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Apr-26-2008American Airlines in talks with Continental, US Air(topic overview)
CONTENTS:
- NEW YORK (Reuters) - American Airlines has had early-stage merger talks with U.S. Airways and is in advanced talks for an alliance with Continental Airlines, sources briefed on the situation said on Friday. (More...)
- I know we've all been speculating about whether any other legacy carriers were going to merge after the Northwest and Delta deal got rolling; many believed that Continental and United were next in line, especially with Continental's suspicious postings on their new website, co-industryconsolidation.com. (More...)
- Northwest has 42 flights a week to Minneapolis, 28 a week to Detroit and seven a week to Memphis. (More...)
- Consolidation is a process that goes far beyond the announcement of a deal. (More...)
- In the past week the U.S. airlines have been reporting their first-quarter results and only Southwest, the pioneer of the low-cost model, has achieved a profit - $34 million, down from $96 million in the same period last year. (More...)
- Very important to note: U.S. stock up 16% at 1pm despite oil remaining at $117. (More...)
- Baker noted that United was interested in acquiring America West Airlines in 1998 and U.S. Airways in 2000. (More...)
- PHL (the 4th largest city in the US) and CLT (home of BofA, and the only large housing market still showing growth) both produce loads factors for U.S. in the low-mid 80's on nearly every flight. (More...)
- How about all 3 airlines merge into the good ones that know how to provide decent customer service, like Southwest, JetBlue and Virgin America. (More...)
SOURCES
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NEW YORK (Reuters) - American Airlines has had early-stage merger talks with U.S. Airways and is in advanced talks for an alliance with Continental Airlines, sources briefed on the situation said on Friday. News of the talks comes after Delta Air Lines' and Northwest Airlines' announced nearly two weeks ago they planned to merge to become the world's largest airline, seeking to counter skyrocketing fuel prices, a weak economy and a growing competitive threat from European carriers as trade barriers fall on trans-Atlantic travel. [1] NEW YORK (Reuters) - American Airlines (AMR.N: Quote, Profile, Research ) has had early-stage merger talks with U.S. Airways (LCC.N: Quote, Profile, Research ) and is in advanced talks for an alliance with Continental Airlines (CAL.N: Quote, Profile, Research ), sources briefed on the situation said on Friday. News of the talks comes after Delta Air Lines' (DAL.N: Quote, Profile, Research ) and Northwest Airlines' (NWA.N: Quote, Profile, Research ) announced nearly two weeks ago they planned to merge to become the world's largest airline, seeking to counter skyrocketing fuel prices, a weak economy and a growing competitive threat from European carriers as trade barriers fall on trans-Atlantic travel.[2]
Delta Air Line's decision to merge with Northwest Airlines could pave the way for other mega mergers, such as United-Continental, and massive consolidation in the U.S. market. Analysts including Kevin Crissey of UBS think United and Continental are already far along in merger talks and Continental chief executive Larry Kellner (right) did little to dispel this when speaking to analysts right after the carrier reported an $80 million first quarter loss. Kellner says Continental will reconsider its often-repeated belief that it should stand alone "to make sure we remain a strong, long-term competitor". He adds Continental could even pull out of the SkyTeam Alliance: "We will also review our continued partnership in the alliance with Northwest, Delta, and SkyTeam, as we evaluate what course of action would be in Continental's best interest." Northwest had the right of first refusal on any potential sale of Continental but gave this up in order to pursue a merger with Delta.[3]
Parker said Thursday that making significant capacity cuts would be easier in a less-fragmented airline industry. He added that U.S. Airways will keep looking at "each and every opportunity" to participate in a merger. During a conference call, he added, "We haven't confirmed that we're in talks with anybody - and we won't." Discussing what could be the first of several U.S. airline mergers, executives of Delta Air Lines Inc. (DAL) and Northwest Airlines Corp. (NWA) testified before Congress Thursday they don't plan to use their proposed linkup as a way to downsize.[4] Why? Bankers close to the company say the airline doesn't offer much to a merger partner. Doug Parker, the chief executive of U.S. Airways, kicked off the latest round of airline merger mania last year when his company made an unsolicited offer to buy then-bankrupt Delta Air Lines for $10.2 billion. Mr. Parker's dream of creating a mega-airline never got off the ground, as Delta management convinced the creditors committee that an independent Delta was in their best interest. Fast-forward to last week, when it was Delta that was doing the shopping, announcing a tie-up with its SkyTeam partner, Northwest Airlines.[5] Richard Anderson, the Delta chief executive who formerly headed Northwest, said there would be no employee layoffs as a result of the deal, and that service to small hubs and communities would be maintained. The airlines expect to achieve synergies by mixing and matching their quite different fleets of aircraft to serve the most appropriate routes. If they get antitrust approval, the airlines plan to complete the merger by the end of the year. Both have announced plans to cut capacity ahead of the merger. William Ayer, chairman and chief executive of Alaska Air Group Inc. (ALK), said his airline, too, will cut capacity this year. The airline on Thursday said it would replace regional jets in its Horizon Air unit with new, more fuel efficient planes, moving to a single fleet type. Horizon will be able to serve its customers with fewer, but larger aircraft. Even with these improvements, Ayer said, "We will need an average $10 per ticket price increase to break even." Airlines have made good progress at raising fares this year, but Parker, at U.S. Air, said that, relatively speaking, air fares are 50% of what they were nearly 30 years ago. He suggested that adding fees, as U.S. Airways plans to do, is a better way to increase passenger revenue. "People don't have to pay for services they don't want," he explained.[4] Even though revenue is rising, sky-high fuel costs have pushed most carriers into the red in the first quarter. Airline executives said this week that if the industry wants to be profitable during up and down cycles, prices for ticket and passenger fees must go up, and airlines need to keep cutting excess seat capacity, preferably by merging. Doug Parker, chief executive of low-cost carrier U.S. Airways Group, Inc. (LCC), told analysts Thursday that individual airlines this year are doing a good job of cutting domestic seat capacity, trimming parts of their business that don't make money.[4]
The U.S. carriers have been hit first by high oil prices because many have only just emerged from Chapter 11 bankruptcy protection after the collapse after the terrorism attacks of September 11, 2001. This meant that they were unable to invest in new aircraft and are flying aeroplanes that are decades old and use 25 per cent to 40 per cent more fuel than current ones. European airlines are also feeling the effect of high fuel costs and the situation is about to get worse as much of their oil hedging ends in the next two months. Carriers that are paying about $80 for half their fuel requirements will soon pay the full market rate and analysts expect that this could trigger a crisis. Airlines such as British Airways and Virgin Atlantic have been unwilling to increase airfares and risk being uncompetitive, so they have instead added "fuel surcharges" to tickets. BA's surcharge for its longest flights has now reached £58 each way. The budget carriers have found another way to introduce stealth increases to airfares by adding ancillary charges for services such as checking baggage or airport check-in. Both tactics have a natural limit and airlines will have to consider other strategies to deal with rising costs.[6]
Combining United with Continental would create a company with a combined $35 billion in revenue and nearly 100,000 employees, surpassing the Delta-Northwest combination as the world's largest airline. That merger may not happen. United Airlines, whose shares plunged 40 percent when it reported a quarterly loss earlier this week, is also talking to U.S. Airways. Analysts have said a merger between those two carriers would be less complex than one between United and Continental Airlines. JP Morgan analyst Jamie Baker earlier this week said a deal between United and U.S. Airways could be easier when it comes to aligning the wages of pilots, combining fleets and reducing flights and seats.[7] A merger of U.S. Airways and United Airlines has "considerable merit" and would be less complex than a much-rumored merger of United and Continental Airlines, a airline analyst wrote in a research note this week.[8]
