Could the Slowdown Force Airline Mergers?
Trouble again in the U.S. airline industry after major carriers recently appeared to stabilize following five years of economic turbulence.
Last year, the industry in general posted profits, and shares of carriers rose accordingly, along with cash reserves. Now, however, soaring fuel prices and declining travel have hit the industry hard.
As the ailing industry struggles for profitability once more, signs of impending mergers are back on the radar.
Consolidation has long been considered a remedy for industry problems.
Mergers, goes the theory, would end the wasteful and now-common problem of more than one carrier servicing the same route. Redundant hubs would be a thing of the past.
Most importantly, there'd be less industry competition, fares could be raised, and profits maximized.
Glenn F. Tilton, chief executive of UAL, parent company of United Airlines, has long been an advocate of airline consolidation. In recent months, other top airline industry executives have also been talking favorably of mergers.
Just days ago investment banks issued reports alerting investors that Delta Airlines may be hunting for a merger deal.
"We believe [the] announcement of a major merger is more likely than not in the next six months," predicted Kevin Cressey of UBS in a written report. A Delta-Northwest merger, in Cressey's opinion, is the most likely deal and will probably be the first.
If and when Delta — or any major U.S. carrier — makes a merger deal, other airlines are likely to join the parade in a follow-the-leader procession.
Editor’s Note: Financial Intelligence Report Stock Picks Soaring. Up 53% to 63%!
Anticipating the move, Cressey boosted his ratings from "neutral" to "buy" on a quintet of major carriers: Delta, Continental Airlines, Northwest Airlines, United Airlines and U.S. Airways.
Lee Moak, head of Delta's pilots' union, wrote members recently that "consolidation may be indeed at our door."
In response to the apparent move toward a merger deal, Delta shares spiked 15 percent.
Although a generally optimistic view of mergers in the abstract is gaining traction, specific labor problems persist which could squelch or delay deals.
American Airlines pilots, for instance, continue to clamor for higher pay.
Pilots and flight attendants at United want higher pay and their benefits — both of which were cut in UA's bankruptcy proceedings — to be restored. Northwest Airlines also has labor problems.
Continental has few potential merger partners, but it could have to make a deal if Northwest and Delta get together.
But proposed mergers in the notoriously difficult airline industry are not often consummated, nor do they win easy approval of the targeted firm, their employees and note holders. Generally, weak airlines instead simply close down.
And mergers tend to bog down quickly. Early last year, US Airways made a hostile bid for Delta but changed its mind after Delta's creditors and employees opposed the merger.
Editor's Notes: