- Dec 4, 2006
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Airline consolidation: Which combined companies will take off?
Dawn Gilbertson
The Arizona Republic
Dec. 13, 2006 08:21 PM
The airline mating game just added more contestants.
On the heels of US Airways' bid for Delta Air Lines last month, four more airlines joined the merger mix on Wednesday.
United and Continental are in preliminary talks, according to national news reports, and AirTran Airways made an unsolicited offer for niche carrier Midwest Express. advertisement
It's uncertain whether any of the proposed pairings will materialize.
Delta is vehemently opposed to US Airways' offer, and its employees swarmed a convention center near Atlanta Wednesday to rally against it. Midwest Express politely declined AirTran's overtures Wednesday and wished the airline's CEO happy holidays. United and Continental officials declined comment.
But analysts say this much is clear: The number of players is likely to shrink.
"The cat's out of the bag," said Jim Corridore, airline analyst for Standard & Poor's, the debt-rating agency. "There's going to be some consolidation."
US Airways CEO Doug Parker has been banging the consolidation drum for a while now and took the first major step last year when he was head of America West and bought bankrupt US Airways. United's CEO, Glenn Tilton, has been similarly outspoken.
They maintain that larger airlines with a broader route network will be more competitive and better able to handle the industry's notorious ups and downs, providing more stability for employees and passengers and better returns for investors.
They also can eliminate duplicate flights and shrink their fleets, helping to raise fares. Airfares have been climbing steadily the past 18 months as airlines try to return to profitability in the face of higher fuel prices, but Parker has said there are still too many flights to keep fares where they need to be for airlines to make money.
In making his pitch for Delta, Parker has repeatedly said the US Airways-America West merger is Exhibit No. 1 in the case for consolidation. The airline has reported three consecutive quarterly profits, better than it had projected, and has forecast a profit for the fourth quarter that ends in a couple of weeks. The stock is about triple its initial offering price.
"We've obviously proven to ourselves that there's a lot of value to be created by merging airlines," Parker said the day the Delta offer was announced. "We believed this to be a unique opportunity to do it again."
Roger King, airline analyst for research firm CreditSights, said other airlines are seeing the early success of that deal "and they're going, 'Wow.' "
Everyone but Delta, that is. The airline has said repeatedly that it wants to emerge from Chapter 11 as an independent airline. It hasn't provided details of its re- structuring plan but says they should be out in the next couple of weeks. Delta officials reportedly laid out their plan for creditors, and its objections to the US Airways bid, on Wednesday, and US Airways made its second pitch to creditors.
Whether Delta can or will stick to that plan in the face of Wednesday's merger moves is the big question.
Analysts said the early advantage from the latest developments goes to US Airways.
King said Delta CEO Gerald Grinstein is "probably feeling less secure every day."
Delta's management and, especially, creditors, who hold the key cards in the airline's bankruptcy, can't ignore the changing landscape.
"It does put a little bit of pressure on them," Corridore said. "If we have carriers that are bigger and going to be getting stronger, then Delta needs to go with the times."
Another plus for US Airways: With its reported discussions with Continental, United looks to be focused on other prey, at least for now.
Parker, Corridore said, is probably "happy that United is not going to come in and take the deal away from them."
Parker, through a spokeswoman, declined to comment.
A competing bid isn't out of the question, of course. United is said to have expressed interest in Delta previously, and another S&P airline analyst said in a report Wednesday that it or Northwest still could make a move for Delta if US Airways' bid looks as if it's gaining ground.
"Running an airline just got tougher," King said. "They've had this bit of a breather this past year (with profits returning), then all of a sudden, 'Kaboom,' the atom bomb was dropped on the industry. Now these guys have got to do some serious long-term thinking. Should I be an acquirer? An acquiree? This is all very difficult stuff."
Dawn Gilbertson
The Arizona Republic
Dec. 13, 2006 08:21 PM
The airline mating game just added more contestants.
On the heels of US Airways' bid for Delta Air Lines last month, four more airlines joined the merger mix on Wednesday.
United and Continental are in preliminary talks, according to national news reports, and AirTran Airways made an unsolicited offer for niche carrier Midwest Express. advertisement
It's uncertain whether any of the proposed pairings will materialize.
Delta is vehemently opposed to US Airways' offer, and its employees swarmed a convention center near Atlanta Wednesday to rally against it. Midwest Express politely declined AirTran's overtures Wednesday and wished the airline's CEO happy holidays. United and Continental officials declined comment.
But analysts say this much is clear: The number of players is likely to shrink.
"The cat's out of the bag," said Jim Corridore, airline analyst for Standard & Poor's, the debt-rating agency. "There's going to be some consolidation."
US Airways CEO Doug Parker has been banging the consolidation drum for a while now and took the first major step last year when he was head of America West and bought bankrupt US Airways. United's CEO, Glenn Tilton, has been similarly outspoken.
They maintain that larger airlines with a broader route network will be more competitive and better able to handle the industry's notorious ups and downs, providing more stability for employees and passengers and better returns for investors.
They also can eliminate duplicate flights and shrink their fleets, helping to raise fares. Airfares have been climbing steadily the past 18 months as airlines try to return to profitability in the face of higher fuel prices, but Parker has said there are still too many flights to keep fares where they need to be for airlines to make money.
In making his pitch for Delta, Parker has repeatedly said the US Airways-America West merger is Exhibit No. 1 in the case for consolidation. The airline has reported three consecutive quarterly profits, better than it had projected, and has forecast a profit for the fourth quarter that ends in a couple of weeks. The stock is about triple its initial offering price.
"We've obviously proven to ourselves that there's a lot of value to be created by merging airlines," Parker said the day the Delta offer was announced. "We believed this to be a unique opportunity to do it again."
Roger King, airline analyst for research firm CreditSights, said other airlines are seeing the early success of that deal "and they're going, 'Wow.' "
Everyone but Delta, that is. The airline has said repeatedly that it wants to emerge from Chapter 11 as an independent airline. It hasn't provided details of its re- structuring plan but says they should be out in the next couple of weeks. Delta officials reportedly laid out their plan for creditors, and its objections to the US Airways bid, on Wednesday, and US Airways made its second pitch to creditors.
Whether Delta can or will stick to that plan in the face of Wednesday's merger moves is the big question.
Analysts said the early advantage from the latest developments goes to US Airways.
King said Delta CEO Gerald Grinstein is "probably feeling less secure every day."
Delta's management and, especially, creditors, who hold the key cards in the airline's bankruptcy, can't ignore the changing landscape.
"It does put a little bit of pressure on them," Corridore said. "If we have carriers that are bigger and going to be getting stronger, then Delta needs to go with the times."
Another plus for US Airways: With its reported discussions with Continental, United looks to be focused on other prey, at least for now.
Parker, Corridore said, is probably "happy that United is not going to come in and take the deal away from them."
Parker, through a spokeswoman, declined to comment.
A competing bid isn't out of the question, of course. United is said to have expressed interest in Delta previously, and another S&P airline analyst said in a report Wednesday that it or Northwest still could make a move for Delta if US Airways' bid looks as if it's gaining ground.
"Running an airline just got tougher," King said. "They've had this bit of a breather this past year (with profits returning), then all of a sudden, 'Kaboom,' the atom bomb was dropped on the industry. Now these guys have got to do some serious long-term thinking. Should I be an acquirer? An acquiree? This is all very difficult stuff."
