SuperFLUF
lazy Mc Donald's pilot
- Joined
- Jul 9, 2003
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http://www.atwonline.com/channels/indepth/index.html
ATWOnline In-Depth
Easier said than done: Splashing cold water on the US's heated merger talk
February 18, 2008----Consolidation speculation is rampant in the world's biggest air transport market, but the widespread talk about possible US airline tie-ups generally breezes past or altogether ignores the multitude of obstacles faced by carriers attempting to form complicated combinations.
As ATW detailed in June 2007, US Airways' failed $10.2 billion hostile takeover bid for Delta Air Lines highlighted the myriad issues associated with attempted airline mergers--and that proposal didn't even reach the point where the US Dept. of Justice was forced to render a judgment. The current speculation centers on DL's reported talks with Northwest Airlines and, if such a tie-up were to be formed, a subsequent follow-up deal between Continental Airlines and United Airlines.
"That scenario seems less likely than popular perception," US Chairman and CEO Doug Parker recently argued. "Delta and Northwest getting together makes lots of sense [based on their route networks], but taking Continental out of the [SkyTeam] Alliance doesn't make sense. . .There's more behind all these transactions than just looking at two route maps. It's a lot more complicated than that."
DL, NWA and CO are all SkyTeam members and a merged DL-NWA obviously would be a SkyTeam carrier. But presumably UA is not leaving the Star Alliance, of which it is a founding member, and therefore CO's Newark and Houston hubs would become part of Star under the DL-NWA/CO-UA consolidation scenario. "Why would you go through all the trouble [of a merger] to lose [Newark and Houston] from the alliance?" asks Parker, wondering aloud whether non-US SkyTeam members would be ready to embrace a merger that could cost them CO's network.
NWA currently holds a "golden share" in CO that allows it to block the latter from entering into a merger. But once NWA enters into a merger agreement, CO has the right to buy back the golden share for a mere $100 and would be free to pursue its own merger deal (even if NWA's merger ultimately was rejected). "If the golden share would become redeemable, that would change our circumstances," CO Chairman and CEO Larry Kellner said.
While CO is content with "our position relative to the industry today," Kellner said it "won't hesitate to act" if the industry landscape changes and rivals combine to form a mega-airline. "We do pay attention to [our] relative size," he said. "Size is important in a network business." In terms of traffic, CO ranked fourth among US airlines in 2007 at 84.31 billion RPMs, trailing American Airlines (138.45 billion RPMs), DL (122.07 billion RPMs including regional operations) and UA (117.4 billion RPMs). However, it had the most balanced network in terms of international and domestic services and the best service reputation among network carriers.
US airline executives continue to argue that the industry is too fragmented and that six legacy carriers will be unable to grow capacity and keep costs down absent consolidation. "I cannot see any logic in [that argument] whatsoever," Avitas Senior VP Adam Pilarski, a longtime industry observer, tells ATWOnline. "If you can't grow capacity with six, I don't see how going from six to three changes it in any way. Six becoming three doesn't create more Americans that want to fly."
And the problems associated with mergers would create operational difficulties that could push passengers to LCCs and new entrants, Pilarski contends: "I don't see any synergies that get translated into cost savings or revenue enhancement. Yes, a few consultants, a few banks, a few executives will make money off of mergers, but the negatives for the industry are obvious. You are trying to merge two different cultures, which never works well. You are talking about airlines that may belong to two different alliances, that have very different fleets, different operating systems. . .How do you integrate the pilot lists? There are a lot of headaches that could cost you a lot in productivity. I'm fairly confident that [mergers] will be problematic."
While AA Executive VP-Finance and Planning and CFO Tom Horton believes that consolidation could "lead to greater efficiency," he acknowledges that "there are a lot of challenges to consolidation in our industry."
Of course, any merger agreement will face scrutiny from DOJ and members of Congress, several of whom already have vowed to fight consolidation on the grounds that it will result in lost jobs and diminished service. While US airline officials appear to believe that DOJ is more likely to approve a merger than in 2001 when it blocked UA's proposed acquisition of then-USAir, the fact that a new President (and a new attorney general) will take office next January may be driving the latest round of talks.
"Since there is going to be a change in administration, there will be some delay" in clearing a merger unless an agreement is submitted by the end of this month, Parker says, predicting that any later submission likely would get caught up in the changeover. But he adds that such approval would still come: "It's more of a timing issue. Irrespective of the administration, the arguments for consolidation are so compelling that I'm not overly concerned that the next administration is going to be against mergers."
Other factors affecting potential mergers are the ongoing decline of US airline stock prices and the credit crunch. Airline shareholders are unlikely to be enticed by the prospect of "cashing out" underperforming stocks in a merger, though Parker insists that they would be interested in moving their shares "to a stronger airline."
