Oil spike may spur consolidation, or not ...

[GogglesPisano]

http://www.reuters.com/article/marketsNews/idUKN0754828120071107?rpc=44


US airline execs worry over oil spike, see mergers
Wed Nov 7, 2007 3:08pm EST
By Kyle Peterson

CHICAGO, Nov 7 (Reuters) - Prospects of $100-a-barrel oil sent shares of U.S. airlines tumbling on Wednesday, renewing talk in the industry of mergers and ticket price hikes as a way to hold onto profit margins.

The oil spike comes as a softening economy begins to threaten an industry only just recovering from years of cutthroat competition and a series of bankruptcies.

"I'm not certain that where we are today is a business that can handle $100-a-barrel oil," US Airways Group (LCC.N: Quote, Profile, Research) Chief Executive Doug Parker said at a Wall Street investor conference on Wednesday.

"We've been through a painful restructuring since 2001, but we're still not fixed," said Parker, whose remarks were broadcast on the Web.

The chief financial officer of AMR Corp's (AMR.N: Quote, Profile, Research) American Airlines stressed that higher ticket prices were necessary to compensate for soaring oil.

"We've got to find a way to pass on fuel expenses to our customers," CFO Tom Horton said at the same conference. "We're going to need to keep driving costs down in order to compensate for the fuel-revenue disconnect."

The price of NYMEX crude oil futures (CLc1: Quote, Profile, Research) -- directly related to the price of jet fuel -- notched a record high above $98.50 on Wednesday. Continued...

UPDATE 1-US airline execs worry over oil spike, see mergers

If economic weakness crimps demand, airlines must consider mergers as a way to pull capacity from their systems, said Parker, the most visible advocate for industry consolidation.

DOMINOES FALLING

Fuel rivals labor costs as airlines' top expense. Since 2006, carriers have offset that cost by reducing the number of seats for sale and raising fares.

Parker, who engineered the 2005 merger of US Airways and America West, failed this year in his attempt to merge US Airways with Delta Air Lines (DAL.N: Quote, Profile, Research).

Delta rejected the US Airways bid, saying it had more long-term value as a stand-alone airline. But as oil prices continue to rise and the U.S. economy shows signs of slowing, airline leaders -- including those at Delta, its new CEO said last month -- have shown renewed interest in consolidation.

Also speaking at the conference, Continental Airlines (CAL.N: Quote, Profile, Research) Chief Financial Officer Jeff Misner said Continental would not likely be the one that started the merger wave.

"Continental will not be left behind," said Misner. "We just don't necessarily have the ability to start the dominoes falling."

Continental has an unusual obstacle to consolidation -- rival Northwest Airlines (NWA.N: Quote, Profile, Research) holds a "golden share" in Continental that gives it the right to block mergers involving the Houston-based carrier in a shareholder vote. Continued...

The unusual relationship dates back to 2001 when Northwest agreed to sell its shares in Continental after it was sued for anticompetitive behavior by the U.S. Department of Justice.

Misner said, however, that Continental is better positioned than most to cope with expensive fuel. Continental's relatively young fleet of more fuel-efficient planes would cushion the company from the blow of higher fuel prices, Misner said.

"It's still cheaper to fly today than it is to drive," he said. (Reporting by Kyle Peterson and Bill Rigby, editing by Dave Zimmerman and Braden Reddall)

 

[dispatchguy]

"We've got to find a way to pass on fuel expenses to our customers," CFO Tom Horton said at the same conference. "We're going to need to keep driving costs down in order to compensate for the fuel-revenue disconnect."

Why do I see that the carriers are going to be crying for more labor-rate concessions.

 

[flatspin7]

Why do I see that the carriers are going to be crying for more labor-rate concessions.

You can't get blood out of a turnip!

 

[Mea25000]

I think in order for things to get better NWA needs to Start dancing with DAL and Maybe ALK that will let CAL go with UAL and then just maybe airlines will start charging what a ticket costs instead of slitting their own wrists.

 

[Ex737Driver]

I think in order for things to get better NWA needs to Start dancing with DAL and Maybe ALK that will let CAL go with UAL and then just maybe airlines will start charging what a ticket costs instead of slitting their own wrists.

Right. And another douhcebag airline or two won't pop-up with pilots looking to undercut the "majors" just to fly a big jet. If and when mergers occur, I bet that the proliferation of Jetblue, XJT, Independence, Skybus, Virgin, etc. type airlines will explode. You have two major airlines become one with routes and hubs dropped and closed and the number of orders for Airbus's with free mx will skyrocket.

