"Struggling airlines look for right combination"

Monday, October 2, 2006

Struggling airlines look for right combination
By TREBOR BANSTETTER
The Fort Worth (TX) Star-Telegram


A long-predicted wave of airline mergers might finally commence in the
months ahead, analysts say, as the major carriers position themselves to
survive and grow.

North Texas' two majors, American and Southwest airlines, aren't likely to
be swept up in any widespread consolidation, at least at first, analysts
say.

But that doesn't mean they wouldn't be affected if rivals like United
Airlines, Delta Air Lines, or Northwest Airlines combine.

"Delta and Northwest are finalizing their bankruptcy reorganization plans,"
Susan Donofrio, airline analyst for Cathay Financial in New York, said in a
recent report. "This is the inflection point historically when many airlines
have concluded that a merger partner would be their optimal strategy."

Although airline insiders have been predicting major consolidation since
2001, there has been only one merger between two relatively small airlines,
US Airways and America West. But a recent report that United has hired an
investment banker to explore possible partnerships, and Chief Executive
Glenn Tilton's statements that consolidation would be good for the industry,
has many analysts talking up potential combinations.

"Now that United has basically come out and said they're shopping around,
it's going to really start the race," said Alan Sbarra, airline consultant
with the Roach and Sbarra firm in San Francisco. "Everyone has been waiting
for this to happen."

At American, headquartered in Fort Worth, union leaders are already
preparing for a fight over the issue.

"I believe one of the greatest near-term risks that we must prepare for is
the high probability of further consolidation within the airline industry,"
Ralph Hunter, president of the Allied Pilots Association, told union board
members during a recent meeting.

Hunter said he had no specific knowledge of acquisition plans by American
executives.

But, he stressed, "Mergers are never positive, and almost always harmful, to
line employees."

Possible combinations 
On Sept. 25, Crain's Chicago Business reported that United, based in
suburban Chicago, has hired Goldman Sachs & Co. to advise it on financial
options that could include an acquisition or merger.

Tilton had previously told reporters that the airline was strong enough
financially to weather a merger.

Analysts have also taken note of the successful partnership of US Airways
and America West.

The combined airline, which kept the US Airways name, posted a $305 million
profit during the second quarter - better than Ameri- can and second only to
Dallas-based Southwest, the industry's most profitable carrier.

The Wall Street Journal has reported that Doug Parker, US Airways' chief
executive, has approached Delta about yet another merger. Delta reportedly
declined to pursue the offer.

Analyst Donofrio says likely pairings include Delta and Northwest, United
and Continental, and discounters JetBlue Airways and Frontier Airlines.

"The ideal airline merger expands the route network, giving each airline
access to new markets and reduces overlapping capacity," she said.

But few analysts expect American or Southwest to be buyers or sellers, at
least in the initial wave. That's largely because both airlines are in
better financial shape than their rivals, and have less to gain - and more
to lose - by assimilating a struggling competitor.

"Southwest will be watching all of these developments closely, but I don't
think you'll see them rush out and merge with someone," said George Hamlin,
an airline consultant with Morton Beyer & Agnew of Arlington, Va.

And American, he said, "has successfully gone down a different path than the
rest of the industry by avoiding bankruptcy."

The airline is unlikely to consider a merger with a weaker competitor, he
said.

Still, both American and Southwest will be forced to take note if two or
more of their competitors join forces.

A United-Continental merger, for example, would knock American out of its
spot as the world's largest airline. It would also mean a competitor with a
vast domestic network, dominance in Pacific markets and a strong presence on
European routes.

Hamlin said a merger would also not likely result in substantial cuts in
flights, which he said the industry still needs.

"You usually don't trim a lot of capacity by merging," he said. "There is a
healthier way to trim the industry down to fighting weight."

The downsides of merging 
Mike Boyd, a consultant with the Boyd Group of Evergreen, Colo., said the
smartest course for American and Southwest would be to sit on the sidelines
and watch merged rivals self-destruct.

"The total at the end of an airline merger is always less than the original
sum of the parts," he wrote in a recent analysis commissioned by American's
pilots union. "In most cases, it is much less."

He said most analysts overlook the substantial risks that come with airline
mergers and said virtually every merger in the past two decades has been a
disappointment.

The oft-touted benefits of combining, he said, are "the intellectual
equivalent of fairy dust."

Mergers create tremendous problems with aircraft-maintenance programs, pilot
and crew training, different airplane types and unions. They rarely improve
efficiency, he said.

Employees and consumers would be the biggest losers, he said.

"Any merger that involves merging American with another major airline system
will be a disaster for American employees," he said.

Consolidation among rivals, however, could be a good thing for American from
a competitive standpoint.

"Mergers are messy, expensive and divert management energies," he said.
"Almost any conceivable combination of American competitors in a merger
would be a positive for American."

Still, analyst Sbarra argues that a wave of consolidation could present a
rare chance to snare assets like the Asian routes controlled by Northwest
and United.

"It could be a once-in-a-lifetime opportunity to get some of those assets,"
he said.

What executives need to consider, he added, is whether it is worth acquiring
the rest of the airline just to get one valuable piece.

Many American employees are still smarting from the airline's acquisition of
TWA in 2001. That buyout added thousands of employees to American's
seniority list, and most TWA employees ended up at the bottom.

"I believe the likelihood of a merger or acquisition event impacting
American is currently high enough that we should begin taking sensible
precautions immediately," Hunter, the pilots association president, said in
his annual message to board members.

Although many analysts have touted the US Airways-America West merger, some
employees have been critical.

"This merger has meant broken promises, stagnant wages and the salaries
among the lowest in the industry for America West flight attendants," said
Gary Richardson, president of the airline's chapter of the Association of
Flight Attendants.

Those attendants are negotiating a new combined contract for workers from
both airlines.

Hamlin said it remains to be seen how consolidation will ultimately play
out.

"Airline mergers are like anything else," he said. "You get the good, the
bad and the ugly."

IN THE KNOW Hooking up? 
Airline industry observers are predicting a wave of mergers among the major
carriers. According to a report by Cathay Financial, likely pairings
include:

Delta-Northwest

These airlines, both in bankruptcy, have complimentary hubs in Atlanta,
Cincinnati, Salt Lake City, Memphis, Minneapolis and Detroit. They would
also combine Delta's strong trans-Atlantic service with Northwest's powerful
Pacific route system.

United-Continental

The two carriers could create an international juggernaut combining United's
dominant Pacific presence with Continental's Atlantic and Latin American
routes. They also have compatible aircraft fleets that would be easy to
combine.

JetBlue-Frontier

These two discount airlines could become a national low-fare carrier to
rival Southwest by pairing JetBlue's strong East Coast service with
Frontier's strength in the West. They also have relatively compatible fleets
of Airbus aircraft.

US Airways

This airline, with a well-connected East Coast route system, could end up
with one of several partners, including Northwest, United or American.

Alaska Airlines

The carrier based in Seattle could merge with several of the majors, which
might covet its near-monopoly in Alaska, strong West Coast service and low
cost structure.

SOURCE: Cathay Financial

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