I know we've all been speculating about whether any other legacy carriers were going to merge after the Northwest and Delta deal got rolling; many believed that Continental and United were next in line, especially with Continental's suspicious postings on their new website, co-industryconsolidation.com. Perhaps that's not the only deal in motion though? United and U.S. Airways, two airlines that have faced particular hardship over the last few years could well-benefit from the consolidation of their services. Both are in the same airline alliance and have numerous domestic hubs that could directly compete with the the new Northwelta. [9] Last year American Airlines flew approximately 100 million passengers. If 15 percent of them checked a bag at the curb at $2 per bag, that's a cool $30 million in additional revenue. I decided to take a closer look at these fees on the following airlines: AirTran, American, Continental, Delta, JetBlue, Northwest, Ryanair (Ireland), Southwest, United and U.S. Airways. I broke down these costs into categories that I think we all make use of from time to time: food service, phone reservations, headsets, a second bag charge, curbside check-in fees and the cost of transporting pets.[10]
Industry sources confirm that the two airlines have indeed breeched the idea, with some predicting UAL could buy U.S. Air outright while others suggesting United might split the target with Continental, a deal that, though complicated, could strengthen Continental out West and United in the Northeast. Meanwhile American Airlines parent AMR Corp. is also considering its options, and reportedly holding discussions with Continental about a potential alliance while at the same time having early-stage merger talks with U.S. Air, according to Reuters. While it is hard to say what the outcome of all of these discussions may be, the extent of the talks shows how serious airlines, beaten down by record-high fuel prices, are about consolidation.[11] American Airlines' talks with Continental are focused on forming an alliance that could share passengers, much like the SkyTeam partnership that includes Air France-KLM, Alitalia, Czech Airlines, Delta Air Lines, and Northwest Airlines, the people said. Alliances have flourished in the industry because they generate profits through marketing programs and flight code-sharing without the headaches of combining operations.[1] American Airlines' talks with Continental are focused on forming an alliance that could share passengers, much like the SkyTeam partnership that includes Air France-KLM (AIRF.PA: Quote, Profile, Research ), Alitalia (AZPIa.MI: Quote, Profile, Research ), Czech Airlines, Delta Air Lines (DAL.N: Quote, Profile, Research ), and Northwest Airlines (NWA.N: Quote, Profile, Research ), the people said. Alliances have flourished in the industry because they generate profits through marketing programs and flight code-sharing without the headaches of combining operations.[2]
Northwest has 42 flights a week to Minneapolis, 28 a week to Detroit and seven a week to Memphis. In an effort to accommodate loyal customers in the Midwest, Northwest tried some point-to-point service to Las Vegas mostly in a bid to discourage competition from locally based Allegiant Air in markets such as Sioux Falls, S.D. Today, a daily round trip to Indianapolis is all that remains of that experiment, and the company also has one daily flight to Los Angeles International to accommodate international traffic transferring from Asia. Of all the airlines at McCarran, it's Delta that brings in the most jumbo jets, which explains why it has the fourth highest market share of seats to the market while having fewer flights than American Airlines. [12] Incidentally, the two carriers have announced the merged company would be known as Delta, the corporate headquarters would be in Atlanta and there are no plans to downgrade any of the existing hub airports. Since merging and consolidation are all about eliminating overlaps and consolidating flights and cutting fleet and staff, where would the new Delta save money if it doesn't downgrade some of its hubs? That's a question regulators likely will be asking when it comes time to approve the merger. For that matter, so will shareholders for both companies, who also have to sign off on the deal. As for Las Vegas, the only overlap the carriers have are those two single flights each have to and from Los Angeles. Would Las Vegas be the worse if either or both of those flights went away? Not likely, since, with an average of 33 1/2 flights a day to that market on six different airlines, that is the busiest route out of our local airport. It's also questionable whether the new Delta would keep all those hubs operating at their current levels.[12] When U.S. Airways emerged from bankruptcy in 2005, it rebranded itself as a "low-cost carrier." It even chose "LCC" as its stock symbol to reflect its new mission as a no-frills airline. Its merger with America West offered transcontinental coverage to what was, at the time, an East-Coast-centric airline. The new, larger airline quickly started to have problems integrating its technology and personnel. It faced rising competition from low-cost leader, Southwest Airlines, in many markets where the two share hubs, such as Las Vegas.[5]
People should pay attention to the newly annonced code-sharing agreement announced 2 days ago with Swiss International Airlines. Given the new era of "open skies", U.S. Airways entry into the LHR market while retaining its LGW service(while others including AA pulled out), look for code-sharing with BMI airlines (another Star Alliance carrier) Even though U.S. seems to be left out of domestic merger-mania, many news sources say talks are continuing with UAL. My take: look for U.S. to initiate truly "global" merger mania with Swiss and BMI as initial partners and UAL getting in on the mix. Huge European, domestic U.S., and Asia presence when combinednow that's a MERGER! Parker got outside financing for US-AWA, my guess is he would have no problem getting the same for a "global" type merger.[5] Spokesman for Continental and United couldn't be reached immediately for comment. The same report said AMR Corp.' s (AMR) American Airlines has had early-stage merger talks with U.S. Airways Group Inc. (LCC) and is in advanced talks for an alliance with Continental.[13] An unnamed source has told Reuters that American Airlines is in talks with U.S. Airways about a possible merger--and that it's also in talks with Continental about sharing passengers! Meanwhile, Continental is currently in talks with United about a possible merger of its own, and has said it will only choose one partner eventually.[7] United Airlines is also in serious merger talks with U.S. Airways, and will choose to merge with either Continental or U.S. Airways soon, the people said. American's talks with U.S. Airways were not serious at this point, one person said.[2]
There is a basic problem with ALPA and their pilots that will cause problems for EVERY proposed merger. That is they have yet to rule in any substantive way how seniority is going to be determined in merged carriers. Instead of requiring "date of hire" be the formula, they have created a hornets nest with the irrational ideas of slotting, super-seniority, "career expectations" and other formulae that ignore date of hire. Say what you will about flight attendants, but approximately 10 years ago the Association fo Flight Attendants recognized what was going on in the industry and had foresight to adopt as part of their Consitiution and Bylaws date of hire as the way to determine mergered seniority. US/AWA flight attendants still aren't merged because U.S. Airways management has dragged its feet in negotiations knowing that they had cheap labor in both existent contracts. Talks are progressing more rapidly now though and they'll be the next group to ratify a merged agreement leaving only the pilots.[5]
One airline industry banker argued to Deal Journal that the U.S. is following an outdated model of competition. Other countries, including France, England and Germany, have relied on one or two airlines each. This banker said, U.S. airlines face a losing battle unless they compete globally. Delta and Northwest acknowledged this obliquely by playing up their global strengths in the statement about their merger. Rival Continental, in a statement about the Delta deal, noted the airline landscape is changing and played up its strengths at Heathrow in London, in Latin America, in India, and in Asia. The future of air travel does not appear to be in U.S. regional hubs: Delta and Northwest expect to cut capacity by 10% and 13%, respectively, most of that from domestic flights as they set their sights on global competition.[14] The merger agreement between Delta Air Lines and Northwest Airlines, a $3.1 billion deal, would create the world's largest carrier and could encourage other airlines to follow a flight path to decreased competition. Whether or not this makes business sense for the airline, it won't be good for consumers.[15] The page went live on April 15, a Continental spokesman said Friday. He had no other immediate details. Its debut came one day after Delta Air Lines and Northwest Airlines announced a transaction that would create the biggest domestic carrier. Delta and Northwest also have their own new Web page, www.newglobalairline.com, which they also posted on April 15. They have a deal already, while Continental's is still in the works.[16]