 

[Andy]

My exact thoughts, Ex737Driver. Along with the loss of good jobs when two airlines merge. But those good jobs will be replaced by the latest startup that lowers the pay bar even further. Skybus is only temporarily holding the bar the lowest.

 

[GogglesPisano]

Delta Airlines still considering an acquisition
CFO Ed Bastian says the airline will have to re-evaluate its business model if oil prices remain near $100 a barrel.
November 7 2007: 6:44 PM EST


ATLANTA (AP) -- Delta Air Lines Inc.'s evaluation of whether it would make sense to purchase another carrier is a "front-burner" issue for the nation's third-largest airline, a senior executive said Wednesday.

"I think there's value there," President and Chief Financial Officer Ed Bastian said of consolidation during a New York investor conference that was broadcast on the Internet. "We just need to find the right transaction for the constituency. If we do find it, we'll certainly consider it."

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On the flip-side, Delta (Charts, Fortune 500) recognizes that buying another airline could have considerable financial costs and cause friction among employees, Bastian said.

Bastian was noncommittal on how long it would take the Atlanta-based airline to complete the review process, nor what Delta's ultimate decision will be. But, he did say that deciding whether to acquire another carrier is on Delta executives' minds.

"It's a front-burner issue for us," Bastian said.

Bastian said Delta believes the consolidation question should be answered before the airline considers whether to sell or spin off any of its ancillary businesses, such as its growing maintenance, repair and overhaul unit.

"We'll be smart, we'll be knowledgeable about what the opportunities are, but I think we want to answer the consolidation issue first," Bastian said.

The airline has said previously it is considering shedding regional feeder carrier Comair, but it has been mum on any talks it may be having.

Delta's CEO hints at airline deal
On other issues, Bastian said Delta has been pleased with its recent results despite the persistently high cost of fuel. He said that next year, Delta expects growth in its domestic business to be strained, while growth internationally is expected to be strong.

Bastian said Delta would have to re-evaluate its business model for next year, particularly on the domestic side, if oil prices near $100 a barrel persist.

Bastian also said that Delta continues to negotiate creditor claims following the airline's emergence from bankruptcy earlier this year. The airline has roughly 400 million shares outstanding, of which about 110 million continue to be held back pending final resolution of claims, Bastian said.

Earlier Wednesday, Delta said it has formed a partnership projected to generate $1 billion in revenue over 10 years for its maintenance, repair and overhaul unit and the parts manufacturer Chromalloy Gas Turbine Corp.

Delta said the deal with Chromalloy will be a boon for Delta's TechOps division.

Chromalloy will manufacture lower cost alternative parts that Delta can use to repair and overhaul engines, Delta spokeswoman Betsy Talton said. Currently, when Delta repairs an engine it typically gets parts for the repair from the original equipment manufacturer, though it has used non-original manufacturer parts in the past, Talton said.

The partnership is expected to generate $1 billion in revenue that the two companies will share, Talton said.

Delta, Air France in joint venture
Delta said the deal will add the CFM56-5 engine type to the list of engines that TechOps services. Delta said that engine type is the engine of choice in Airbus aircraft.

The deal also includes the parts development program and 250 engine overhauls to be performed by Delta TechOps employees over the term of the agreement.

Delta said its maintenance, repair and overhaul unit took in more than $310 million in revenue last year. Besides providing maintenance and engineering support for Delta's fleet, TechOps serves more than 100 aviation and airline customers from around the world.

 

[skywdriver]

Right. And another douhcebag airline or two won't pop-up with pilots looking to undercut the "majors" just to fly a big jet. If and when mergers occur, I bet that the proliferation of Jetblue, XJT, Independence, Skybus, Virgin, etc. type airlines will explode. You have two major airlines become one with routes and hubs dropped and closed and the number of orders for Airbus's with free mx will skyrocket.

\

Never know, hopefully it would backfire on the LCCs. There isn't much overlap in say a UAL/CAL merger, and it very well might prevent any new startups. It would be very hard to compete with such a vast route structure that could offer more point to point flying as well as filling up hubs for international flights. Wishful thinking maybe, but the consolidation could very well run some of the little guys off.

 

[jonjuan]

You can't get blood out of a turnip!

Sure you can. Have you seen regional 50/76 seat salaries?