And the state of credit markets means a carrier will have more difficulty raising money to finance an "acquisition" of another carrier. "It doesn't change the likelihood of mergers, just the structure," Parker says. "The structure will move from debt financing to equity financing" and merger agreements will be "equity-equity transactions."--Aaron Karp
ATWOnline In-Depth
Easier said than done: Splashing cold water on the US's heated merger talk
February 18, 2008----Consolidation speculation is rampant in the world's biggest air transport market, but the widespread talk about possible US airline tie-ups generally breezes past or altogether ignores the multitude of obstacles faced by carriers attempting to form complicated combinations.
As ATW detailed in June 2007, US Airways' failed $10.2 billion hostile takeover bid for Delta Air Lines highlighted the myriad issues associated with attempted airline mergers--and that proposal didn't even reach the point where the US Dept. of Justice was forced to render a judgment. The current speculation centers on DL's reported talks with Northwest Airlines and, if such a tie-up were to be formed, a subsequent follow-up deal between Continental Airlines and United Airlines.
"That scenario seems less likely than popular perception," US Chairman and CEO Doug Parker recently argued. "Delta and Northwest getting together makes lots of sense [based on their route networks], but taking Continental out of the [SkyTeam] Alliance doesn't make sense. . .There's more behind all these transactions than just looking at two route maps. It's a lot more complicated than that."
DL, NWA and CO are all SkyTeam members and a merged DL-NWA obviously would be a SkyTeam carrier. But presumably UA is not leaving the Star Alliance, of which it is a founding member, and therefore CO's Newark and Houston hubs would become part of Star under the DL-NWA/CO-UA consolidation scenario. "Why would you go through all the trouble [of a merger] to lose [Newark and Houston] from the alliance?" asks Parker, wondering aloud whether non-US SkyTeam members would be ready to embrace a merger that could cost them CO's network.
NWA currently holds a "golden share" in CO that allows it to block the latter from entering into a merger. But once NWA enters into a merger agreement, CO has the right to buy back the golden share for a mere $100 and would be free to pursue its own merger deal (even if NWA's merger ultimately was rejected). "If the golden share would become redeemable, that would change our circumstances," CO Chairman and CEO Larry Kellner said.
While CO is content with "our position relative to the industry today," Kellner said it "won't hesitate to act" if the industry landscape changes and rivals combine to form a mega-airline. "We do pay attention to [our] relative size," he said. "Size is important in a network business." In terms of traffic, CO ranked fourth among US airlines in 2007 at 84.31 billion RPMs, trailing American Airlines (138.45 billion RPMs), DL (122.07 billion RPMs including regional operations) and UA (117.4 billion RPMs). However, it had the most balanced network in terms of international and domestic services and the best service reputation among network carriers.
US airline executives continue to argue that the industry is too fragmented and that six legacy carriers will be unable to grow capacity and keep costs down absent consolidation. "I cannot see any logic in [that argument] whatsoever," Avitas Senior VP Adam Pilarski, a longtime industry observer, tells ATWOnline. "If you can't grow capacity with six, I don't see how going from six to three changes it in any way. Six becoming three doesn't create more Americans that want to fly."
And the problems associated with mergers would create operational difficulties that could push passengers to LCCs and new entrants, Pilarski contends: "I don't see any synergies that get translated into cost savings or revenue enhancement. Yes, a few consultants, a few banks, a few executives will make money off of mergers, but the negatives for the industry are obvious. You are trying to merge two different cultures, which never works well. You are talking about airlines that may belong to two different alliances, that have very different fleets, different operating systems. . .How do you integrate the pilot lists? There are a lot of headaches that could cost you a lot in productivity. I'm fairly confident that [mergers] will be problematic."
While AA Executive VP-Finance and Planning and CFO Tom Horton believes that consolidation could "lead to greater efficiency," he acknowledges that "there are a lot of challenges to consolidation in our industry."
Of course, any merger agreement will face scrutiny from DOJ and members of Congress, several of whom already have vowed to fight consolidation on the grounds that it will result in lost jobs and diminished service. While US airline officials appear to believe that DOJ is more likely to approve a merger than in 2001 when it blocked UA's proposed acquisition of then-USAir, the fact that a new President (and a new attorney general) will take office next January may be driving the latest round of talks.
"Since there is going to be a change in administration, there will be some delay" in clearing a merger unless an agreement is submitted by the end of this month, Parker says, predicting that any later submission likely would get caught up in the changeover. But he adds that such approval would still come: "It's more of a timing issue. Irrespective of the administration, the arguments for consolidation are so compelling that I'm not overly concerned that the next administration is going to be against mergers."
Other factors affecting potential mergers are the ongoing decline of US airline stock prices and the credit crunch. Airline shareholders are unlikely to be enticed by the prospect of "cashing out" underperforming stocks in a merger, though Parker insists that they would be interested in moving their shares "to a stronger airline."
And the state of credit markets means a carrier will have more difficulty raising money to finance an "acquisition" of another carrier. "It doesn't change the likelihood of mergers, just the structure," Parker says. "The structure will move from debt financing to equity financing" and merger agreements will be "equity-equity transactions."--Aaron Karp
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