More Mergers?

[Sonny Crockett]

USair/AWA
DAL/NWA
UAL/CAL

Hmm????

CHICAGO - Get ready for a raft of mergers in the U.S. airline industry.

The proximate cause, of course, will be the bankruptcies. A filing by Delta Air Lines (nyse: DAL - news - people ) seems imminent, with Northwest Airlines (nasdaq: NWAC - news - people ) taxiing not far behind

Bankrupt airlines have become as familiar as long security lines at U.S. airports. US Airways Group (otc: UAIRQ - news - people ) has filed for bankruptcy protection twice. UAL (otc: UALAQ - news - people ), the parent of United Airlines, has been stuck in Chapter 11 for nearly three years. If US Air gets out, it will because of the generous agreement from America West Holdings (nyse: AWA - news - people ) to buy the carrier. (Analysts remain pessimistic about that marriage surviving.)

What's different this time? Economics in the airline industry have changed, and banks and the U.S. government are now more reticent to save flagging carriers. Together, these factors will produce a wave of consolidation. Forbes.com polled a host of experts, including money managers, analysts and former executives, asking them which combinations make sense.

The factors fueling the consolidation are well known. Passengers are filling more seats (83% load factor), but falling fares are killing the airlines. Yields, or passenger revenue divided by revenue passenger miles, are 28% below their levels in 2000, according to Airline Forecasts, an economic consulting firm. The airlines will have losses of $4.2 billion this year, bringing total losses to $38 billion since 2001.

Jet fuel bills are up $9 billion this year over 2003. And fuel, which once made up only 10% to 15% of total operating costs, now accounts for 27% to 30%, exceeding labor costs at some airlines, says Vaughn Cordle, who runs Airline Forecasts. Jet fuel has tripled in price since the 1990s and now runs $1.85 to $2 per gallon.

Here, then, are the combinations predicted by Cordle and our other experts:

UAL and Continental Airlines (nyse: CAL - news - people ): This would probably be the best match of all the major U.S. carriers. UAL, unable to get its bankruptcy reorganization plan approved so far, would make a natural fit with Continental. The latter would bring strong Latin American and U.S. East Coast routes to United's strong domestic U.S. and Asia Pacific route system.

With Continental, United would be more likely to secure the $1.5 billion to $2 billion in exit financing the airline has been so far unable to raise. Continental is arguably the best managed of the major carriers, with the possible exception of AMR (nyse: AMR - news - people ), the parent of American Airlines.

One caveat: Current UAL Chief Executive Glenn Tilton would be out of a job, since Continental management would most likely want to run the airline.

AMR and Northwest Airlines: Executives at American Airlines parent AMR have no desire to jump into the merger game, given the carrier's disastrous merger with TWA, which it purchased and liquidated. The experience was a major blow to the egos of American Airlines management and workers, many of whom lost their jobs.

But if Continental and United threaten to merge, the landscape could be so altered that American would have no choice but to rethink its position. Despite Northwest's thorny labor problems, the carrier brings a prize that American covets: routes to the Far East. So far, American has had to expend considerable effort to build those routes itself.

Other possible combinations with American that our experts mentioned include Alaska Air Group (nyse: ALK - news - people ). American could also be interested in select United assets, such as Asia-Pacific routes, should UAL have to raise cash.

Delta and Northwest: Both of these airlines have their challenges. Delta is getting clobbered in the southeastern U.S. from AirTran Holdings (nyse: AAI - news - people ) and other low-cost carriers. Pilots are retiring in record numbers, draining off badly needed cash, and CEO Gerald Grinstein is running out of options to keep the airline out of Chapter 11.

Northwest, meanwhile, under pressure to further cut labor costs, is facing the threat of a strike. Together, the airlines could leverage their partnerships with Air France-KLM (nyse: AKH - news - people ) and Sky Team Airline Alliance. The combined carrier would have a stronger regional, national and international platform. Northwest would bring U.S. upper-Midwest and Asian routes; Delta has its strong Atlanta hub and the lucrative shuttle between Boston, New York City and Washington, D.C.

