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American may stay above the fray
Talk of airline mergers is flying, but American may sit this one out
09:38 PM CST on Saturday, December 9, 2006
By TERRY MAXON / The Dallas Morning News
When US Airways Inc. and Delta Air Lines Inc. bought West Coast airlines in the 1980s, American Airlines Inc. was right there with them, acquiring regional carrier AirCal Inc.
When United Airlines Inc. and US Airways announced they were going to merge in 2000, American quickly responded with its own purchase of Trans World Airlines Inc. in early 2001.
When the new US Airways last month made an offer to merge with Delta, American ... well, American kept its head down.
There's still a long way to go before the current fever of merger talk and deal-making speculation runs its course. American and parent AMR Corp. may feel compelled to respond to the creation of a new, massive competitor.
But this may be one industry consolidation that Fort Worth-based American, now the world's largest airline, will not feel the need to jump into the middle of.
For the record, American is playing it cool, making few comments about its own possible interest in finding a merger partner. In the past, that reflected a desire to hide its cards. This time around, nonaction may be its preferred response.
Roger Frizzell, vice president of corporate communications at American, said the carrier's focus right now is fixing its own problems and trying to reach "sustained profitability." American posted profits in the second and third quarters, its first consecutive quarterly profits since 2000.
"We're going to be mindful of what's happening in the industry," Mr. Frizzell said. "We're going to watch carefully. But right now, we've got enough to do to take care of the improvements that have been under way at our own airline."
At an investment conference Thursday in New York, American chief financial officer Tom Horton said other industries, such as telecommunications, have gotten healthier through consolidation. But he said he didn't know whether the airline industry would consolidate.
"This is a troubled industry," Mr. Horton said. "It's still a relatively troubled industry despite some recent enthusiasm around the industry. It's an industry that's lost tens of billions of dollars in the last five years. It's destroyed a lot of capital. That is not good for shareholders, customers or employees."
Although American has joined in with its own mergers in the past, some industry experts say the best action for American may be to simply stay on the sidelines, because the costs and pain of mergers rarely outweigh the advantages.
Bad mix
The result of many airline mergers has been incompatible fleets of airplanes, conflicting cultures, unhappy labor and a mishmash of an organization.
"There are no laws written right now that compel American Airlines to find a merger partner," said Darryl Jenkins, industry consultant and former director of the Aviation Institute at George Washington University.
Consultant Michael Boyd, president of The Boyd Group in Evergreen, Colo., said American should avoid any calls to find its own merger partner, but it should be ready to pounce on any opportunities from other mergers.
For example, US Airways executives had said they expect to reduce a combined company's capacity 10 percent from the separate airlines' current capacity, and to spin off one of the two East Coast shuttles – one now flown by US Airways and one by Delta.
Mr. Boyd is among industry analysts who believe a US Airways-Delta combination would be a bad idea. The new company would be "very confused for several years," he said.
"Let's forget this myth that if they merge that American will have an economic imperative to merge as well. This [a Delta-US Airways merger] will make the combined entities weaker, not stronger," Mr. Boyd said.
"Therefore, the first thing American should do is encourage them to merge. It will give them a very confused, disoriented competitor. From that perspective it's good," he said. "From the downside, it will also give these clowns on Wall Street more incentive to try and do merger deals."
Helping the competition
Jamie Baker, airline analyst for JP Morgan Chase & Co., has predicted that a Delta-US Airways merger would be good for other major U.S. carriers because it will take so much capacity out of the system. Fewer seats can mean higher prices for everyone, and fewer seats on Delta-US Airways means a greater likelihood that travelers will buy seats on other airlines' jets.
"We believe that AMR at a minimum will bid for the divested Shuttle assets" if a Delta-US Airways merger succeeds, Mr. Baker wrote in a report shortly after US Airways revealed its offer in mid-November.