Combined, it would fly to about 400 destinations in 67 countries--including "6,000 new city pairs"--with a fleet of 1,400 aircraft. "This really does, for the first time in the U.S., create an airline that has breadth and scope of service around the world," Anderson said. It would be "the second largest to Asia, largest to Japan, largest to the U.S. and Canada, second largest in Latin America, and the largest to Europe, Africa, the Middle East and India." Air Transport Association chief economist John Heimlich during an Association of Corporate Travel Executives webcast this week said Delta and Northwest are attempting to catch up with carriers in Europe and Asia, which already have engaged in consolidation. "At today's fuel prices, restructuring is clearly of interest to the carriers, especially in terms of having the scale to compete with their foreign rivals to attract corporate volume agreements, frequent flyer loyalty, etc., that you cannot fully do with alliances." Having such scale opens (or re-opens) many possibilities for the carriers. Northwest's domestic operation is "not optimally sized to support those great Asian assets," said NWA president and CEO Doug Steenland, referring to the carrier's Pacific operations.[17] The former appears more likely than the latter, certainly in the short term, after the U.S. Department of Transportation gave the public until this week to object to its decision to approve transatlantic immunity for SkyTeam members Air France, Alitalia, Czech Airlines, Delta, KLM Royal Dutch Airlines and Northwest. If finalized, that approval would free those airlines to coordinate pricing, scheduling, distribution and information systems, as well as pool costs and revenues and promote "metal neutrality" on transatlantic routes. The merger proposal affects both the domestic U.S. and international markets.[17] The most likely outcome is that airlines will reduce capacity and shut down routes that are not operating with near-full planes, while other carriers will seek mergers in the hope of finding big cost reductions. Delta has decided to pursue both of these strategies and will cut the number of services it offers by 11 per cent this year, while also merging with Northwest in a deal that will create the world's largest carrier by passenger numbers.[6] The current air travel market is challenging for all airlines. Delta and Northwest both emerged recently from bankruptcy. This month, Frontier Airlines joined Aloha, ATA and Skybus on a growing list of carriers currently in bankruptcy. Fuel costs are the major driving factor in these bankruptcy filings, and larger carriers are not immune. Labor costs are also substantial, and they are at the center of the union opposition to the merger.[18] Delta Air Lines and Northwest Airlines have both recorded multi-billion dollar losses for the first three months of 2008, hit by crippling fuel costs.[19] The proposed merger of Minneapolis-based Northwest Airlines and Delta Air Lines of Atlanta shouldn't have a huge effect on Las Vegas consumers and the local tourism economy unless you consider the potential of higher ticket prices to be a problem.[12] So it is with the proposed merger of Delta Air Lines and Northwest Airlines. Although the combination will probably navigate regulatory roadblocks successfully, it is unlikely to deliver on its promises of billions in savings and long-term profitability.[20]
Northwest said Friday night it will match the approximately 3 percent to 5 percent increases first implemented Thursday by United Airlines and matched by Delta Air Lines, American Airlines and Continental Airlines.[21] Since 2004, there has been a major PR campaign pushing for Delta (Air France's U.S. partner) to acquire Northwest and for United Airlines to acquire Continental Airlines. (United is the partner of Lufthansa, which operates the other European intercontinental network.) The European Union delayed signing a new aviation treaty with the United States for five years as it tried (unsuccessfully) to gain the right for carriers such as Air France and Lufthansa to directly control the management of their U.S. partners.[22]
How could a merger find billions in new cost savings? The claim of scale economies is silly. How can anyone believe there are billions in revenue synergies when there are no plans to significantly restructure either network? Every large U.S. airline merger in the past 20 years has been a dismal financial failure, mostly because airlines wildly overestimated these synergies. Unless Delta can convince expert outsiders that it can readily achieve $5 billion to $7 billion in synergies, there is no possibility that this merger could benefit the public interest. Wall Street has already sent a clear signal that it believes a merger would be pointless without huge capacity cuts and hub closures, but Delta management has clearly promised those cuts will never happen. These megamergers create the risk of an operational meltdown that could cripple the nation's aviation system. Absolutely no one who flies regularly expects these mergers to be implemented without major problems.[22] The American airline industry lost $1.5 billion (£760 million) in the first three months of the year and fears are growing that European carriers will be the next to feel the pain. High oil prices have caused enormous losses among airlines in the United States, forcing them to seek bankruptcy protection, cut capacity and look for mergers.[6] Northwest Airlines also suffered, posting a $4.1bn net loss, much wider than the $292m a year earlier when it was struggling to emerge from chapter 11 bankruptcy. Like Delta, the vast portion of this - $3.9bn - was a one-off accounting charge to take into account the negative effect of fuel prices, which cost Northwest an additional $445m in the quarter, 57.3% more than in the same period a year earlier. "Today's results demonstrate the volatility of the airline industry and the challenges that airlines face related to uncontrollable increases in input costs such as oil," said Dave Davis, Northwest Airline's chief financial officer.[19] "We have little doubt that smaller hubs will be deemphasized," according to a research note issued by UBS analyst Kevin Crissey. "There simply are too many hubs," said Credit Suisse analyst Dan McKenzie, speaking this month during an ACTE forum. "Unfortunately, by the time Delta and Northwest consummate their marriage (if at all) and potentially revisit their aversion to hub closures, industry losses are expected to have escalated," according to JP Morgan Securities analyst Jamie Baker, who ascribed an "80 percent probability" to the deal closing by next year's first quarter. Northwest on its Web site said the combined airline "will maintain its agreements with valued corporate partners of both airlines. All existing sales agreements will continue to be honored according to their terms and conditions."[17] Update: Continental and United are in merger negotiations and hope to finalize a deal by next week, The New York Times reported Friday afternoon. Continental Airlines is getting ready for what the airline industry believes is inevitable, if its Web page is any indication. A link for the consolidation page, www.co-industryconsolidation.com, sits next to a headline, "Latest News and Offers," just to the right of a form where passengers can book their flights.[16] Speculation centers on United and Continental Airlines as leading candidates. Speculation also sees the urgency in such deal-making as stemming from airline desires to get their deals approved by the Justice Department under the Bush administration. Merger fever even has spread to low-fare carriers such as Southwest Airlines, which may feel pressure to explore the possibility with low-fare carrier AirTran just to maintain a hold on the market for bargain travelers. It goes without saying that the melding of two companies, their pilot pay structures and other support staff factors will be neither easy nor cheap. It remains to be seen whether such moves will result in improved share prices, but the writing is on the wall for passengers vying for seats and destinations.[15]
Continental Airlines is free to pursue any deal it likes now that it has redeemed a "golden share" previously controlled by Northwest. That share gave Northwest a say over Continental's future, but with Northwest entering a definitive agreement with Delta, Continental was entitled to redeem it.[17]
UAL has long been an outspoken proponent of consolidation, and it has been widely expected to make a move in response to Delta's planned deal. The airline has had extensive talks with Continental Airlines Inc.; however, sources say disagreements over how a deal would be structured and Continental's hesitance to sell has complicated those discussions.[11] For now, Continental's consolidation page features just a few links. One is to press releases, including the statement the company issued after the Delta-Northwest deal was announced, as well as Continental's announcement last week of its $80 million first quarter loss. Another link takes visitors to a "Frequently Asked Questions" page that talks about what the Delta-Northwest merger might mean to Continental. A third provides links to company Web casts.[16]
What of U.S. Airways? The airline's stock has plummeted more than 80 percent since the Delta deal failed to go through early last year. It is the only major carrier that is rarely mentioned as a possible merger partner for the other remaining legacy carriers.[5] Unlike the post-merger rally enjoyed by U.S. Airways, Delta stock is down 17 percent since the merger deal was announced.[20]
U.S. Airways can give well, flights from Philadelphia to Shannon, Ireland. That is another major problem with U.S. Airways: Its lack of coveted hubs. Its hubs are in second-tier cities such as Phoenix and Charlotte, N.C. not the ideal places to launch international service. U.S. Airways' best hope may come from an international airline that would want its domestic routes. Any such deal is probably a long way off.[5] If U.S. Airways wants to continue to brand itself as a "low cost carrier" then it needs to reduce prices in line with the service it provides. The best thing that could happen to this company is for a foreign carrier to buy it. I would also have to disagree that it's hubs are not attractive locations for foreign carriers to launch international routes.[5] If international routes are so profitable then why does U.S. Airways put its worst foot forward on international flights? The answer is obviously emblematic of how disfunctional the entire company is. Service on envoy class international flights has reached lows i have never experienced on even the worst of the nationalized international carriers, and i have traveled on most of them.[5]
