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More Mergers?

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Sonny Crockett

Well-known member
Joined
Aug 9, 2005
Posts
584
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.
 
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.
 
I think if history has shown that most mergers were a surprise to most people.
 
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.
 
Sonny Crockett said:
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.
 
Mkubwa said:
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...
 
furloughfodder said:
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.
 
Last edited:
TWA Dude said:
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???
 
aa73 said:
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.
 
MedFlyer said:
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.
 

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