Sparked by the audacious $8.7 billion bid of US Airways for Delta Air Lines, US carriers in December leapt into a new round of consolidation talks.
While no done deals immediately emerged and a US Airways-Delta merger looks increasingly unlikely (see below), the manoeuvring signals that consolidation may become a reality in 2007.
United Airlines chief executive Glenn Tilton again called for consolidation as the legacy carrier sector faces a likely down cycle. "We are not waiting for opportunities to come to us," said Tilton, and it emerged within hours that United parent UAL is holding preliminary talks with Continental Airlines.
Houston-based Continental would not confirm the discussions. Although chairman Larry Kellner says Continental prefers to remains independent, he told employees: "We'll do what we need to do to act in the best interest of you, our customers, our shareholders and the communities we serve."
Meanwhile, Northwest Airlines, which has veto power over certain major transactions by Continental, hired mergers-and-acquisition specialist Evercore Partners to advise it. But Northwest, which plans to emerge from bankruptcy by mid-2007, says it does not have any offers and told employees: "The company is engaged in contingency planning in the current environment. Evercore will provide strategic counsel across the entire industry."
Describing the steps as "defensive positioning", Alan Sbarra of consultants Roach and Sbarra says: "This has been waiting to happen for a long time, and I expect some real moves toward consolidation, even if they're not the combinations now proposed. We don't need six legacy network carriers."
Given the strong cash flows carriers now enjoy, Fitch Ratings analyst Bill Warlick says "private equity capital is widely available to support industry restructuring". Private equity powerhouse Texas Pacific Group is already involved in the Qantas takeover (see page 22) and in two big US travel distribution deals (see page 14).
One definite offer emerged: AirTran Airways, the low-cost carrier that rivals Delta throughout the south-east with a fleet of 117 jets, made a $290 million bid for smaller Midwest Air, a Milwaukee-based niche carrier with a high mix of business traffic. Midwest, with 72 mainline aircraft, turned it down and revealed it had rejected the offer in October. AirTran chief executive Joe Leonard says he went public because Midwest would not respond to his offer, much as US Airways went public when Delta refused to entertain its bid.
Leonard says Midwest would grow in the merger, but Midwest chairman Tim Hoeksema calls the two corporate cultures "too different". Leonard says "it's going to be one of the wildest periods we've seen since right after the deregulation act was passed" in 1978.
"We are not waiting for opportunities to come to us" Glenn Tilton chief executive, United
Source: Airline Business