Starting May 7, U.S. Airways, the second-busiest air carrier at McCarran, has a new way to raise revenue and to get into your wallet. The company is introducing "Choice Seats," which will require passengers to pay an additional $5 per flight if they choose to sit in window or aisle seats toward the front of the coach cabin.[12] The two airlines' pilot groups are nowhere near agreement on a master seniority list--which determines pilots' pay, route assignments, and vacation time--and morale among the old U.S. Airways crew is plummeting. Late last week, the old U.S. Airways pilots, fed up with their union representation, voted to leave the Air Line Pilots Association and join a new union. All of these challenges have affected the passenger experience.[20] The airline's frequent fliers aren't subject to the additional fee, which is paid when passengers use Web Check-In 24 hours to 90 minutes before flight time. Later this year, Choice Seats will be available through kiosk and ticket counter check-ins at the airport. In its announcement, U.S. Airways said Choice Seat purchases occur by flight segment so a Las Vegas traveler flying, for example, to Philadelphia with a change of planes in Phoenix would have to pay the fee for each leg of the trip. Arizona Charlie's Decatur marked its 20th anniversary in Las Vegas with a rededication ceremony and ribbon-cutting last week.[12] U.S. Airways' Las Vegas hub capacity has fallen off dramatically from a year ago, with 23.6 percent fewer flights now than there were in April 2007.[12]
Phoenix is a great hub for Latin American and maybe even future Asian routes. Let's see how Delta/Northwest works out because currently they are not that far ahead of U.S. Airways as internationally reputable airlines. I say let the industry go global here in the U.S., the rest of the world has and they are now light years ahead of us. It's pretty sad if you think that we taught the world how to fly and make a business out of it and look where we are now.[5] In a memo to the airline's 35,000 employees, U.S. Airways Chief Executive Officer Doug Parker said mergers "could result in a much healthier industry, which would be good for our employees, our customers and the communities we serve."[5] U.S. Airways Chief Executive Doug Parker is a big advocate of industry consolidation. When the rumors about U.S. Airways hit the media, he felt compelled to communicate directly with his employees. "Most of you know my views on consolidation, and those have not changed," Parker told employees in a memo.[12]
Rest assured if U.S. Airways chooses to participate in any industry consolidation, we will do so because we believe it is the best interests of our employees and our airline." He added that the Delta-Northwest deal could force others to act. "We can't ignore what's happening in the world around us," he said.[12]
At the time, the 2005 U.S. Airways merger was hailed by Wall Street; indeed, after the merger the airline's stock price rallied.[20] Historically, airline mergers have been expensive and difficult to complete. U.S. Airways merged with America West in 2006, but still doesn't have a single labor agreement with all of its pilots.[4] The Northwest-Delta merger more closely resembles the acquisition of U.S. Airways by America West Airlines in 2004. Unlike the smaller mergers that yielded today's major network airlines, this one was billed as a complementary and equal arrangement in which a smaller but more profitable airline purchased a larger, troubled carrier.[20] U.S. Airways doesn't offer a merger partner access to lucrative international routes, where the bulk of airline profits are generated.[5]
Recent headlines announcing the possible merger of Northwest and Delta airlines warned of higher ticket prices, the end of service to smaller markets and fewer flights along existing routes. All of these changes are likely, but they will occur even if the airlines remain separate. The relevant question is whether customers would be better off than they would be without the merger.[18] Critics say the merger would increase ticket costs. That may be the price Las Vegans pay for this mergers and others if they occur. Airlines routinely oversell their flights because they know about how many people won't show up for a given flight for one reason or another. What results is that some passengers are involuntarily denied boarding if more people show up than they expect.[12] Given what's been going on with higher gas prices and record high costs for oil, it is understandable that people would harbor misconceptions about airline mergers including the belief that it would be part of the natural industry shakeout process, or that airline mergers would be a necessary response to escalating fuel costs and a downturn in the business cycle.[15] Frontier, ATA, Aloha and Skybus have all been grounded by high costs while in Europe, Oasis has gone bust and Silverjet is looking for a buyer. These results come from a quarter when oil prices were in the $100 to $110 per barrel range, but oil is now trading at $120, and with no indication that fuel costs will fall soon, many airlines are preparing for the worst.[6] The low-cost model that fuelled the growth of Ryanair and easyJet is under threat from rising fuel prices. High fuel costs and the economic slowdown prompted Michael O'Leary, chief executive of Ryanair, to say profits could fall by 50 per cent this year, but analysts fear that the situation could get worse. No-frills carriers have met rising oil prices by cutting other costs and by introducing new charges, such as bag-checking fees.[6] Doug McVitie, managing director of Arran Aerospace, an aviation consultancy, said: "The legacy of rising oil prices may turn out to be an aviation industry that is dominated by only a handful of super-sized airlines." The City expects British Airways to announce a further profits warning this year as rising fuel bills cut its margins potentially to zero. Willie Walsh, the chief executive, said last month that BA's fuel bill would rise by 20 per cent to £2.5 billion this year and this forced him to scrap a promise to reach profit margins of 10 per cent.[6]
The City expects European airlines to experience the same problem as high oil prices drive up operating costs. British Airways's share price has more than halved since this time last year and analysts expect it to report a second profit warning within months. Andrew Fitchie, aviation analyst at Collins Stewart, said: "It's going to be very bad indeed."[6] The revised profit margin is 7 per cent, which translates into a £273 million profit reduction. Aviation analysts have been downgrading the stock more severely as they expect fuel to cost even more and the company's share price has halved since this time last year.[6]
The spike in jet fuel prices was the last straw. U.S. Airways didn't hedge the bulk of its fuel costs, providing little buffer from skyrocketing jet fuel costs, which are up 70 percent from this time last year.[5] Then even established names could go bust. Continental is operating smaller aircraft across the Atlantic in a strategy to cut costs, but last year 96 of its planes ran low on fuel as they approached New York. Continental now uses 180-seat Boeing 757s rather than 250-seat 767s on some flights from London to New York and British Airways is planning to do the same on its new services from Amsterdam and Paris to the U.S. These smaller aircraft burn less fuel and are easier to fill with passengers.[6]
Airline revenue per passenger mile and proportion of seats filled have been falling, indicating that cutbacks throughout the industry are coming. Northwest has already eliminated flights, and earlier this year it announced more cutbacks in the future. As airlines retrench, combining overhead costs of the two airlines makes more economic sense and will help both airlines survive in a shrinking market.[18]
In general, Las Vegas is a "spoke" to Northwest's hubs in Minneapolis, Detroit and Memphis, Tenn., and Delta's hubs in Atlanta, New York, Salt Lake City and Cincinnati. That means most of those airlines' flights from Las Vegas are to those cities.[12] If other carriers catch the fever, it could be a whole new ballgame, especially after three airlines already have quit operating. Legacy carriers Northwest and Delta operate strong hub-and-spoke operations, a system that enables them to fly small planes into a broad number of markets and funnel traffic into a hub a large airport where many passengers change planes to make connections to their destinations.[12]