The airline most often linked with American as a possible partner is Northwest Airlines Inc., which has a large route system between the United States and Asia that American has long coveted. American's route system to Asia pales by comparison.
"AMR is flush with cash and certainly has the credibility to pursue a transaction. Northwest specifically would fit very nicely into AMR's network," Mr. Baker wrote.
That may seem like a good idea, Mr. Boyd said, until one looks at all the obstacles such a combination would face.
"You can make an argument where American rushes off, buys Northwest, paints the airplanes and does nothing else, and you have an entity with synergy. It makes sense in theory," Mr. Boyd said. "But you get to the 'U' word, unions, and then watch the fur fly."
Mr. Jenkins offers much the same advice as Mr. Boyd.
"If I were American, I would sit on the sidelines and sees what falls out," Mr. Jenkins said. "They have a very bad history of mergers. They also have a very bad history of labor relations. They need to get their own costs under control and make sure their own future is secure before they take on somebody else's problem."
Lessons from AirCal
The AirCal acquisition, announced in November 1986, was designed to give American a major presence up and down the West Coast. But low-cost carrier Southwest Airlines Co.'s rapid expansion in California – starting service to eight cities there between 1982 and 1994 – prevented American from charging the fares it needed to make money and eventually forced American to reduce its service there.
In fact, when Southwest in 1993 announced it was entering the San Jose market, American later the same day announced it would be ending service to a number of cities from San Jose and reducing its daily flight schedule by 38 percent. It later closed down its San Jose hub.
The purchase of Reno Air Inc. in 1999 was designed to restore a West Coast system for American. But that acquisition, as well as the 2001 purchase of TWA, was premised on a booming economy with an appetite for full-priced business travel.
American closed its purchase of TWA in April 2001, just as average fares started to drop and five months before the Sept. 11 terrorist hijackings devastated the industry and its profits. Since then, American has shed many of the TWA airplanes, employees and facilities that it picked up in the merger.
Buying parts
Mr. Frizzell, the American executive, said American has done very well when it has bought portions of other airlines, such as Eastern Air Lines Inc.'s Latin America system in 1990 and TWA's London Heathrow Airport routes in 1991.
"Some of the others [deals] are yet to be determined as we go into our future of American Airlines," Mr. Frizzell said. "There were some important assets we acquired with TWA and Reno, and that's part of the strength of our network today."
E-mail [email protected]
American's Past Deals
American Airlines has bought a few airlines in its time. The most recent:
•Air California, or Air Cal, was purchased in 1986 to be the linchpin for American's West Coast service. American opened a connecting hub in San Jose, Calif.
Result: American took over the Air Cal system just as Southwest Airlines was ramping up its California service. It soon found its $200 roundtrip fares between Southern California and Northern California were undercut by roundtrip fares under $100 from Southwest. By the early 1990s, Southwest carried more than one-fourth of all travelers inside California. On the same day in 1993 that Southwest announced it was starting service to San Jose, American announced it cut service there by 38 percent. It later closed the hub and subleased gates to Reno Air.
•Reno Air, purchased in 1999, was acquired to boost the West Coast presence that American had let dwindle after closing the San Jose hub. With the Silicon Valley/dot-com boom, American wanted a greater share of the higher-dollar business travel market.
Result: The dot-com boom deflated in 2000 and 2001, taking a lot of high-value travelers with it.
•Trans World Airlines, bought in 2001, offered American another major hub in St. Louis to supplement and relieve pressure at its major Dallas/Fort Worth International and Chicago O'Hare hubs.
Result: The economic downturn, combined with the aftermath of the September 2001 terrorist attacks, dampened demand, reduced average fares and wreaked havoc with industry profits – particularly for high-cost carriers like American. Many of the ex-TWA employees have been furloughed alongside thousands of American employees. Excluding airplanes flown by regional subsidiary American Eagle, American's fleet now has about 700 jets, compared with more than 900 flown by American and TWA combined at the end of 2000.
