Industry watchers expect more North American airline consolidation moves in the wake of Continental Airlines' success in yanking United Airlines out of the arms of US Airways to forge a merger that would leapfrog Delta Air Lines to become the largest US carrier.
The tie-up would force American Airlines into a distant third place in terms of overall traffic.
"With United and Continental getting together, others are going to have to take action," says Chris Tarry, chief executive of UK-based consultancy CTaira.
There is already speculation that the move will force a union between American and spurned US Airways. The latter's chief executive Doug Parker recently expressed the carrier's long-held view that the US airline industry could only support three hub-and-spoke carriers in the long-term.
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On the day the merger was unveiled, American boss Gerard Arpey told employees the combination could result "in a better balance between industry supply and demand, potentially resulting in a more rational competitive environment".
Straight-talking Continental chief executive Jeff Smisek admits leaked merger discussions between United and US Airways reignited Continental's interest in examining its own merger with United. In just three weeks Continental and United agreed to merge through an all-stock transaction with a combined equity value of $8 billion and a projected $29 billion in annual revenues, based on 2009 results.
The combined airline will have a fleet of almost 700 jets - over two-thirds of which are Boeings - and a further 160 aircraft on order.
Although the result would be a new giant airline ranked ahead of the two existing "mega-carriers" Delta and Air France/KLM in revenue passenger kilometres, and in terms of 2009 data second only to Delta in passenger numbers, Tarry believes the tie-up is not just about size. "It's about greater reach and a greater presence in the marketplace. But size alone is no guarantee of success whatsoever," he says.
The new entity would combined the United name with Continental's logo and livery. But aside from this and the decision that headquarters will be at United's hometown of Chicago and Smisek and Tilton allocated roles of chief executive and chairman, respectively, details remain scant.
Currently their combined workforce is nearly 88,000, and labour endorsement, particularly from pilots, is crucial for the merger's success, and there may be concerns about rationalisation moves.
"You can move all the pieces around the chess board and come up with all the different combinations," says Tarry, "but the real issue is how to get more growth at a lower cost."
Tarry points out that the only way of driving costs down is to remove duplicated facilities and says another question is whether there will be "a desire for commonality" across the merged carrier's fleet (see box). "There will be a rationalisation of the fleet over time, but they've got to be able to fund it," he says.
In the absence of any official capacity estimates for the combined entity, Jamie Baker of JP Morgan has created 2011 pro forma model that assumes an 8% system capacity cut and a 5% reduction in operating expenses.
Baker estimates the merged carrier has 13 nonstop overlap routes, 11 of which would be reduced to monopoly status, which compares with 12 overlaps in the Delta-Northwest merger of 2009.
The two parties believe if their merger gains regulatory approval they can achieve net revenue and cost synergies of up to $1.2 billon by 2013 as one-time consolidation costs are estimated to be the same amount during the next three years.
Both Baker and Barclays Capital analyst Gary Chase offer a 75% likelihood that the merger will curry favour with US regulators. "We believe the facts of the case ultimately are in favour of the combining carriers," says Chase.
MERGER OFFERS FLEET INTEGRATION CHALLENGESAll-Boeing operator Continental Airlines is meshing its 333 aircraft with United's slightly larger, but mixed fleet that comprises 248 Airbus A320 family and Boeing 757 single-aisle aircraft and 111 Boeing widebodies. While the tie-up offers a good fit from an aircraft type perspective, there is little commonality in the mix of engines, with each airline having a different manufacturer powering its 757s, 767s and 777s.
Just under half of the 161 aircraft on order are widebodies, including a combined 50 787s. United also has orders for 25 A350 XWBs. While the A350 is only offered with Rolls-Royce engines, Continental has selected GE over R-R for its 787s but United is yet to choose. This could mean the UK engine maker, which is the 787's alternative supplier, "stands to lose the most" from any rationalisation moves, warns JP Morgan airline analyst Jamie Baker.
United intends to decide on a replacement for its 96 757s this year, and the airline's boss Glen Tilton points out that this process can now be done "with an eye to the integration process".
Source: Flight International