In the U.S. international market, Continental-United would also top Delta-Northwest, with a 17.2% share versus a 14% share. The biggest U.S. carrier, or at least the biggest until Delta and Northwest combine, American Airlines, was nonplussed in its response to the unveiling of the Delta-Northwest plan.[3] Speaking from American's perspective I think there will be an appropriate time to cross that bridge." "It will be interesting to see what American Airlines and British Airways do, and how this may give SkyTeam a stronger platform to go after multinationals with renewed vigor--giving Star Alliance a run for its money," added TRX's Gillespie. DOT said the SkyTeam partners must abide by certain conditions and implement their planned joint venture within 18 months. In explaining its proposal to approve the alliance's application, DOT concluded that nonstop market shares claimed by transatlantic competitors do "not change significantly as a result of this transaction" and that the competitive landscape does not change "to any significant degree." At press time, DOT had posted no new comments from parties opposing its tentative approval. The deadline passes this week.[17] A oneworld alliance request for antitrust immunity--covering American Airlines, Iberia, Finnair, Malev Hungarian Airlines and Royal Jordanian Airlines--still is pending at the U.S. Department of Transportation. While that does not include oneworld founder British Airways, AA and BA may be considering another run at securing their own antitrust immunity.[17]
Spokesman for American Airlines and U.S. Airways declined to comment on the report.[13]
With its labor woes, service struggles and sunken stock price, U.S. Airways hasn't been seen as a major player as airlines rush to the altar to combat high fuel prices and a weak economy.[5] Then, in 2007, the stock tanked, and the airline itself didn't perform so well either. It took a year and a half to merge the respective reservations and booking systems of U.S. Airways and America West.[20]
The Department of Transportation's latest Air Travel Consumer Report indicates that U.S. Airways has the highest complaint rate of all U.S. airlines.[20] Given the current state of U.S. airways, it may be all that the airline need to keep a competitive edge. (The pilots, on the other hand, are a different thread.)[5] If U.S. Airways is to be acquired by other airline company, the problem with pilots' seniority MUST be addressed. Otherwise, it won't work.[5]
United-Continental continues to generate "furious speculation," JPMorgan analyst Jamie Baker wrote Monday, but a deal between United and U.S. Airways could be easier when it comes to aligning the wages of pilots, combining fleets and reducing flights and seats.In addition, Baker wrote, United and U.S. Airways already have code-share agreements and are part of the Star Alliance.[8] Although mainstream press reports have identified United as a Continental merger partner, JP Morgan's Baker sees "considerable merit to a United-US Airways combination," including some degree of fleet commonality and no alliance complications. Both are part of Star Alliance. "United was interested in America West in 1998, U.S. Air in 2000; today, both are available under one roof," Baker wrote.[17] United, on the other hand, is not only pursuing Continental but is also in talks with U.S. Airways about a merger.[7] The rumor mill was churning again on Friday with talk of potential dealmaking involving United Airlines parent UAL Corp. and U.S. Airways Group Inc.[11]
Continental is also in advanced talks with United Airlines for a full merger, the sources said.[1] Continental is also in advanced talks with United Airlines (UAUA.O: Quote, Profile, Research ) for a full merger, the sources said.[2]
Chicago-based United Airlines and Houston's Continental Airlines have been rumored merger partners for years.[12]
United Airlines lost $537 million, American lost $328 million, Delta lost $274 million, Northwest lost $191 million, Continental lost $80 million and JetBlue lost $8 million.[6] In Congressional hearings yesterday, House Judiciary Committee Chairman John Conyers, a Michigan Democrat, fretted that if Delta and Northwest merge, it will "result in a cascade of other mergers," including Continental Airlines-United Airlines and American Airlines-US Airways and lead to three mega-carriers competing only against each other.[14]
United, American, Continental, Northwest and Delta, are all struggling to keep up with skyrocketing jet fuel prices that have more than doubled in the past year.[23] Delta is claiming, quite unbelievably, that merging with Northwest will generate enough incremental synergies to repay the acquisition costs, plus another $1 billion in implementation costs, plus enough additional profits to justify the huge integration risks, plus additional profits on top of that to significantly counteract high fuel prices.[22] Jim Cron, senior vice president of revenue management, said Northwest made the move "to offset the extraordinarily high cost of fuel." The fare increase comes on the heels of Northwests earnings report this week, which showed a $4.1 billion (2.63 billion) loss in the first quarter, almost all of it from a massive accounting charge.[21] The top U.S. airlines have burned through a combined billion dollars in fuel costs in the first quarter alone.[23] You catch most of the problems in this article: fuel costs, poor route structure and merger hang-over, but you might also add: aircraft fleet quality and composition, servicing structure and costs, continuing lack of internal controls, second/third tier positions in important airports and first tier positions in truly lesser locations. The company also drags around with it this image of being less-than-professional on all fronts, be it right or wrong, and management in particular does nothing good to raise that rather "tinny" image by trying to pretend reality through gimmicks like its ticker symbol, a choice and action that confirm their badly conceived "face" toward the public.[5] American and Continental had already posted losses, blaming fuel costs, when United issued its first quarter results Tuesday.[24]
Fuel has risen so fast that it now accounts for half of an airline's total costs, which leaves the budget carriers little room to keep total costs down. Both Ryanair and easyJet are taking delivery of new aircraft. Analysts see the potential for a perfect storm of budget carriers offering more seats that cost more to operate but with fewer passengers to buy them.[6] How about some good insight into what the new Open Skies agreement might mean for domestic carriers and the opportunities that exist now for true globalization for the airline industry. The U.S. markets represent an incredible investment opportunity for foreign carriers and a huge market for them to capitalize on given the valuation of the dollar against foreign currencies. It's ripe for the picking and there's little doubt foreign carriers want and will eventually get more access to domestic U.S. markets. I'm interested to see others' comments on this.[5] For an airline that most say is in trouble, it was awfully upbeat considering the industry is melting down. Bookings are strong, revenue is up, U.S. is #1 ontime of the majors for 1st quarter, a totally new Business Class has been unveiled and they got $2.7 billion on hand and fule hedges that most majors don't have.[5]
Some believe that mergers also help ease labor relations for airlines, who depend on service employees including pilots, stewards and mechanics. Pilots at several airlines, notably American, have been unhappy with their benefits or seniority. There have been several instances where airlines, crying about competition and the threat of bankruptcy, convinced their workers to take pay or benefit cuts to ensure the survival of the airlines. As UBS wrote this week, "Management is often hamstrung to meet labor demands because the industry is troubled financially. This leads to labor versus management tensions.[14] Mitchell argues that there are three very narrow and money-oriented groups arguing for legacy airline mergers in the United States individual hedge funds that do not understand industry fundamentals but had made large speculative gambles on consolidation; a handful of very senior airline executives who have not been able to generate substantial profits but would realize multimillion-dollar payouts in most merger scenarios; and Wall Street firms, lawyers and consultants eyeing big merger fees. There are many reasons why airline mergers of this magnitude would be bad for passengers, not the least of which would be fewer available seats and the possibility of fewer stops at regional airports.[15]
More likely, according to Mitchell, the first megamerger proposal could quickly trigger additional defensive mergers and permanently reduce the number of airline competitors. It is impossible to look at a potential merger between Delta and Northwest in isolation, and without looking at the possibility of an entire web of consolidation efforts.[15] Delta management fought back by negotiating favorable contract terms with Delta's pilots. In a letter dated April 14, Moak announced his support for the merger with Northwest. Delta had agreed to give their pilots annual pay raises through 2012, furlough protection, and a 3.5 percent equity stake in the newly merged airline.[20] The airline's pilot union president referred to the merger as " a recipe for failure" and slammed the Delta union for "try to disadvantage the Northwest pilots economically and with respect to our seniority."[20]
If approved by regulators and shareholders--and not scuttled by Northwest's angry pilots union--the transaction would create a combined carrier called Delta, headquartered in Atlanta and led by current Delta CEO Richard Anderson. It would generate $35 billion in annual revenue--making it the world's largest commercial airline. The two carriers heralded their proposed union as "pro-competitive" and "complementary," designed to create a financially stable and stronger global competitor.[17]
