Lakefield went to Wall Street and arranged for ALL as in 100% of the total financing to MERGE the two carriers..I say again MERGE.. not buy/purchase. Then handed the whole mess over to Doogie and his imcompetent management team because in his own words "all I want to do is go home to RSW and PLAY GOLF!" Sorry for the rant but I'm sick of the press and the Cacti spewing and misconstruing the TRUTH! This was a merger period!
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