Northwest may have a leg up on other carriers in completing this deal. It has a poison pill type of agreement with Continental that could prevent another airline from merging with the Houston-based carrier.

 

[mach none]

AA and Alaska has been going around for about 15 years. I doubt it will happen anytime soon. But crazy things are about to happen in this industry.

 

[Capt.LongThrust]

I think if history has shown that most mergers were a surprise to most people.

 

[Mkubwa]

Don't count on it.

Mergers are expensive and acrimonious. No one has the money anyway.

I think what's more likely to happen is a painful exchange of market share from the legacies to the LCC's via Chapter 11 filings. Legacies will continue to shrink, extracting hard won pay and benefits, turning union members against one another as the senior fight to keep what they possibly can and the junior to simply keep from being sacrificed (furloughed). All the while, the LCC's will grow and contractual improvements (at unionized LCC's) will fail as managements threaten to curtail growth (thus, stagnating careers) as an exchange. Meanwhile, the cost of fuel will soak up the blood of the legacy employees' sacrifices rendering them insufficient and ineffective.

God forbid there's a terrorist attack on a refinery or two. Fuel prices will go into geosynchronous orbit and drive a stake into the heart of most every carrier (certainly US carriers; maybe not so much state-subsidized airlines) and effectively slash the belly of the US economy.

Doom? Yes. Why? Because there's no slack left in the system - you know, the straw and the camel...

Avoidable? Yes, but it means somebody, maybe more than one, has got to go Chapter 7. Personally, I don't see it happening though.

The only winners in this scenario are the bankruptcy lawyers, "consultants", and upper management. I love the "teeth" in the new bankruptcy law about management and bonuses. Jesus... Have to show they've "got another offer" - like that's going to be difficult.

 

[furloughfodder]

AMR and Northwest Airlines: Executives at American Airlines parent AMR have no desire to jump into the merger game, given the carrier's disastrous merger with TWA, which it purchased and liquidated. The experience was a major blow to the egos of American Airlines management and workers, many of whom lost their jobs.

Disastrous for who? It was the biggest single windfall in aviation history saving thousands of AA jobs.

 

[TWA Dude]

Mergers are expensive and acrimonious. No one has the money anyway.

There's plenty of money out there, just not with the airlines. AWA-USA is being funded from the outside. The precedent has been set...

 

[aa73]

Disastrous for who? It was the biggest single windfall in aviation history saving thousands of AA jobs.

Yeah, right. I'm sure the thousands of AA pilots who are furloughed because of this stupid merger are enjoying their "Windfall."

If you want to state the facts, why don't you stick with the facts. This merger benefitted pilots from both airlines, and screwed pilots from both airlines.

i.e., no different than any other merger in the last 20 yrs.

 

[MedFlyer]

There's plenty of money out there, just not with the airlines. AWA-USA is being funded from the outside. The precedent has been set...

True, but the AWA-USA merger is much smaller than a CAL/UAL or NW/DL merger. Plus, the two carriers have little overlap and a common fleet goal...not true for CAL/UAL or NW/DL. Even with that said, I think there's many folks in Tempe who are getting real nervous about this merger. AWA was on the rebound, but they may have destroyed that rebound by pairing themselves with USAirways.

I think many of these mega-mergers are more fantasy than reality...particularly with fuel prices this high. If fuel stays this high, I think eventually the creditors and investors are going to realize that they have to let one (or two) carriers liquidate. The only question is who gets liquidated???

 

[TWA Dude]

Yeah, right. I'm sure the thousands of AA pilots who are furloughed because of this stupid merger are enjoying their "Windfall."

First, it's debatable whether the TWA aquisition caused any furloughs. Yes, AMR would've have more cash on hand and less debt but that doesn't translate into fewer furloughs. If you look around the industry you'll see little correlation.

Second, less than two thousand of the approx 3000 AA furloughs are nAAtives, hence there are not "thousands" of AA pilots furloughed.