Delta Chief Executive Officer Richard Anderson, right, and Northwest Chief Executive Officer Douglas Steenland, left, testify on Capitol Hill in Washington, Thursday. That doesn't cover the whole story. The U.S. also supports a host of regional airlines, and the recent spate of bankruptcy filings or closures suggest that they can't survive independently either.[14] America West's strength in the western United States meshed well with the East Coast focus of U.S. Airways. Northwest and Delta executives tout the geographic fit of their pairing.[20] Unlike the post-merger rally enjoyed by U.S. Airways, Delta stock is down 17 percent since the deal was announced.[20]
The rise in the oil price helped to drive Delta's operating expenses up 20% in the three months of the year compared to the same quarter in 2007. With the U.S. economy on the brink of recession, Delta Air Lines - like most of its domestic rivals - is having a tough time filling internal flights and plans to aggressively scale these back.[19] Followers of Delta Air Lines Inc.' s drawn-out negotiation to buy Northwest Airlines Corp., which played out for more than two months before an announcement was made, know all too well the danger of putting too much stock in airline gossip.[11] Delta Air Lines posted a net loss of $6.4bn for the period, compared to a loss of $130m the year before.[19]
Consolidation is a process that goes far beyond the announcement of a deal. Calyon analysts expect Delta and Northwest to take up to four years to show the benefits of their merger. [14] Members of Congress who oppose the Delta-Northwest deal are sticking loyally to the idea that competition leads to lower ticket prices and more jobs. Congress plans to do more, apparently: A Credit Suisse research report today said that "there is movement this morning in the Senate towards an FAA reauthorization bill that could pick up amendments designed to slow down airline MA." It could include a passenger bill of rights and merger provisions that could require unions to be at the table in labor negotiations.[14] The merger between the two airlines depends on approval from the competition authorities and the unions, but if successful it will create the biggest airline by passenger volume.[19]
Aviation consultant Bob Mann said a U.S. Airways-American Airlines merger would not be a marquee matchup and would give American, currently the largest U.S. carrier, little extra depth overseas.[2] The starting point of radical airline consolidation was the 2004 merger between Air France and KLM -- two strong, profitable carriers that controlled two of the three large intercontinental connecting hubs in Europe.[22] The largest airline merger in history is likely to get bogged down in operational and personnel challenges. Northwest-Delta is being touted as a merger of equals, but the most effective airline mergers have usually involved a larger, richer carrier that is trying to get something another carrier has, such as routes, hubs, or aircraft.[20]
USAir bypasses nearly every major origin and destination hub in the U.S., markets that are less likely to die out during an economic downturn. While there is business in the their hub towns, too many of their destinations are leisure routes whose performance is very subject to economic volatility. Their "Latin" routes really only encompass tourist destinations, and crowded ones at that. They don't operate any business destinations south of the U.S. at all, Brazil for example. Despite their self-proclaimed LCC status, their fares are in line with all other major carriers. The only thing that differentiates them from the legacy carriers is the lesser level of service. As for their A350 long-haul planes on order, Airbus still has yet to finalize the plane's design and is anticipating delivering the first plane at earliest six years from now. Regarding foreign investment, it's likely to happen.[5] If anyone really thinks that flying in Europe is cheaper, think again. While we may hear about Ryanair and Easyjet on this side of the pond all the time, the truth is that legacy European carriers have a stranglehold on all continental airports and non-leisure routes and fares remain far about U.S. levels. If Ryanair were to ever come to the U.S., look for fares from Akron to Las Vegas coming down, (though the flight would be advertised as Chicago to Los Angeles -and your legs would be non-functional for three days after being cramped in their tiny seats ).[5] The new Allegiant routes to San Francisco International begin June 6 and to San Diego on June 12. About 100 helicopters fly between Las Vegas and the Grand Canyon every day, and Clark County officials are hoping to take them out of urban airspace, which should reduce noise to thousands of Las Vegan who live beneath their flight paths.[12] Horizon is using a 76-seat Bombardier Q400 twin-engine turboprop aircraft for the route. Las Vegas-based Allegiant Air is expanding its Bellingham, Wash., operations by adding two new routes San Francisco and San Diego. Allegiant has built quite a side business in Bellingham after basing two of its MD-80 jets there, with direct routes to Phoenix, Reno and Palm Springs, Calif., as well as Las Vegas.[12]
Two airlines have announced new service, one to the benefit of Las Vegas consumers and the other that should enrich a local company.[12] Because Las Vegas is a market some of the big carriers have experimented with in the past, McCarran International Airport has had some point-to-point service with Delta and Northwest.[12] At one time, Las Vegas was a spoke to one of Northwest's international hubs, Tokyo, resulting in Las Vegas' first nonstop trips from Asia.[12]
Of the approximately 140 flights a week Delta operates in Las Vegas, 110 are on Boeing 767 jumbo jets or high-capacity narrow-body Boeing 757s.[12] When Delta introduced a low-cost subsidiary called Song in 2003, it flew directly to Las Vegas from some nonhub locations. When Delta discontinued Song in 2006, it decided to keep some of its best routes, and some of them still exist today.[12]
Former Las Vegas Mayor Ron Lurie has served as executive vice president and general manager of the property, owned by American Casino and Entertainment Properties, for the past 17 years.[12]
In the past week the U.S. airlines have been reporting their first-quarter results and only Southwest, the pioneer of the low-cost model, has achieved a profit - $34 million, down from $96 million in the same period last year. [6] U.S. Airways estimates that new fees can add $100 million a year in revenue.[4] U.S. Airways on Thursday joined the other large, United States-based network carriers in reporting a major quarterly loss: It said it was $236 million in the red.[5]
One last detail: Air Canada already has a substantial stake in U.S. Airways. It can be done; the partnership may resemble a LufthansaSWISS relationship where the two carriers operate as separate carriers.[5] I think there's a lot more to it than a simple code-share between U.S. Airways and Swiss and I would bet BMI, possibly UAL and other Star Alliance carriers may be involved as well.[5]
Truly "Open Skies" is becoming a reality and given the sorry state of domestic carriers, the Euro and the Pound valuation against the Dollar, and the newly-announced code share with Swiss, the NY Times should look at the possibility of GLOBAL alliances and mergers which CAN be orchestrated without a majority "foreign" ownership.[5] Contrary to what many industry observers would advise, the combined entity would maintain "all hubs" in the United States, including smaller ones in Cincinnati, Memphis and Salt Lake City. "This merger is not predicated on domestic capacity rationalization," said Delta president and CFO Ed Bastian.[17] Got to get the Delta/ NWA merger done quickly so that everyone can move on the idea of a combined Delta/NWA/ Air France/ KLM airline. Or else the industry could liquidate.[14] Amadeus director of airline distribution David Doctor used the Air France-KLM merger as an example of the potentially positive developments for the corporate travel community. "They made their products a lot more consistent, as well as their policies toward the corporates," he explained.[17]
The Northwest-Delta merger is likely to fall victim to many of the same problems. The two airlines had previously promised they would not merge unless the pilot groups agreed on a master seniority list in advance. Talks collapsed in February, and most observers took the airline executives at their word and assumed the merger was off.[20] Airline mergers have, by and large, been disastrous. That's the debate raging around Delta and Northwest's plans to merge.[14] Now the combined airline would be based at Delta's headquarters in Atlanta. Once you add these (not insurmountable) political hurdles to the treacherous operational challenges, the merger seems less likely to succeed.[20]
DL have more than 2.7 billion of cashflow, while NW have more than 3.1 billion cashflow. All in all, I would think that Delta (both old and "new") Delta Richard Anderson is highly qualified airline executive - even though he is trained and licensed attorney. He truly understand the entire airline operations, finances and government relations, as well as International relations, to namely a few.[5] "Welcome to a portion of our web site designed specifically to provide Continental's perspective on airline industry consolidation," the site's first post reads. "We will add new information to this section as it arises."[16] An era globalization(made easier by increasingly open-skies) is around the corner and Parker with USAirways would love to be on the leading edge. Though is has its obvious problems, USAirways has huge domestic coverage, a European hub in the largest single-airport U.S. city (PHL)and 2 very large hubs in PHX and CLT that are outside heavily congested corridors and that have the traffic and capacity to support Int'l flying. It also has a Chairman that makes no bones about the fact that he wants to be a leader in the "global" airline market. Obtaining domestic financing outside the airline industry is his strong-suit.[5] Long seeking deeper domestic capacity cuts to help the airline industry weather another challenging period, Wall Street analysts rejected the notion that the airline need not close hubs.[17]
