December 7, 2007
Pressure on US airlines to merge is mounting as high fuel costs and weakening domestic travel demand threaten to destabilize freshly restructured carriers, senior airline executives said this week.
Airlines will have a hard time passing fuel expenses to customers through higher fares in a softening economy, senior executives of American Airlines parent AMR, UAL – parent of United Airlines, Delta Air Lines and US Airways said at the Reuters Aerospace and Defense Summit.
Delta’s Chief Financial Officer Edward Bastian said Delta remains confident in its future as a stand-alone company, but the current economic environment poses unforeseen threats that make the airline consider alternatives.
“The timing has certainly been accentuated by having oil at nearly USD$100 a barrel,” Bastian said on Thursday. “That causes one to look harder at structural solutions.”
Airline leaders see industry consolidation as a way to cut costs and capacity and lend stability to the volatile industry. A common view is that if two of the big airlines merge, others will scramble to find partners of their own.
The last merger of two major carriers was in 2005 between US Airways and America West. Early this year, Delta fought off a hostile bid from US Airways.
Speculation swirled last month that United and Delta were in talks. Delta denied the reports, but said it is considering strategic alternatives that could include consolidation.
The US airline industry is recovering from a years-long downturn triggered in part by low-fare competition and exacerbated by high fuel prices.
In 2006, the industry began cutting the number of seats for sale and raising fares. But trouble is brewing for the industry as it grapples with oil prices that hit a record high near USD$100 a barrel in November.
Airline executives have been increasingly vocal this year about the need for consolidation as a way to cut costs and reduce capacity.
“I’m happy to see more people come to the conclusion that we came to long ago,” US Airways Chief Executive Doug Parker said on Wednesday. “Wall Street seems extremely interested in trying to figure out what would trigger consolidation.”
So far, however, carriers have been reluctant to tackle obstacles presented by organized labor and anti-trust laws. Parker and other leaders also believe the transition to a new presidential administration in January 2009 poses a logistical hurdle to airline consolidation.
“There is a bit of a timing issue in that there is going to be a change,” Parker said. “If there is not something announced very early in ’08, I think you will see everything put on hiatus.”
AMR CFO Tom Horton said on Monday that carriers may attempt consolidation before the end of the Bush administration believing it to be more receptive to merger proposals than its successor government would be.
“It would seem that this administration has been relatively accommodative toward large mergers,” Horton said.
But regulatory history is not on the side of merger proponents. Aviation experts note the government’s long-held aversion to approving deals that involve relatively healthy big carriers. The last two major airline mergers involved at least one bankrupt airline.
The last attempt of two relatively healthy airlines to merge — United and US Airways — foundered on competition concerns in 2001.
UAL CFO Jake Brace said on Monday that regardless of economic conditions and regardless of the presidential administration, consolidation is healthy for the airline industry.
“We want consolidation to happen sooner rather than later, and we think that doing something now and getting it done in this administration is a good thing,” Brace said.
“If we were able to control that outcome, that’s what we’d do,” Brace said.
(Reuters)