Airline Mergers To Watch
Mark Tatge, 08.16.05, 1:45 PM ET
CHICAGO - Get ready for a raft of mergers in the U.S. airline industry.
The proximate cause, of course, will be the bankruptcies. A filing by Delta Air Lines seems imminent, with Northwest Airlines taxiing not far behind
Bankrupt airlines have become as familiar as long security lines at U.S. airports. US Airways Group has filed for bankruptcy protection twice. UAL, the parent of United Airlines, has been stuck in Chapter 11 for nearly three years. If US Air gets out, it will because of the generous agreement from America West Holdings to buy the carrier. (Analysts remain pessimistic about that marriage surviving.)
Here, then, are the combinations predicted by Cordle and our other experts:
UAL and Continental Airlines (nyse: CAL - news - people ): This would probably be the best match of all the major U.S. carriers. UAL, unable to get its bankruptcy reorganization plan approved so far, would make a natural fit with Continental. The latter would bring strong Latin American and U.S. East Coast routes to United's strong domestic U.S. and Asia Pacific route system.
With Continental, United would be more likely to secure the $1.5 billion to $2 billion in exit financing the airline has been so far unable to raise. Continental is arguably the best managed of the major carriers, with the possible exception of AMR (nyse: AMR - news - people ), the parent of American Airlines.
One caveat: Current UAL Chief Executive Glenn Tilton would be out of a job, since Continental management would most likely want to run the airline.
AMR and Northwest Airlines: Executives at American Airlines parent AMR have no desire to jump into the merger game, given the carrier's disastrous merger with TWA, which it purchased and liquidated. The experience was a major blow to the egos of American Airlines management and workers, many of whom lost their jobs.
But if Continental and United threaten to merge, the landscape could be so altered that American would have no choice but to rethink its position. Despite Northwest's thorny labor problems, the carrier brings a prize that American covets: routes to the Far East. So far, American has had to expend considerable effort to build those routes itself.
Other possible combinations with American that our experts mentioned include Alaska Air Group (nyse: ALK - news - people ). American could also be interested in select United assets, such as Asia-Pacific routes, should UAL have to raise cash.
Delta and Northwest: Both of these airlines have their challenges. Delta is getting clobbered in the southeastern U.S. from AirTran Holdings (nyse: AAI - news - people ) and other low-cost carriers. Pilots are retiring in record numbers, draining off badly needed cash, and CEO Gerald Grinstein is running out of options to keep the airline out of Chapter 11.
Northwest, meanwhile, under pressure to further cut labor costs, is facing the threat of a strike. Together, the airlines could leverage their partnerships with Air France-KLM (nyse: AKH - news - people ) and Sky Team Airline Alliance. The combined carrier would have a stronger regional, national and international platform. Northwest would bring U.S. upper-Midwest and Asian routes; Delta has its strong Atlanta hub and the lucrative shuttle between Boston, New York City and Washington, D.C.
Northwest may have a leg up on other carriers in completing this deal. It has a poison pill type of agreement with Continental that could prevent another airline from merging with the Houston-based carrier.
Mark Tatge, 08.16.05, 1:45 PM ET
CHICAGO - Get ready for a raft of mergers in the U.S. airline industry.
The proximate cause, of course, will be the bankruptcies. A filing by Delta Air Lines seems imminent, with Northwest Airlines taxiing not far behind
Bankrupt airlines have become as familiar as long security lines at U.S. airports. US Airways Group has filed for bankruptcy protection twice. UAL, the parent of United Airlines, has been stuck in Chapter 11 for nearly three years. If US Air gets out, it will because of the generous agreement from America West Holdings to buy the carrier. (Analysts remain pessimistic about that marriage surviving.)
Here, then, are the combinations predicted by Cordle and our other experts:
UAL and Continental Airlines (nyse: CAL - news - people ): This would probably be the best match of all the major U.S. carriers. UAL, unable to get its bankruptcy reorganization plan approved so far, would make a natural fit with Continental. The latter would bring strong Latin American and U.S. East Coast routes to United's strong domestic U.S. and Asia Pacific route system.
With Continental, United would be more likely to secure the $1.5 billion to $2 billion in exit financing the airline has been so far unable to raise. Continental is arguably the best managed of the major carriers, with the possible exception of AMR (nyse: AMR - news - people ), the parent of American Airlines.
One caveat: Current UAL Chief Executive Glenn Tilton would be out of a job, since Continental management would most likely want to run the airline.
AMR and Northwest Airlines: Executives at American Airlines parent AMR have no desire to jump into the merger game, given the carrier's disastrous merger with TWA, which it purchased and liquidated. The experience was a major blow to the egos of American Airlines management and workers, many of whom lost their jobs.
But if Continental and United threaten to merge, the landscape could be so altered that American would have no choice but to rethink its position. Despite Northwest's thorny labor problems, the carrier brings a prize that American covets: routes to the Far East. So far, American has had to expend considerable effort to build those routes itself.
Other possible combinations with American that our experts mentioned include Alaska Air Group (nyse: ALK - news - people ). American could also be interested in select United assets, such as Asia-Pacific routes, should UAL have to raise cash.
Delta and Northwest: Both of these airlines have their challenges. Delta is getting clobbered in the southeastern U.S. from AirTran Holdings (nyse: AAI - news - people ) and other low-cost carriers. Pilots are retiring in record numbers, draining off badly needed cash, and CEO Gerald Grinstein is running out of options to keep the airline out of Chapter 11.
Northwest, meanwhile, under pressure to further cut labor costs, is facing the threat of a strike. Together, the airlines could leverage their partnerships with Air France-KLM (nyse: AKH - news - people ) and Sky Team Airline Alliance. The combined carrier would have a stronger regional, national and international platform. Northwest would bring U.S. upper-Midwest and Asian routes; Delta has its strong Atlanta hub and the lucrative shuttle between Boston, New York City and Washington, D.C.
Northwest may have a leg up on other carriers in completing this deal. It has a poison pill type of agreement with Continental that could prevent another airline from merging with the Houston-based carrier.