Large airlines can charge more money for tickets to overseas flights. Pilots know they can't make much money on short domestic flights, and so they angle for the better-paying international ones. In general, analysts and bankers as well as some airlines are starting to believe that independence is too expensive both to airlines and to their shareholders. UBS wrote this month, "We believe should consider every incremental dollar paid to labor, or route that is not cut to satisfy a politician, or gate that is sold under a DOJ antitrust remedy, as a concession that comes out of shareholders' pockets."[14] Their U.S. Air route network is deceptively large as there are relatively few U.S. air flights and aircraft serving the principal cities when compared to the stronger airlines, and a large number of cities are very much a "second/third tier" strategy again with relatively thin service compared to their competition (both domestic and foreign).[5]
A huge reason for any other carrier to avoid U.S. like the plague is the total non-ability of the pilots to come to any kind workable relationship. After more than two years of negotiation the bitter relations between the west coast and east coast pilot groups has soured so horribly that they have created their own union from scratch. No other carrier wants to bring this kind of discontent into their ranks, to add to what is already a prickly group at any airline.[5] Last year there were 96 incidents when Continental 757s ran low on fuel having made the Atlantic crossing. This strategy has been criticised by aviation safety experts but the airline insists that the flights were safe as they still had a fuel reserve onboard.[6] Airlines are cutting back on flights and services, but raising fees on everything from fuel surcharges, extra baggage and even choice seats.[23]
Fuel prices and the lack of synergies will create huge pressures to cut corners on implementation, and battles between aggrieved employee groups have begun. This is a train wreck waiting to happen, and it could easily make the recent American Airlines MD80 maintenance debacle look like the proverbial Sunday picnic.[22] American, which acquired rival TWA back in 2001, reported a $328 million loss for the first quarter as fuel prices surged by 48%.[3]
When Oberstar spoke, the FAA jumped, grounding thousands of American Airlines jets, inconveniencing hundreds of thousands of passengers and slapping a $10.2 million fine on Southwest Airlines for a problem that, by all accounts, had been solved months earlier.[12] While it has been invited to the money-losing party, it seems to be the only major American airline not invited to the merger jamboree.[5] American Airlines planes sit at their gates at O'Hare International Airport in Chicago last week.[12] AMR, which owns American Airlines, has been in discussion with Continental as well.[5]
Consolidation elsewhere in the sector is expected, with reports that UAL, parent of United Airlines, is in talks with rival Continental.[19] Continental is said to be holding talks with United Air Lines, according to people involved in the discussions. The two sides are said to be pushing for their own deal this spring, in hopes of winning approval from the Bush administration before a new president takes office.[16]
The firms agreed to merge in a $5bn ('2.5bn) deal last week as a way to cut costs and boost revenue as oil prices hover near $120 a barrel.[19] The high price of fuel could force the airlines to raise fares 20 to 25 percent in the coming months to offset the sky-high costs of doing business.[23] I am not talking about the plane tickets, though the cost of airfare is bad enough, what with the post-9/11 security fees, airport/government tack-ons and the increasingly nasty fuel surcharges. These airline ticket charges alone can be like deciphering your latest phone bill ''' just when you think you've seen all the fees, you suddenly come to that last page with those 3,000 text messages your teenager racked up. At least we know about the extras that make up our ticket, and once the ticket is purchased, that's it, we're done.[10]
The new aircraft are "on order" not in place, and there's an awful lot that happens between orders and taking into service. The big guys lost money because it's been a terribly tough business: large losses even where there has been volume and "quality travel" as it costs serious money to keep an airline intact and maintain even just "good" standards.[5] Not to mention the added "benefit" to the airlines of making the "total cost" of the air portion of your trip harder to compare. These "nickels and dimes" do add up.[10]
The proposed Delta Air Lines-Northwest Airlines megamerger is part of a well-organized effort to radically reduce competition in long-haul intercontinental markets.[22] Delta and Northwest are arguing it would. The CEOs of the two airlines made promises that Congress was incredulous they could keep.[14] Fuel sits at $4 a gallon while it takes around 53,000 gallons to fill the average Boeing 747. Delta and Northwest alone paid $2.5 billion to fuel their planes in the first three months of the year.[14] Delta, Northwest and United just underwent years of draconian cost cutting during bankruptcy proceedings.[22]
Northwest's greatest share of routes is in the Midwest, while Delta's routes are more heavily in the South. Most of the routes where the two overlap are among the most competitive in the country, such as that between New York and Detroit.[18] In addition to 61 round trips a week to Atlanta, 26 a week to New York's John F. Kennedy International Airport, 28 to Salt Lake City and 18 to Cincinnati, Delta has five a week to Boston, four a week to Fort Lauderdale, Fla., and seven a week on a commuter partner to Los Angeles International Airport to accommodate international traffic.[12]
The fuel bill for flying from London to New York has quadrupled in the past eight years because of rising oil prices.[6] United said it will deepen job cuts to 1,100 including hundreds in management. It will park 30 jets, twice as many as it said earlier, and it will cut domestic flights, potentially affecting Hawaii connections but action like that only makes a dent in fuel bills that are still rising. The CEO of Delta said that just to break even at current prices he would need to hike all fares up to 20 percent.[24]
Most airlines are bringing in more revenue but the sustained high fuel prices are wiping out most profits.[23] Airline travel expert Rick Seaney says the staggering fuel expenses are adding up to more trouble for the airlines in the form of bankruptcies, mergers and added passenger fees.[23] Jim Oberstar (D-MN), the powerful chairman of the House Transportation Committee, penned a scathing and wrongheaded op-ed about airline mergers' supposedly baleful effects on airline passengers.[20]
A Delta-Northwest deal brings with it the more troubling prospect of other legacy airline mergers.[15] Delta wants to fast-track the merger before President Bush leaves office, believing that a Republican administration would look more favorably on the deal than a Democratic one. One of the things the Delta-Northwest deal already has accomplished is that it has gotten other big carriers to reconsider their positions.[12]
Very important to note: U.S. stock up 16% at 1pm despite oil remaining at $117. Parker has made no secret about ithe wants to mergeand my guess he's looking beyond the continental U.S. Even though his (ill-advised) attempt to merge with DAL failed, he's somewhat of a business maverick and has proven he can raise money from outside sources to fund a merger. [5] Misconceptions abound when it comes to the benefits of airline mergers, according to Kevin Mitchell of the Business Travel Coalition. Chief among them, he contends, is the notion that there is a strong, growing groundswell of support for airline mergers.[15] The biggest airline merger of all time may wind up being a huge disappointment.[20] The Tempe airline, still digesting the 2005 America West/US Airways merger, made it clear again Wednesday that it shouldn't be counted out.[5] Given current market conditions, the merger probably will have little effect on travelers, and on balance, it should be beneficial. Customers should be skeptical about airline claims that they would purchase new airplanes and provide other upgrades after a merger.[18]
The headset fees. You know why it happens: it's a new stream of revenue for airlines who are trying just about anything to make a buck in order to keep their heads above water, with oil near $120 a barrel.[10] "Oil has risen to over $113 per barrel, and Wall Street is anticipating a recession that, if it happens, will lower all airline revenues.[12]
After all that Northwest's pilots have sacrificed in recent years--first there was the post-9/11 downturn, then the airline's 2005 bankruptcy--they may take more drastic action.[20] According to industry observer and former pilot Rob Mark, " Don't be surprised if there is at least one major airline strike designed to fire one more shot where management can't miss the message." While Northwest-Delta struggles to make its business case, it will also have to run the government gauntlet.[20] This is such a typical article from another so called "expert." These "experts" articles are so superficial, and I think their entire research comess from reading other "experts" articles. What actually gets published is a very superficial article such as this one which could have been written by someone who knows nothing of the airline industry, which is probably the case here. This article has bits and pieces that have been rehashed so many times over and over in the past several years. I truly believe this author's assignment was to help "fill up the page" for his editor.[5] Congress isn't wrong to be skeptical. The airline industry has been a disaster for years, and it's hard to believe that will change now.[14]