Talk of airline mergers is flying, but American may sit this one out
09:38 PM CST on Saturday, December 9, 2006
By TERRY MAXON / The Dallas Morning News
When US Airways Inc. and Delta Air Lines Inc. bought West Coast airlines in the 1980s, American Airlines Inc. was right there with them, acquiring regional carrier AirCal Inc.
When United Airlines Inc. and US Airways announced they were going to merge in 2000, American quickly responded with its own purchase of Trans World Airlines Inc. in early 2001.
When the new US Airways last month made an offer to merge with Delta, American ... well, American kept its head down.
There's still a long way to go before the current fever of merger talk and deal-making speculation runs its course. American and parent AMR Corp. may feel compelled to respond to the creation of a new, massive competitor.
But this may be one industry consolidation that Fort Worth-based American, now the world's largest airline, will not feel the need to jump into the middle of.
For the record, American is playing it cool, making few comments about its own possible interest in finding a merger partner. In the past, that reflected a desire to hide its cards. This time around, nonaction may be its preferred response.
Roger Frizzell, vice president of corporate communications at American, said the carrier's focus right now is fixing its own problems and trying to reach "sustained profitability." American posted profits in the second and third quarters, its first consecutive quarterly profits since 2000.
"We're going to be mindful of what's happening in the industry," Mr. Frizzell said. "We're going to watch carefully. But right now, we've got enough to do to take care of the improvements that have been under way at our own airline."
At an investment conference Thursday in New York, American chief financial officer Tom Horton said other industries, such as telecommunications, have gotten healthier through consolidation. But he said he didn't know whether the airline industry would consolidate.
"This is a troubled industry," Mr. Horton said. "It's still a relatively troubled industry despite some recent enthusiasm around the industry. It's an industry that's lost tens of billions of dollars in the last five years. It's destroyed a lot of capital. That is not good for shareholders, customers or employees."
Although American has joined in with its own mergers in the past, some industry experts say the best action for American may be to simply stay on the sidelines, because the costs and pain of mergers rarely outweigh the advantages.
Bad mix
The result of many airline mergers has been incompatible fleets of airplanes, conflicting cultures, unhappy labor and a mishmash of an organization.
"There are no laws written right now that compel American Airlines to find a merger partner," said Darryl Jenkins, industry consultant and former director of the Aviation Institute at George Washington University.
Consultant Michael Boyd, president of The Boyd Group in Evergreen, Colo., said American should avoid any calls to find its own merger partner, but it should be ready to pounce on any opportunities from other mergers.
For example, US Airways executives had said they expect to reduce a combined company's capacity 10 percent from the separate airlines' current capacity, and to spin off one of the two East Coast shuttles – one now flown by US Airways and one by Delta.
Mr. Boyd is among industry analysts who believe a US Airways-Delta combination would be a bad idea. The new company would be "very confused for several years," he said.
"Let's forget this myth that if they merge that American will have an economic imperative to merge as well. This [a Delta-US Airways merger] will make the combined entities weaker, not stronger," Mr. Boyd said.
"Therefore, the first thing American should do is encourage them to merge. It will give them a very confused, disoriented competitor. From that perspective it's good," he said. "From the downside, it will also give these clowns on Wall Street more incentive to try and do merger deals."
Helping the competition
Jamie Baker, airline analyst for JP Morgan Chase & Co., has predicted that a Delta-US Airways merger would be good for other major U.S. carriers because it will take so much capacity out of the system. Fewer seats can mean higher prices for everyone, and fewer seats on Delta-US Airways means a greater likelihood that travelers will buy seats on other airlines' jets.
"We believe that AMR at a minimum will bid for the divested Shuttle assets" if a Delta-US Airways merger succeeds, Mr. Baker wrote in a report shortly after US Airways revealed its offer in mid-November.
