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Airline Industry Consolidations  
User currently offlineStevenUhl777 From , joined Dec 1969, posts, RR:
Posted (11 years 3 months 3 weeks 1 day 12 hours ago) and read 2166 times:

It came up in another thread, so I'll be the bold one and initiate it:

US Airline Industry Consolidation
a.) which airlines will merge, and why
b.) which airlines will expand/terminate their alliance/code share agremeents?
c.) Taking a risk here...but any more Ch. 11's or Ch. 7's in the next year or so?
d.) Which hubs will expand or disappear, and why?
e.) Should the foreign ownership % increase to 49%....why/why not?
f.) Based on "e" above, how would this affect airline mergers/consolidations of US carriers?

Have fun, folks...lots to chew on here!

19 replies: All unread, jump to last
 
User currently offlineWorldTraveler From , joined Dec 1969, posts, RR:
Reply 1, posted (11 years 3 months 3 weeks 1 day 8 hours ago) and read 2116 times:

Here is my 2 cents worth…

Merger activity will happen primarily in Europe and the US. Asia is too economically diverse to allow extensive regionwide cross border investments (although some will occur between some countries) and much of what will happen in Latin America has already happened. I don’t think there will be much more bankruptcy action. Alliances have worked so far but you can't get costs out if each airline operates their own headquarters and has different fleets, certification, etc.

Foreign ownership restrictions will come down between the US and Europe but the US will negotiate for it – primarily access to key markets like London – rather than make it available to all countries. Because there is so much consolidation that needs to occur on both sides of the Atlantic and because there will be greater but not complete access to markets between the US and EU, European and US carriers will focus on opportunities in their own region before they look across the Atlantic. The environment is ripe for consolidation in Europe and the US and all affected governments are tired of propping up money losing airlines. Low cost carriers are so pervasive in the US and EU that the threat of monopolies no longer exist; LCC’s dictate the fare structure even if they don’t fly into a city based on their presence in one nearby.

In the US, USAirways is setting itself up as a fine candidate to be acquired – they are too small to survive on their own but could nicely fill out AA or UA’s network (both will be hard pressed to come up w/ cash but AA is probably most likely to figure out how to make it work) or provide a foundation for a European carrier who will probably need another US carrier to round out their US portfolio via an alliance.

DL is the most likely acquirer w/ their less than complete international route network, their collection of underperforming hubs outside of ATL, and the best of the big six balance sheets. DL’s CEO has said most often that consolidation is necessary to cure industry ills. While CO has been mentioned before, I predict they will go after NW who will find it increasingly difficult to compete given that they used most of their trump cards to succeed financially during the early 90’s; you can only go to the well (employee concessions, cost deferrals) so many times. There are big obstacles to a DL-NW merger but their networks complement each other; both airlines have enough older fleet types that it is possible to unify their very different fleets by getting rid of some older types which should be possible when several hubs (CVG, MEM, and SLC) are closed. DL will beef up presence on the west coast and provide the feed to the Pacific operation which NW has not done. DTW still has huge growth potential which would benefit from DL's huge RJ arsenal.

CO is likely to be able to survive as a standalone carrier (their stated intention) and could be a strong partner w/ a foreign airline – it could merge w/ HP or AS to add some west coast depth and could take over either DEN or SLC depending on which become available.

AA and UA are both capable of standing alone but one will fight to get US – the only real answer to beefing up the East coast – except for AirTran perhaps (although that is not real likely).

WN and B6 realize they can better grow themselves internally than acquire or be acquired.

In Europe, BA, AF, and LH will be the acquirers as well as the Virgin group. Current alliance lines will probably closely approximate how ownership could occur. AZ, IB, OS, and LX are probably most at risk of being acquired and having their hubs downsized if not eliminated. KL is probably going to go w/ BA (I know this has been discussed before) because BA knows that the price for being able to acquire other EU carriers is to open up LHR and LGW to the US carriers and they must have at least one strong continental Europe hub to preserve flows over LHR which are at risk when they have to give up slots to US carriers. LX and KL could both fit nicely in BA’s portfolio but LH will closely watch their flanks and keep BA out of central Europe.