Baker noted that United was interested in acquiring America West Airlines in 1998 and U.S. Airways in 2000. [8] Parker was not able to settle old business, disputes of old system of U.S. Airways and American West pilots. That is what it is holding it back.[5] Starting in May, United and U.S. Airways will charge extra for a second checked bag. U.S. Airways will also begin its choice seats program, which will charge passengers five dollars extra for an aisle or window seat on some of its flights.[23] Here, Bob. These "experts" need to start thinking outside their tiny box of preconceived notions. Does the NY Times really think that USAirways and its CEO are going to sit on the sidelines and watch while all the other majors marry-up? If so, they are completely missing the ballgame and don't understand Parker who will attempt to see to it that U.S. Airways is a major player one way or the other. The stock is up 18% despite its loss so me thinks something big is going on behind the scenes.[5] U.S. Airways' hub in Pittsburgh is gone, which has produced bitterness in that city.[12] The purported synergies of U.S. Airways and America West have long ago been consumed by operational challenges.[20] The reason U.S. Airways remains a wallflower has to do with the way it was formed and where it flies.[5] As for Jim Brown claims that U.S. Airways have lots of cash on hand, while majors do not have much. That is simply misleading and totally untrue.[5] Well, I am stunned that some of discussion about U.S. Airways and Parker. I suggest that those who did not do a thorough research, and "confirm" the accuracy source of information to back up the findings and facts.[5] Can U.S. Airways and Parker be a major player? My bet is that the groundwork is already being laid for it and that the dealing is going on behind close doors right now.[5]
PHL (the 4th largest city in the US) and CLT (home of BofA, and the only large housing market still showing growth) both produce loads factors for U.S. in the low-mid 80's on nearly every flight. Their "Island" flying is seasonal which is high-yield and this summer U.S. is serving 21 cities with 23 nonstops to Europe per day form PHL alone. While its CASMs(cost/seat mile) are relatively high, so is their yeild. With new increased trans-con flying this summer(PHL and CLT to Vancouver, Portland and Sacramento and increases to SAN, SFO, SEA, LAS frequencies) their feed for International flight continue to grow while they drop short-haul leisure markets. The same things that may seem as weaknesses domestically, make it ideal for feeding Int'l flights including new code-share partners Swiss and BMI. [5] If the merger of the old U.S. and old America West could be undone, that would provide the best material for mergers United takes the old U.S., which helps it fill out in the northeast and southeast plus additional international routes - as proposed nearly a decade ago. AA or CO takes the old AW to fill out its western presence.[5] If I had to choose, I'd rather have CO & UA go at it (not that I'm advocating the merger). From a business standpoint, they would have a bigger route network, and hubs at really major cities (such as SF, LA, Chicago, NY, DC to name a few).[7] Objections to Delta-Northwest and subsequent megamergers fall into three categories. The first objection is that these mergers don't make sense from a business or financial standpoint.[22]
Is 2nd merger in works for U.S. Airways? Calyon Securities Analyst thinks U.S. could be an acquirer.[5] Continental will choose either the merger or the alliance, not both, sources said.[2] With Northwest's "golden share" in Continental redeemed, there is nothing now stopping Continental from merging with Star Alliance member United.[3] On the global scene, SkyTeam's conditional antitrust immunity--based around a joint venture between Delta, Northwest, Air France and KLM--likely would precede additional alliance integration.[17]
Analysts have suggested a possible combination between oneworld member American and Alaska Airlines, which is not a member of any alliance but has previously said it wants to stay independent.[3]
Continental Airlines and UAL, the parent of United Airlines, are supposedly cozying up together.[5] International airlines are barred from owning more that 49 percent of a United States airline. Talks to liberalize those laws are starting in Europe next month, however, as part of the second-round negotiations of the "Open Skies" treaty.[5] If bmi should merge, it better be with Virgin Atlantic. They are the second and third largest airlines with hubs at Heathrowthe first being BA of courseand both of them will occupy substantial space of LHR's next new terminal, expected to be completed by 2012.[5] The company also filed for insolvency, due to what it termed "immediate illiquidity." Though demand for its powerplants has increased steadily in the past two years -- with aircraft makers such as Diamond and Cessna offering factory-spec new aircraft equipped with Thielert diesels -- the company has a decidedly rocky financial history. Thielert has delayed releasing its 2007 earnings report until the end of April, citing the need to reexamine results from previous years. That decision came after a German court tossed out Thielert earnings statements from 2003 through 2005, due to valuation discrepancies. As ANN reported earlier this month, shares in Thielert fell to their lowest levels in three years after news of trouble at the diesel-engine maker first surfaced. At that time, the company's board requested the immediate removal of Thielert and Grosser from their executive-level positions, but added Thielert would continue serving as Chief Operating Officer once a successor was appointed.[25]
Over the years, Minnesota has offered Northwest some $445 million in loans and incentives to maintain a hub and a headquarters there.[20] Continental lost $80 million, American lost four times that much, and United even more.[24] United is rumoured to have made an approach to Continental and American is also thought to be considering merger opportunities.[6]
As Lee Moak, chairman of the Delta group, wrote in a letter to Delta pilots, " labor integration issues are often an extremely difficult and contentious part of traditional mergers. When and if such mergers are eventually completed, many of the corporate synergies originally envisioned are unable to be fully realized or at least significantly delayed."[20] Delta executives hoped that Northwest pilots would be willing to resolve the seniority list issues swiftly in order to get in on the benefits of the Delta contract.[20] There will be few layoffs after the deal except for executives, Delta and Northwest swore.[14]
How about all 3 airlines merge into the good ones that know how to provide decent customer service, like Southwest, JetBlue and Virgin America. [7] The Delta-Northwest combination potentially creates a formidable competitor. In that world, all airlines are going to have to make dramatic changes to their existing business models in order to be viable."[12]
All in all U.S. Air is far more sizzle than steak and even the sizzle is not very good.[5] Air France-KLM, Lufthansa and BA are expected to drive consolidation in Europe, creating mega carriers capable of withstanding a long period of high costs.[6]
SOURCES
1. American Airlines in talks with Continental, US Air | Reuters
2. American Airlines in talks with Continental, US Air | Reuters
3. Continental and United the next to consolidate?
4. US Airlines Cut Capacity, Charge More Despite Strong Demand
5. Why US Airways May Fly Solo - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times
6. European airlines face squeeze on profit - Times Online
7. Mergers: American Airlines Flirting With US Airways On Possible Merger
8. Charlotte Business | Charlotte Observer
9. Rumor: United and US Airways could announce merger soon - Gadling
10. ABC News: Why Airlines Are Nickel and Dime-ing You
11. Any UAL deal will be faster than Delta-Northwest talks (Dealscape)
12. In Business Las Vegas
13. UPDATE: Continental, United In Advanced Merger Talks - Report
14. Deal Journal - WSJ.com : Delta-Northwest: Stop The Madness, Start the Mergers
15. The Buffalo News: Opinion: Bad idea takes flight
16. Is Continental Preparing for a Deal to Take Off? - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times
17. Delta, NWA Propose Merger, Gain Tentative SkyTeam Immunity
18. Blocking merger would cause more harm than good - Theodore Bolema - Politico.com
19. BBC NEWS | Business | Sky-high fuel hurts US airlines
20. Delta Force -- The American, A Magazine of Ideas
21. Northwest raising fares by 3 to 5 percent, matching increases by United and other carriers - International Herald Tribune
22. Airline merger will cripple competition - Hubert Horan - Politico.com
23. WCSH6.com - Airfares Set To Rise Due To Fuel Costs
24. Fuel Costs Create More Problems for Airlines | KGMB9.com | United, Said, Million, Fuel, Lost
25. Aero-News Network: The Aviation and Aerospace World's Daily/Real-Time News and Information Service
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