The airline most often linked with American as a possible partner is Northwest Airlines Inc., which has a large route system between the United States and Asia that American has long coveted. American's route system to Asia pales by comparison.
"AMR is flush with cash and certainly has the credibility to pursue a transaction. Northwest specifically would fit very nicely into AMR's network," Mr. Baker wrote.
That may seem like a good idea, Mr. Boyd said, until one looks at all the obstacles such a combination would face.
"You can make an argument where American rushes off, buys Northwest, paints the airplanes and does nothing else, and you have an entity with synergy. It makes sense in theory," Mr. Boyd said. "But you get to the 'U' word, unions, and then watch the fur fly."
Mr. Jenkins offers much the same advice as Mr. Boyd.
"If I were American, I would sit on the sidelines and sees what falls out," Mr. Jenkins said. "They have a very bad history of mergers. They also have a very bad history of labor relations. They need to get their own costs under control and make sure their own future is secure before they take on somebody else's problem."
Lessons from AirCal
The AirCal acquisition, announced in November 1986, was designed to give American a major presence up and down the West Coast. But low-cost carrier Southwest Airlines Co.'s rapid expansion in California – starting service to eight cities there between 1982 and 1994 – prevented American from charging the fares it needed to make money and eventually forced American to reduce its service there.
In fact, when Southwest in 1993 announced it was entering the San Jose market, American later the same day announced it would be ending service to a number of cities from San Jose and reducing its daily flight schedule by 38 percent. It later closed down its San Jose hub.
The purchase of Reno Air Inc. in 1999 was designed to restore a West Coast system for American. But that acquisition, as well as the 2001 purchase of TWA, was premised on a booming economy with an appetite for full-priced business travel.
American closed its purchase of TWA in April 2001, just as average fares started to drop and five months before the Sept. 11 terrorist hijackings devastated the industry and its profits. Since then, American has shed many of the TWA airplanes, employees and facilities that it picked up in the merger.
Buying parts
Mr. Frizzell, the American executive, said American has done very well when it has bought portions of other airlines, such as Eastern Air Lines Inc.'s Latin America system in 1990 and TWA's London Heathrow Airport routes in 1991.
"Some of the others [deals] are yet to be determined as we go into our future of American Airlines," Mr. Frizzell said. "There were some important assets we acquired with TWA and Reno, and that's part of the strength of our network today."
E-mail [email protected]
American's Past Deals
American Airlines has bought a few airlines in its time. The most recent:
•Air California, or Air Cal, was purchased in 1986 to be the linchpin for American's West Coast service. American opened a connecting hub in San Jose, Calif.
Result: American took over the Air Cal system just as Southwest Airlines was ramping up its California service. It soon found its $200 roundtrip fares between Southern California and Northern California were undercut by roundtrip fares under $100 from Southwest. By the early 1990s, Southwest carried more than one-fourth of all travelers inside California. On the same day in 1993 that Southwest announced it was starting service to San Jose, American announced it cut service there by 38 percent. It later closed the hub and subleased gates to Reno Air.
•Reno Air, purchased in 1999, was acquired to boost the West Coast presence that American had let dwindle after closing the San Jose hub. With the Silicon Valley/dot-com boom, American wanted a greater share of the higher-dollar business travel market.
Result: The dot-com boom deflated in 2000 and 2001, taking a lot of high-value travelers with it.
•Trans World Airlines, bought in 2001, offered American another major hub in St. Louis to supplement and relieve pressure at its major Dallas/Fort Worth International and Chicago O'Hare hubs.
Result: The economic downturn, combined with the aftermath of the September 2001 terrorist attacks, dampened demand, reduced average fares and wreaked havoc with industry profits – particularly for high-cost carriers like American. Many of the ex-TWA employees have been furloughed alongside thousands of American employees. Excluding airplanes flown by regional subsidiary American Eagle, American's fleet now has about 700 jets, compared with more than 900 flown by American and TWA combined at the end of 2000.