Third, keeping one's job while another pilot is furloughed instead constitutes a windfall. The 1200 stapled ex-TWA'ers provided a nice cushion. I believe it to a fact that had AA not purchased TWA more nAAtives would be currently furloughed.

 

[TWA Dude]

Even with that said, I think there's many folks in Tempe who are getting real nervous about this merger. AWA was on the rebound, but they may have destroyed that rebound by pairing themselves with USAirways.

I'm sure AWA can back out anytime it wants with little to no penalty. Doing so would likely result in liquidation of USAirways with no subsequent benefit to AWA. Not that I'm arguing in favor of this merger (since it makes me plenty nervous as well) but Doug Parker seems convinced that AWA has no future on her own. Time will tell.

 

[Mkubwa]

I think many of these mega-mergers are more fantasy than reality...particularly with fuel prices this high. If fuel stays this high, I think eventually the creditors and investors are going to realize that they have to let one (or two) carriers liquidate. The only question is who gets liquidated???

Med,

Small carriers, e.g. US, ATA, might be liquidated but forget about the larger carriers, e.g. NW, DL, UA. Historically, if a strike merited a PEB to halt then the carrier was (and is) considered too vital to shut down. Even without the historical precedent the liquidation of a large carrier would decimate local economies and the politicians can't have that. Oh yes, and then there's GECAS - got to keep paying those leases, you know.

Job losses via furloughs will fly under the radar. A "few" jobs lost beats the whole show packing up and leaving town. Plus, it maintains the current state of unreasonable over-competition ensuring that airlines have no pricing power and that the traveling public maintains the privilege to complain about service while paying unsustainably low fares.

The question to ask is: who's making money off this disaster and how? Obviously, someone is - why would anyone throw good money after bad? Find these folks (GECAS, airline managements, bankruptcy lawyers, consultants, flight school owners who crank out pilots like sausages, clueless and detached economists [Kahn] who are only concerned with building their academic reputation - screw everyone else, the federal government with their laughable pilot licensing standards and Republican free market horsesh!t completely unsuited for a safety-critical industry) and you've found the enemy.

The 1200 stapled ex-TWA'ers provided a nice cushion.

If you look at the AA pilot contracts of the past you'll notice they resemble Detroit auto worker contracts more than major airline pilot contracts. In other words, they were all about the number of jobs - not the quality of those jobs. As a result, AA was grossly overmanned. Add in 9/11, a recession, transparency of pricing via the Internet, the backlash from the gouged business traveler, the rapid growth of LCC's as an outgrowth of this, and you can see that there was a giant glob of adipose tissue hanging over the Texas-sized belt buckle of American Airlines. When it came time for Big Cletus to get himself up off the couch, pick the lint out of his navel and shape up, the bulk of the bulk that needed burning off happened to be the TWA folks.

On a related note, AA's management was smart enough to know that too much competition is a bad thing (howls of protest from the bus riding public heard in the background). AA bought up competition (TWA, Reno, Air Cal, etc.) and integrated the workforce to make the deal pass muster with the politicos.

 

[alaskaplt]

Alaska and Virgin America.

 

[F9 Driver]

Alaska and Virgin America.

At least you'd have better looking tail(s)

 

[aa73]

First, it's debatable whether the TWA aquisition caused any furloughs. Yes, AMR would've have more cash on hand and less debt but that doesn't translate into fewer furloughs. If you look around the industry you'll see little correlation.

Second, less than two thousand of the approx 3000 AA furloughs are nAAtives, hence there are not "thousands" of AA pilots furloughed.

Third, keeping one's job while another pilot is furloughed instead constitutes a windfall. The 1200 stapled ex-TWA'ers provided a nice cushion. I believe it to a fact that had AA not purchased TWA more nAAtives would be currently furloughed.

AS,

First, whatever. Thousands or not, there are a ton of pilots who lost their jobs BECAUSE of the TWA acquisition, in addition to the 9/11 setback and current factors. TWA was nothing but a bucket of debt, which AA took on. Had the acquisition not taken place, AA would have definitely furloughed anyway, but not NEARLY the amount today. Not even half, probably.