My thoughts…how about someone else…


User currently offlineMatt D From United States of America, joined Nov 1999, 9502 posts, RR: 47
Reply 2, posted (11 years 3 months 3 weeks 1 day 7 hours ago) and read 2102 times:

My two cents' worth says that I agree with you as far as USAir goes. Sooner or later, they're GOING to be bought out. Not if, but when. It's only a matter of time. But I beg to differ with AirTran and JetBlue.

Personally, I feel that one or both of them will be prime takeover targets by the end of the decade. Unless they are paying cash for their respective new aircraft spending orgies, they are probably mortaged to the hilt. And as has been noted before, once employee seniority and a/c maintennance starts to factor in, the US economy (and the majors) will have rebounded to much better health, are going to want to "take back" what they lost, so to speak. This is exactly what happened with PEOPLExpress. They were soaring with the eagles. They had the low fares, money was rolling in, and they were spreading like a cancer. But in the end, it was arguably those very points that ultimately left them vulnerable to takeover: they had no cards to play.

As to who will go after them, it's anyones guess. A lot will depend on how the United debacle plays out, and whether or not there are any other mergers like the possible scenarios you laid out (all of which are, IMO totally plausible).


User currently offlineCaribb From Canada, joined Nov 1999, 1639 posts, RR: 8
Reply 3, posted (11 years 3 months 3 weeks 1 day 7 hours ago) and read 2080 times:

I agree on US Airways as well. The other carrier I find most interesting in this context is Northwest. If KLM moves over to Oneworld or SkyTeam where does that leave Northwest? If they split they'll have to rearrange their alliance option... Do they join the same alliance or go it alone?

User currently offlineN670UW From United States of America, joined Jul 2003, 1606 posts, RR: 8
Reply 4, posted (11 years 3 months 3 weeks 1 day 7 hours ago) and read 2086 times:

I also agree about US Airways. It's been great that they successfully made their way through and emerged from bankruptcy, but it just seems that US is losing a sense of direction again.

User currently offlineCapt078 From United States of America, joined Jul 2003, 421 posts, RR: 1
Reply 5, posted (11 years 3 months 3 weeks 1 day 5 hours ago) and read 2047 times:

i think if the economy does not pick up soon, ual and midwest will dissolve. currently, there is too much capacity across the nation. this would predicate the demise of one of the majors and ual (despite its rich history) is certainly the worst positioned in the industry currently. i also don't see much future in southeast, pan am, interstatejet, hooters, transmeridian, or allegiant.

as far as mergers go, no way ual or aa will acquire us airways. as many of you may be aware, we have anti-monopolistic legislation in the country and (remember the recent ruling against united acquiring us airways) there is no panel that would allow such an action. the same goes for continental and northwest (by the way, nwa is larger than continental and more in a position to acquire than the opposite). i do see the possibility of mergers among the "smaller" majors and some of the "regional" carriers.

i always thought america west and us airways would complement each other well (similar aircraft, and little current route crossover). this is even more feasible now as us airways emerged from chapter 11 with lower pay scales, much closer to america west's. for us airways to maintain its identity, it is either going to have to become a niche carrier (a la alaska airlines and aloha), a low cost carrier ( a la america west), or it is going to have to merge to expand its network into a truly transcontinental one. i'd also look at hawaiian being integrated into one of the larger majors with less western presence (most likely continental or northwest).

as an american, i am reluctant to suggest foreign ownership or competition of domestic air travel here. however, as an economist, i understand the costs the public faces with protectionist policies. with every other industry and product, once the us market is opened to foreign competition, even though there is an expected loss of jobs, the u.s. public always ends up paying less for the product. the same should be expected for air travel. if foreign carriers are granted access to the u.s. domestic market, there will undoubtedly be a loss of american jobs here as competition drives away the weaker american carriers. however, the lower ticket fares and better service resulting from competition, and more importantly, the economic efficiencies gained will far outweigh these costs when looking at the matter on a macroeconomic level. plus, the u.s. will never open its markets without reciprocity, which means our domestic carriers will be in a position to do what i've mentioned above in foreign markets. even if the u.s. carriers were not granted reciprocity, the u.s. gov't should grant foreign carriers access to our markets, at least from an economics standpoint.


