Delta and jetBlue to merge?

bluetoad

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Dec 16, 2003
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Sneak Peek 2006
Mark Tatge On Transportation
12.28.05, 6:00 AM ET

Flash: Forecasts For 2006


The Big Trend
After three horrible years, some airlines may start showing profits in 2006. It is too early to call it a turnaround, but moderating fuel prices have brought relief, at least enough for the money-losing airlines to get through the winter travel slowdown. Unit revenue is improving, costs are down and more people are flying.

The Unconventional Wisdom
Deregulation is the best thing that ever happened to the U.S. airline industry. That’s false. It’s true that ticket prices dropped, but billions of taxpayer dollars and private investment capital were also poured down the drain in wasteful runway expansion and new airport terminals. Many of these facilities sit empty as the industry consolidates, making bondholders jittery. The problem is that the industry remains highly regulated in just about every area except fares. True deregulation would open the skies globally, allowing foreign carriers to expand into the U.S. and vice versa.

The Misplaced Assumption
That all airlines have to morph into cute versions of Southwest (nyse: LUV - news - people ) and JetBlue (nasdaq: JBLU - news - people ) to survive. It’s true that costs per available seat mile need to drop another 15% to 20% for some legacy carriers to break even. But longer term, there will still be room for longer haul, full-service airlines serving business travelers. Some passengers will pay a 10% to 15% premium for full-service airlines that service distant destinations. Just how big that group is remains under debate. It may not be like the good old days, but what is?

The Watch List
-- US Airways Group (otc: UAIRQ - news - people ): Investors and lenders threw $745 million at this shotgun marriage of bankrupt US Airways and America West Airlines (nyse: AWA - news - people ), thinking Chief Executive W. Douglas Parker could fix what several other bosses and two brushes with bankruptcy couldn’t: US Airways' poor route structure, grumpy pilots and uncompetitive costs. The new US Airways faces big integration hurdles, but is a test case for airline mergers. Does it work to merge a low-cost upstart (America West) with an established legacy carrier (US Airways), hiring the discount carrier’s boss to run the whole shebang? If so, could an AirTran (nyse: AAI - news - people )-JetBlue combination with Delta Airlines (nyse: DAL - news - people ) or Northwest Airlines (nasdaq: NWAC - news - people ) be far behind?
-- Delta and Northwest: Both airlines, under pressure to match discounters, are using Chapter 11 to reconfigure fleets, get labor concessions, reform pension plans and revamp networks. Delta is in worse shape than Northwest, known throughout the industry as the airline that flies to “where it is cold and dark.†But even Northwest, which has a fortress hub in Minneapolis, is attracting low-price competition. The question for both these airlines is who will be their merger partners. Smart money says that neither is likely to stay independent post-bankruptcy.

-- AMR's (nyse: AMR - news - people ) American Airlines, Continental Airlines (nyse: CAL - news - people ) and UAL's (otcbb: UALAQ.OB - news - people ) United Airlines: American and United have gone through painful restructurings. American narrowly avoided bankruptcy, but while United has been stuck in Chapter 11 forever, it is now promising to emerge in 2006 with one of the lowest cost structures in the industry. One problem: Chief Executive Glenn F. Tilton still hasn’t articulated just how United is going to make money, and United is almost certain to lose money if oil stays above $50 a barrel. Continental, arguably the best-managed legacy airline, would love to buy United, a combination that would give the combined carrier clout in South America. American, meanwhile, after five years of relentless cost-cutting, is struggling with fuel prices. Unlike United, American has avoided alienating its employees and will probably break even if oil hovers at $60 a barrel.

-- Southwest: The bloom is off the rose at Southwest, where costs are likely to rise, especially with fuel hedges starting to expire next year. Chief Executive Gary Kelly has done a marvelous job of riding out the aviation downturn the past three years, but Southwest has also embraced an expensive expansion into high-cost markets, including Denver.

-- British Airways (nyse: BAB - news - people ) is a possible American merger partner should the European Union-U.S. Open Skies agreement be reached, allowing greater airline access across the Atlantic. Could new BA Chief Executive Willie Walsh's promise to eliminate 35% of the airline’s managers be a precursor to sale?

The Bold Prediction
There will be two or three big airline mergers in the next 24 months. Pricing is simply too weak to support available seat capacity. The Northwest and Delta bankruptcies could hold clues as to possible dance partners.
 

Busdrvr

Veteran
Aug 20, 2002
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I haven't heard of this analyst, and apparently for good reason. What a moron. He has no concept of the business structure at AWA, Jblu or DAL. :rolleyes: