Yesterday’s JP Morgan Aviation, Transportation and Defense conference carried little news about airline merger and consolidation (M&A) activity, as carriers paraded their new dedication to capacity discipline, the strength of their balance sheets and their continued ability to raise liquidity even in a tight credit market.
The capacity discipline professed by legacy and low-cost carriers alike didn’t even raise an eyebrow yesterday, despite Monday’s report that only about a billion ASMs have been shed from the system. The remarkable capacity cuts – 85 billion ASMs – by the network carriers, have largely been taken up by the low-cost carriers – 84 billion – or shed off to regional operators at an unknown number of ASMs. See related report: Capacity did not decline much for US airline industry in recession
The overwhelming message yesterday is that each airline has not only survived the recession, but is well-positioned to take advantage of the nascent recovery taking hold. Listening to the rhetoric, one would have to conclude they all have the best costs for their respective sectors, the best quality and the best balance sheets… And, after a full day of listening, it is clear that may be the takeaway for those in attendance as they staggered toward the door in total sensory and information overload.
While the interest in mergers has been keen ever since the December Raymond James investor’s conference, the enthusiasm for asking the question was absent yesterday, likely because it is increasingly clear little is likely to happen this year, making it only so much yesterday’s news. Even so, it was enough of a topic that the buzz before the conference started was the fact that Continental and United were first and back-to-back must mean something, according to JP Morgan’s Mark Streeter, who denied it meant anything at all.
In December, every speaker was peppered with the question. This time, only the legacies were asked, and really only United and Continental. US Airways was not even questioned, although is well-known to favour consolidation and United, also favouring consolidation, said its position remains unchanged.
Legacies taking a wait-and-see approach
United, Continental and US Airways repeated what has been said before, but Continental seems slightly more definite in its explanation that its refusal to merge with United was a one-time event and if the competitive landscape were to change for the worse a defensive maneuver would be in the offing. For now, however, the entire legacy arena is waiting to see how the Delta/Northwest merger plays out and whether or not it will realise the synergies and revenue benefits promised. Judging from what Delta CEO Ed Bastion said, the answer will be yes…and then some.
“Delta has done a good job with the merger, but I think it premature to judge how well that merger will play out,” said Continental's Smizek, noting how the balance of power has changed. “The market is speaking and, as [United Chair] Glenn Tilton pointed out, the market capitalisation of Delta is more than United and Continental combined. But, of course, that is a point in time and the market changes.
“We will continue to watch the merger, it is important to watch since, as they so often like to point out, they are the world’s largest airline,” he continued. “But we are a big threat to Delta. We are a powerhouse in New York, which they’d like to be. We are a growing threat in the Pacific and you’ve see the actions there on JAL where they’ve taken out their check book and spent money like drunken sailors. And they have seen us and the Pacific Joint Venture with Star Alliance and our partnership with United and ANA. We are strong in Latin America where they have great ambitions as well. We recognise them as a threat and they recognise us as a threat.
“I’ve made it clear to all my co-workers and to the Street, when we chose not to merge with United that was a point-in-time decision,” he concluded. “And I think it was the right decision. That said, we continue to watch the competitive dynamics, and if we think it is in our best interest to bulk up defensively we’ll do so. But, for now, it is premature to make that decision at this time.”