The US airline industry is in such a dire financial situation that it cannot afford to merge
As share prices and stock values plummet, mergers that could have been done in an all-stock or stock-and-cash basis have been called off, and instead carriers are turning to self-discipline to cut capacity.
United's failure to find a merger partner illustrates this well: the Chicago-based carrier turned first to Continental Airlines and then to US Airways, and each of those prospective partners declined a deal. After that, United decided to embark on aggressive cuts, as did Continental.
Both Continental and US Airways said that they would remain independent and US Airways chairman Doug Parker, a passionate advocate of consolidation, said that it is "simply unlikely that anything will happen in 2008 as our industry continues to struggle with how to function in a world with $130-a-barrel oil prices".
Meanwhile, shares in UAL fell to about $7, their lowest in a year and down from a 52-week high of $51. In June shares in US Airways hovered in the $4 range, down from nearly $38 in the past year. That, combined with the large cash outlays that any merger inevitably requires, has quieted US merger mania.
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"Consolidation is not a panacea for solving all the industry's problems. While it may play a role, it is only one factor"Gerard Arpey |
Calyon Securities analyst Ray Neidl adds: "Mergers, which are supposed to make the industry more efficient, may not work in this environment since there is a large cash outlay up front and high execution risk. The current crisis may serve to cool the merger frenzy."
But Dave Swierenga, a former chief economist at the Air Transport Association who is now with consultancy AeroEcon, says: "There's a partner somewhere for United. Mergers are still in my belief the best way to get capacity down and prices up."
Delta Air Lines and Northwest Airlines continue to lobby at full tilt for their proposed merger, which as designed involves very little route overlap. But they have still drawn the anger of House Transportation Committee chairman Jim Oberstar, who voiced his opposition to the merger in an early June letter to the Department of Justice.
Continental, meanwhile, is believed to be debating a switch in alliances from SkyTeam, where fellow allies Delta and Northwest are combining. It could join Star, where it would be able to work closely with both US Airways and United, or it may join oneworld.
British Airways chief executive Willie Walsh flew to Houston, where Continental is based, ostensibly to celebrate the switch of BA's Houston service from London's Gatwick to Heathrow airport but he is believed to be attempting to persuade Continental chief executive Larry Kellner to join oneworld. BA is a founding member of oneworld.
Source: Airline Business