Second, keeping one's job while another pilot is furoughed is nothing more than a product of time spent at one's airline in relation to another pilot at said airline. i.e, seniority. It is only fair that AA pilots who hired on at AA get first dibs on furlough protection. Sorry, it may not sound fair, but how fair would it be to AA pilots if TWA pilots kept their jobs, and AA pilots got the boot - when those very same AA pilots were the ones to get hired at AA first - before any hint of an acquisition of a much smaller airline on the brink?

The way the deal is set up assures that pilots from both airlines both benefitted AND got screwed from the acquisition.

Having said that, I will say this - I hope that the AWA/US merger goes much more smoothly than ours did. Hoefully they will take a page out of our (AA/TWA) playbook as an example of what not to do.

 

[mach none]

At least you'd have better looking tail(s)

There are no Virgins at Alaska. We all got screwed 5/1/05.

That rumor is floating around that we are involved in some manner with Dick Branson and Virgin America. Alter ego airline for when things get tough in 07 and on? Goad the AS pilot group in to a job action and you have replacements within the air group. Maybe Horizon will be flying Airbuses before too long.

I have no doubt that our management is up to something. Virgin? Aloha? Frontier? All of the above?

 

[Delville]

It is rumored that AirTran and Alaska are candidates for some sort of deal. From a post on another thread: "The routes are almost perfectly complementary and the fleet types are very similar. Both airline's fleets are almost exactly the same size (right around 100). AirTran is going to 162 total aircraft and Alaska probably to about 125 or 130 total." The payscales are also fairly close if you check them out. Apparently, AirTran CEO Joe Leonard has been asked on a few occasions specifically about a deal with Alaska. He has denied anything of the sort. But what would you expect?

 

[pilotmejiaj]

USair/AWA
DAL/NWA
UAL/CAL


Northwest may have a leg up on other carriers in completing this deal. It has a poison pill type of agreement with Continental that could prevent another airline from merging with the Houston-based carrier.

What does the agreement say?

 

[Fly4hire]

What does the agreement say?

There are 6 clauses that restrict actions by the CAL Board without consent of
the NWA Board. The term is 25 years. (18 years remaining)
They can't be bought, merged, or parceled-out without NWA's consent. There
are also a couple of restrictions on stock transactions. NWA holds the spoiler trump card in this scenario. I'm sure it's for sale if the price is (very) high.

Don't forget NWA has 5th freedom rights from Japan onwards that cannot be transfered to another entity without being renegotiated with the Japanese, which is considered unlikely. These routes are a major attraction of NWA, and would likely result in them being the ones doing the aquiring vs. being aquired.

Personally I hope it's AMR, and then NWA ALPA could staple all the APA pilots, except for the Reno, TWA, etc. former ALPA groups that they would make whole. That alone would be worth it

BTW why are so many of you paying attention to anything written by Vaughn Cordell, notorious UAL Scab?

 

[AAslag]

Personally I hope it's AMR, and then NWA ALPA could staple all the APA pilots, except for the Reno, TWA, etc. former ALPA groups that they would make whole. That alone would be worth it

Now, THAT, would be worth the price of admission.

 

[pilotmejiaj]

There are 6 clauses that restrict actions by the CAL Board without consent of
the NWA Board. The term is 25 years. (18 years remaining)
They can't be bought, merged, or parceled-out without NWA's consent. There
are also a couple of restrictions on stock transactions. NWA holds the spoiler trump card in this scenario. I'm sure it's for sale if the price is (very) high.

Don't forget NWA has 5th freedom rights from Japan onwards that cannot be transfered to another entity without being renegotiated with the Japanese, which is considered unlikely. These routes are a major attraction of NWA, and would likely result in them being the ones doing the aquiring vs. being aquired.

Personally I hope it's AMR, and then NWA ALPA could staple all the APA pilots, except for the Reno, TWA, etc. former ALPA groups that they would make whole. That alone would be worth it

BTW why are so many of you paying attention to anything written by Vaughn Cordell, notorious UAL Scab?

OK, Thanks