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Business
More Stable Airlines Fly Out of Mergers; Fliers Poised to Benefit From Greater Investments, Stability
By Susan Carey, Jack Nicas And Mike Spector
1030 words
11 February 2013
19:23
The Wall Street Journal Online
WSJO
English
Copyright 2013 Dow Jones & Company, Inc. All Rights Reserved.
The U.S. airline industry is starting to fly high again.
An expected merger agreement this week between AMR Corp.'s American Airlines and US Airways Group Inc. could end the latest chapter on consolidation that has helped to stabilize an industry troubled for decades.
The $10 billion-plus deal would follow three other industry megamergers since 2008, a period of consolidation that has produced a healthier industry with the prospects of sustainable profitability and investment-grade credit ratings.
Travelers would have fewer airline choices—an AMR-US Airways merger would leave four airlines controlling about 83% of domestic seats—but potentially the benefits of greater reliability and airline investments.
Few believe U.S. fares would rise dramatically as a result of the merger. Competition remains intense as discount carriers account for roughly 37% of domestic passenger air trips, keeping a lid on price increases. On an inflation-adjusted basis, domestic fares are about 15% lower than they were in 2000, according to government data.
And even though there are fewer airlines, passengers still have numerous choices. For instance, a person who wants to travel to Seattle from Savannah, Ga., can choose between flying Delta via Atlanta, American through Dallas, US Airways via Philadelphia or Charlotte, and United through three of its hubs.
People familiar with the matter said the AMR and US Airways boards are scheduled to meet separately on Wednesday to consider the merger plan, which could be announced later that day or on Thursday if the timing doesn't slip. US Airways Chief Executive Doug Parker would run the combined carrier as CEO, while AMR CEO Tom Horton would become nonexecutive chairman for a limited period. Current talks are focused on the length of Mr. Horton's term, the makeup of the new board and potential compensation for the airline's new management and other employees, these people said.
The U.S. airline industry has struggled to stay aloft since it was deregulated 35 years ago. The ensuing decades brought multiple bankruptcies, liquidations and billions of dollars of losses as carriers pursued what in hindsight were self-destructive strategies as they tried to cope with rising costs, inefficient labor contracts and the advent of low-fare competitors.
This year, analysts are predicting that all of the nation's 11 publicly traded passenger airlines will be profitable, and together earn roughly $6.8 billion, even though jet fuel— their biggest expense—currently costs about $3.24 a gallon. That would top one of the industry's most profitable years, 1997, when it earned $4.8 billion amid jet-fuel prices hovering around 60 cents a gallon. Only in 2006 and 2007 did the industry exceed the 2013 estimate, but those results were inflated by items related to bankruptcies.
Emboldened by both bankruptcies and mergers, U.S. airlines are reducing capacity on money-losing routes, cutting back at some of their hubs and taking a hard line on costs, said John Thomas, head of the global aviation practice at L.E.K. Consulting LLC. "Taking structural costs and inefficiencies out of the system is what excites people about consolidation," he said. "Large carriers can weather the storm so much better than small carriers."
More Stable Airlines Fly Out of Mergers; Fliers Poised to Benefit From Greater Investments, Stability
By Susan Carey, Jack Nicas And Mike Spector
1030 words
11 February 2013
19:23
The Wall Street Journal Online
WSJO
English
Copyright 2013 Dow Jones & Company, Inc. All Rights Reserved.
The U.S. airline industry is starting to fly high again.
An expected merger agreement this week between AMR Corp.'s American Airlines and US Airways Group Inc. could end the latest chapter on consolidation that has helped to stabilize an industry troubled for decades.
The $10 billion-plus deal would follow three other industry megamergers since 2008, a period of consolidation that has produced a healthier industry with the prospects of sustainable profitability and investment-grade credit ratings.
Travelers would have fewer airline choices—an AMR-US Airways merger would leave four airlines controlling about 83% of domestic seats—but potentially the benefits of greater reliability and airline investments.
Few believe U.S. fares would rise dramatically as a result of the merger. Competition remains intense as discount carriers account for roughly 37% of domestic passenger air trips, keeping a lid on price increases. On an inflation-adjusted basis, domestic fares are about 15% lower than they were in 2000, according to government data.
And even though there are fewer airlines, passengers still have numerous choices. For instance, a person who wants to travel to Seattle from Savannah, Ga., can choose between flying Delta via Atlanta, American through Dallas, US Airways via Philadelphia or Charlotte, and United through three of its hubs.
People familiar with the matter said the AMR and US Airways boards are scheduled to meet separately on Wednesday to consider the merger plan, which could be announced later that day or on Thursday if the timing doesn't slip. US Airways Chief Executive Doug Parker would run the combined carrier as CEO, while AMR CEO Tom Horton would become nonexecutive chairman for a limited period. Current talks are focused on the length of Mr. Horton's term, the makeup of the new board and potential compensation for the airline's new management and other employees, these people said.
The U.S. airline industry has struggled to stay aloft since it was deregulated 35 years ago. The ensuing decades brought multiple bankruptcies, liquidations and billions of dollars of losses as carriers pursued what in hindsight were self-destructive strategies as they tried to cope with rising costs, inefficient labor contracts and the advent of low-fare competitors.
This year, analysts are predicting that all of the nation's 11 publicly traded passenger airlines will be profitable, and together earn roughly $6.8 billion, even though jet fuel— their biggest expense—currently costs about $3.24 a gallon. That would top one of the industry's most profitable years, 1997, when it earned $4.8 billion amid jet-fuel prices hovering around 60 cents a gallon. Only in 2006 and 2007 did the industry exceed the 2013 estimate, but those results were inflated by items related to bankruptcies.
Emboldened by both bankruptcies and mergers, U.S. airlines are reducing capacity on money-losing routes, cutting back at some of their hubs and taking a hard line on costs, said John Thomas, head of the global aviation practice at L.E.K. Consulting LLC. "Taking structural costs and inefficiencies out of the system is what excites people about consolidation," he said. "Large carriers can weather the storm so much better than small carriers."
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