User currently offlineWorldTraveler From , joined Dec 1969, posts, RR:
Reply 6, posted (11 years 3 months 3 weeks 20 hours ago) and read 1994 times:

Capt078,
I think EU and US govts now recognize that it is foolish to expect 6 network carriers to survive in the US and as many as 10-12 in Europe when every other network industry such as telecommunications has been allowed to consolidate. There will probably be some market share target which may go up to 25-30% of the market. Market share is only meaningful if a business has pricing power and right now the LCC's have it. I think it is conceivable that any of the big 6 airlines from a market share perspective could merge w/ each other. Part of the reason for merging will be to eliminate some network capacity so the current share of any two combined US or EU carriers will not be the sum of their current share.

I think the US government will show preference to a US carrier rather than a foreign carrier acquiring another US carrier, as will the EU but consolidation will occur and it may happen across the Atlantic.

LCC's costs will grow just like People Express and they will be big enough to be valuable acquisition targets.



User currently offlineBestwestern From Hong Kong, joined Sep 2000, 7264 posts, RR: 57
Reply 7, posted (11 years 3 months 3 weeks 20 hours ago) and read 2002 times:

Interesting comment regarding NW and DL - they have relatively non - overlapping route networks, with NW strong to Asia, and DL strong to Europe. CVG will be replaced by DTW, MEM by ATL and a strong West Coast hub (DEN, LAX?) will replace SLC. JFK could be further boosted, as would the song operation.

A perfect fit into this picture would be America West.

This coupled with Air France in Europe and a strong Asian carrier (JAL?) will form a perfect airline alliance.





The world is really getting smaller these days
User currently offlineSrbmod From , joined Dec 1969, posts, RR:
Reply 8, posted (11 years 3 months 3 weeks 20 hours ago) and read 1974 times:

What's good for the "scheduled charter" airlines (Hooters Air {operated by PACE Airlines}, Allegiant, Southeast, Transmeridian) is that these scheduled flights are not the backbone of their airlines. These airlines make money off of the vaction charters, as the scheduled charters are usually on days when they are not running charter flights for travel companies.

User currently offlineLuv2fly From United States of America, joined May 2003, 12147 posts, RR: 49
Reply 9, posted (11 years 3 months 3 weeks 20 hours ago) and read 1943 times:
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I see the continued down sizing by the majors as they cost structure still is way to high. I think JetBlue and Airtran will remain independent as will WN. Frontier for now I can see them also by themselves. Midwest not sure if they will survive, and if not I do not see anyone buying them outright just picking the pieces they want after the sale. AA still do not think they are out of the woods yet. UA doing better tho IAD and the ACA problem not going to be good for UA. US see them still down sizing and trying to decide on what they want to be as an airline.


You can cut the irony with a knife
User currently offlinePlanemannyc From United States of America, joined Aug 2003, 1008 posts, RR: 8
Reply 10, posted (11 years 3 months 3 weeks 17 hours ago) and read 1883 times:
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I think Frontier will be bought out by JetBlue. It has fleet commonality with JetBlue (albeit it flies the A318 and A319 rather than the A320), it uses JetBlue's LiveTV system for inflight entertainment, and its branding position is similar to JetBlue's -- "not one of those old airlines". I think when JetBlue will face pressure to expand beyond the organic process, it will look at Frontier for that growth opportunity. Don't know when, but my guess is it will happen.



