Airline mergers gaining attention - and traction (?) in 2010
The “M” word – merger – has been trumpeted in US airline circles since December, particularly once the analyst community began to see there might be a light at the end of the recessionary tunnel. A mere three months later, merger is on the tip of the tongue both in the executive suite, as well as on Wall Street. That is why mergers will probably be topic number one at next week’s JP Morgan’s Aviation, Transportation & Defense Conference where at least eight airlines will hold court trying to convince the 700 attendees they are investment worthy.
In recent weeks, the word merger has been burning the newswires in an attempt to glean who and when. The most likely candidates – US Airways and United Airlines – have been sending clear signals they are in the market for a marriage.
Jesup and Lamont Analyst, Helane Becker, thinks an US Air/United match would “give UA a much needed presence on the US East Coast in the North/South market where United is just not a factor,” she told the Centre for Asia Pacific Aviation (CAPA).
Continental is apparently sticking with its 'independence-is-best strategy' - probably a smart move given the fact that it has set itself apart, not only as a superior product, but also in its fiscal performance which will be positive this year (or CEO Jeff Smizek doesn’t get paid). See related report: Continental Airlines’ yields and traffic levels improve in Feb-2010, aiming to “make money” in 2010
United should be so lucky. While it has signaled a sea-change in its management objectives – managing for profitability in the down cycle – gaining the support of the unions, to realise that sea change will be hard and risky.
2010/2011 ripe for merger movement
Labour is a big issue, with the Air Line Pilots Association saying the only good merger is one that protects jobs and creates a profitable carrier, according to MIT International Centre for Air Transportation Research Engineer, Bill Swelbar. Enough said there.
There are a lot of open contracts right now, giving airlines an opportunity to fold merger plans and incentives into any deal. That makes the 2010/2011 period ripe for merger movement. Even with that, airlines remain risk averse with the slow recovery from the recession and the tight credit markets.
Airlines have fallen all over themselves in the last year to build liquidity, making consolidation through bankruptcy less likely. The time needed for full recovery to increase liquidity and plan a merger right will likely delay mergers no matter what the rising stock prices indicate.
Delta is still completing its merger with Northwest which the rest of the industry is watching carefully to see if the synergies promised equal the investment time and trouble to merge. The rest of the pack, including American, have alluded again and again to the need for further capacity reductions, even as the capacity already eliminated is equal to the size of an entire airline – namely US Airways. But, of course, they all say they are open to any possibility if it is good for the stakeholders.
Even so, in the age of alliances, many have questioned what makes mergers so attractive, given the subsequent technology integration and labour issues. After all, an earlier United/US Airways deal was halted in favour of luring Continental into the Star Alliance.
Despite that, it is clear more capacity has to come out of the US system and the only way to do it is through mergers, if airlines have truly avoided the threat of bankruptcy - which remains uncertain.
Alliance building dominated last year, as Continental completed its move to Star and American and Delta fought over JAL. Why merge, the theory goes, when you can get merger benefits through alliances. But that is on the international front. More US consolidation is required, according to Becker, who pointed to the merger mania in Europe.
“The biggest benefit is a continuation of the reduction in capacity,” she told CAPA. “There are still a number of routes that have too much capacity and there is a lot of overlapping capacity. Mergers can happen: AirFrance-KLM, Lufthansa-Austrian Airlines and the pending British Airways-Iberia merger".
What to expect next week
The usual suspects will be at Tuesday’s event, including – in order of appearance – Continental, United, AirTran, Boeing (don’t expect any merger talk there), Southwest, US Airways, Delta, JetBlue and Alaska. Expect United and US Airways to be signaling each other across the crowded room, just as they did at last week’s Reuters travel conference, which prompted the latest stories in the first place. Just imagine what is going on behind closed doors.
While most of the discussion has centred on the legacies, the low-cost group could be ripe for consolidation too. MIT’s Swelbar suggests that Alaska, JetBlue and AirTran should be part of the mix, along with Air Canada. He even suggested the sale of a legacy domestic operation, which, he said, was similar in concept to the Delta/US Airways slot swap. Now that really would stir up the pot.