"U.S. Airline Chiefs Ponder: Merger Wave or Ripple?"

Thursday, December 7, 2006

Airline Chiefs Ponder: Merger Wave or Ripple?
By Del Quentin Wilber
The Washington (DC) Post


When US Airways made its unsolicited takeover bid for Delta Air Lines last
month, it jolted the recovering airline industry and sparked talk about a
wave of potential mergers.

Analysts and executives started dreaming up potential partnerships involving
the nation's six traditional carriers: Continental, American, United, Delta,
US Airways and Northwest.

US Airways is trying to convince Delta's creditors -- the carrier is in
bankruptcy protection -- that its deal would create a lean and powerful
airline. Delta is fighting the proposal and plans to unveil its
reorganization plan in the coming weeks.

In interviews, chief executives at four major airlines and two of their
low-cost competitors offered their views on whether the industry is poised
for a wave of mergers.

American Airlines

Gerard J. Arpey, chief executive

Arpey declined to say what he thinks the future will hold for the industry
or his carrier -- the nation's largest. But he said that one of American's
biggest challenges in coming years will be to maintain its focus on reducing
costs, especially as it is expected to earn its first profit in six years.

"Continuous improvement is the key to our future in the revenue and cost
front," Arpey said. "We have to make sure the progress that we have made
thus far does not diminish our appetite and enthusiasm for driving the
company to a sensible net margin.

"You can get confused in this business that after years and years of losses,
you make a little bit of money and that is enough to replenish your assets.
It's not."

He added: "In any other normal industry comparison, we would have a long way
to go."

Delta Air Lines

Gerald Grinstein, chief executive

Grinstein, whose carrier is struggling to emerge from bankruptcy protection
next year, doesn't think there will be a spate of consolidations soon. He
said the airlines have achieved their cost-reduction goals without having to
resort to mergers.

The established carriers have done better financially in recent months than
some of the low-cost airlines -- a sign that the industry has done a good
job of reining in expenses, he said.

"Two or three years ago, you had network carriers on the run," he said.
"They were under a lot of pressure. A lot of that has shifted. Network
carriers have more traction than they had before. Low-cost carriers -- like
JetBlue and AirTran-- have deferred deliveries of new planes. A shift has
taken place. I'm not sure what benefits mergers are going to bring to that
environment."

JetBlue

David Neeleman, chief executive

Neeleman hopes for consolidation among the large network carriers because it
would improve industry efficiency -- and airlines watching the bottom line
would not flood markets with cheap seats to fight off JetBlue's low-cost
tickets, he said.

He added that the goal of a Delta-US Airways merger would be to cut flights
to reduce costs. If the merger doesn't work out, Neeleman said he expects
Delta to emerge from bankruptcy protection as a more "profit-motivated
company."

"Either way, we win in this thing," he said. "If they cut flights and cut
seats, that gives us a chance to expand into those places."

Neeleman said he does not see many merger possibilities for JetBlue. But he
is looking to establish partnerships to help funnel passengers to other
carriers operating at JetBlue's hub at John F. Kennedy International Airport
in New York.

"They are all clamoring to have us hook up to them," he said.

Southwest Airlines

Gary C. Kelly, chief executive

The future doesn't look bright for the traditional airlines, according to
Kelly. "The industry is at the peak of the cycle here where carriers have
been able to stem the flow of losses and the bleeding has temporarily
stopped," he said. "Inevitably, we'll have another recession, and that will
put the industry in the loss situation again. . . . I would not be surprised
to see the number of legacy carriers cut in half over the next five years."

Consolidation would be good news for Southwest because merged carriers tend
to reduce routes and flights, allowing Southwest to swoop in and gobble up
passengers, Kelly said.

If the Delta merger goes through, Kelly said he would consider bidding on
one of the combined carrier's lucrative shuttle routes among Washington, New
York and Boston. The merged carrier would probably have to sell one of its
shuttles to appease regulators.

"Nobody ever wants to sell us anything, but that doesn't mean we won't
figure out a way to buy it," he said.

United Airlines

Glenn F. Tilton, chief executive

An outspoken proponent of consolidation, Tilton said US Airways' offer has
set the stage for other potential mergers. In coming years, he said, the
nation's six traditional carriers could shrink to three merged companies --
a process that would help the U.S. airline industry compete with strong
foreign carriers.

"We think it makes good sense for the airline industry in the United States,
the passenger airline industry, if it's going to be sustainable in the long
term," he said of merger possibilities. "We think this should happen."

Like other executives, Tilton believes the industry is on an "up cycle" and
has improved financially because major carriers restructured in bankruptcy
protection. But, he said, "that can't be the answer -- serial bankruptcies.
It can't be the industrial solution for the sector."

He declined to say whether United was examining any specific partnerships
but added the carrier would "take advantage" of a promising merger
opportunity.

US Airways

Douglas Parker, chief executive

Parker, often hailed as one of the best airline executives because he
orchestrated the merger of America West and US Airways last year, says his
company can be an example of how mergers can be successful.

He expects his pursuit of Delta to further show that "in a world of so much
low-cost competition, it is in the best interest of airlines to get costs
down, and you can do that through mergers."

He said he thinks that in a few years there will be "four to six large
legacy, network carriers. I think low-cost, point-to-point carriers will be
bigger than they are today. The network airlines will hopefully have done
enough work to compete with those low-cost carriers."

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