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Airline Mergers, Chapter 11 Filings Forestall Inevitable Industry Shakeout

Posted on: Friday, 16 September 2005, 21:00 CDT

Sep. 17--When US Airways won approval yesterday to exit bankruptcy and join America West to form a new discount giant to take on the likes of Southwest Airlines, it marked the latest attempt by two airlines to fortify themselves through a merger.

But during a week in which two other large airlines entered bankruptcy court, many industry observers believe aviation needs to allow some weaker carriers to disappear. After a generation of many failed airline mergers, some are saying the healthier airlines should resist the urge to merge, relieve some of the intense competition in the skies and then zero in on the good assets. A more solvent industry could better absorb the discarded planes, routes, even workers.

"The smart move for other airlines is patience," said Anthony Sabino, an airline industry expert and professor at St. John's University's Peter J. Tobin College of Business in New York. "You don't want to buy someone else's problems."

More than a decade ago, Delta Air Lines Inc. became the north Atlantic market's biggest airline after it plucked the prized European routes from a dissolving Pan American World Airways. Now Delta is the one seeking Chapter 11 protection.

It filed Wednesday in New York along with Northwest Airlines Corp. They join another major carrier, UAL Corp.'s United Airlines, which has been in bankruptcy protection since 2002. Speculation exists that Delta and Northwest may want to merge their way out of the courts as US Airways hopes to do.

But over the past quarter-century, airline mergers and outright acquisitions have largely failed or not helped. AMR Corp.'s American Airlines' purchase of Air California in 1987 failed to produce expected savings. American's merger with Trans World Airlines in 2000 was hurt by the 2001 terrorist attacks that forced American to scale back in many of the hubs it wanted to control. US Airways acquired gates and facilities of Pacific Southwest Airlines in the late 1980s for long-haul routes, but shut the regional network that may have been more profitable. And US Airways and Piedmont Airlines were unable to merge corporate cultures after joining in 1989.

"It's unpalatable to workers and lenders to let the airlines go for the good of the industry," said Hugo Burge, president of Boston-based cheapflights.com, an online fare finder. "But we need a shakeout. ... I'm sure we'll see more attempts at mergers, when what we need is more innovation."

In the case of the US Airways-American West combination, cleared by U.S. Bankruptcy Judge Stephen Mitchell yesterday, analysts are mixed on whether a smaller, newer airline like American West can successfully absorb a once debt-laden major carrier -- one emerging from court protection from creditors for the second time in three years.

Mitchell yesterday approved US Airways' reorganization plan after allowing the airline to provide $12 million in severance pay to 11 executives who will not be given jobs at the merged airline. The ruling allows the Arlington, Va.-based airline to be purchased by America West, the nation's eighth-largest airline, as soon as Sept. 27.

The new airline is expected to be the nation's fifth largest, with headquarters in Tempe, Ariz. It plans to keep the US Airways name.

With different company atmopsheres and labor unease growing, many analysts aren't sure how well the union will go, even though they have complimentary routes and US Airways has shed billions in costs and debt. In general, merging airline staffs has often proven difficult and the marriages often don't end up cutting costs.

There is also no guarantee that anti-trust regulators would approve more mergers. Regulators examine competitive problems, potential fare increases and market share of a combined airline when weighing a proposed consolidation. They opposed a US Airways and United merger five years ago and also nixed Northwest's 1998 effort to acquire an interest in Continental Airlines Inc.

In the past decade, U.S. Department of Justice has approved only one other merger besides the US Airways-America West union: the TWA-American union.

There is obvious pressure from various interests to keep struggling airlines alive, including from workers, pensioners and others. Creditors fear the lose of their investments. Lenders fear no one else will want their planes. The government fears a lack of competition and a return to high fares.

"There is a lot of interest in keeping airlines afloat, but the reality is that the airplanes won't be parked in the desert," said Ron Kuhlmann, a vice president at Unisys R2A Transportation Management Consultants. "Someone else wants them. And someone else wants the mechanics, too. But the airlines go into bankruptcy, they merge, they don't die."

Experts contend that factors from fuel prices to Internet shopping have led to too many seats being offered by airlines at prices that don't pay their bills. There is also a divide between the legacy carriers, those in operation before federal deregulation in the late 1970s, who have higher debts, higher payrolls and pensions, and younger low-cost carriers without those pressures.

As legacy carriers reduce flights in some markets to save money or focus on more profitable routes, discount carriers such as Southwest and JetBlue Airways Corp. are the ones filling the void. Among the examples, Southwest has more than made up the US Airways flights lost at Baltimore-Washington International Airport. In New York, JetBlue has taken over as the dominant carrier at John F. Kennedy International Airport, where Delta and American once reigned.

Said Darryl Jenkins, a Washington area aviation consultant and visiting professor at Embry-Riddle Aeronautical University, "People want cheap fares, and ultimately, these [bankrupt] guys are going to have to learn to run their businesses or go away and make room for someone else to do it."

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Source: The Baltimore Sun, Maryland

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