User currently offlineJessman From United States of America, joined Jul 2001, 1506 posts, RR: 7
Reply 11, posted (11 years 3 months 3 weeks 16 hours ago) and read 1867 times:

I think a NW/DL consolidation would be interesting, but I would disagree w/bestwestern re. DTW replacing CVG. CVG is geographically a better place for a hub as it is closer to the center of the country, and most people on NW already have to connect through MSP. Both Michigan and Minnesota don't have anything north of them but Canada. MSP is already further north than YYZ. CVG is often ranked as a nicer airport (But I haven't heard any reports since the new Terminal, so this may change). CVG has NO discount airlines (No Southwest, No America West, No American Trans Air. and the CVG area (Specifically Northern Kentucky where the airport is) is still growing rapidly. CVG has better winter weather.
I will admit I am prejudiced on this, but as a final note this may depend upon who acquires whom. If Delta is still the brand then delta will keep it's second largest hub; if NW is the brand then NW will keep it's second largest hub. It would be easier to say that the acquired carrier went away than to rebrand everything.


User currently offlineNDSchu777 From United States of America, joined Oct 2001, 419 posts, RR: 3
Reply 12, posted (11 years 3 months 3 weeks 16 hours ago) and read 1837 times:

Jessman,

It would be interesting if a DL/NW merger occured if they would pick CVG or DTW as a hub. You brought up a lot of interesting points, but Detroit has a much larger population and O&D base than Cincinnati/Northern Kentucky. And both airlines dominate their respective airports and have a lot invested in them. It'd be a tough decision...but then again this discussion is all hypothetical to begin with  Wink/being sarcastic.

~Nick


User currently offlineSTT757 From United States of America, joined Mar 2000, 16892 posts, RR: 51
Reply 13, posted (11 years 3 months 3 weeks 14 hours ago) and read 1784 times:

U and UAL are the best bet, after that..

Either CO/DL (they have been "close" three times since '96).

CO/NWA

DL/NWA

Or

CO/DL/NWA (if they could pull that off they have the most impressive route network)

Hubs,

ATL, DTW, EWR, IAH, MSP, SLC, NRT, Guam

+



Eastern Air lines flt # 701, EWR-MCO Boeing 757
User currently offlineStevenUhl777 From , joined Dec 1969, posts, RR:
Reply 14, posted (11 years 3 months 3 weeks 14 hours ago) and read 1770 times:

In all the excitement, I forgot to offer my own predictions!

Some event (terrorist, worsening economy, or otherwise) will trigger a slurry of merger activity. Here's what I think might happen in the next few years:
- Jet Blue and Frontier merge, OR..
- Jet Blue and USAir merge, OR
- United and USAir finally get the green light to merge (most likely)
- American and Airtran merge...or perhaps AA and AS? USAir perhaps?
- If United gets to merge with USAir, then AA will be looking to do a similar merger to keep up...Continental, maybe?
- DL/NW/CO merger in some combination...the DL/NW seems to make the most sense

Hubs: SLC, CLT, PIT will most likely go away. DEN, ORD, DFW, IAD, DTW, JFK, SFO and LAX grow in strength. IAH, SEA, MIA, BOS remain about the same

Foreign ownership: barring a big development in the US/UK talks, the percentage will probably stay at 25%. Given that:
LH will look to buy 25% of UA at the end of Ch. 11

Alliances: I think there will be a lot of changes to oneworld and SkyTeam. Depending on what happens with UAL and USAir, StarAlliance could also see a big change.


User currently offlineDCA-ROCguy From United States of America, joined Apr 2000, 4514 posts, RR: 34
Reply 15, posted (11 years 3 months 3 weeks 13 hours ago) and read 1752 times:

Consolidation is always an interesting topic, fascinating to hear what everyone thinks. Just a few additions and notes to what's already been said:

--USA will *not* allow any Cartel-network carrier to buy another; as Capt078 noted we have strict antitrust laws. The UA-US ruling, from a Republican administration no less, makes clear that isn't happening. However, USA has 15-20 percent too much network-carrier capacity right now, maybe more. I predict two network carriers go Ch. 7 in the next couple of years. UA and US are likeliest candidates. UA is still badly managed, US is brilliantly managed but far from out of woods.

Besides, which USA network carrier is in another financial position to buy another, which is how mergers generally work? They'll wait for liquidations adn buy pieces for *only* the pieces they want for pennies on the dollar. Dept of Justice will happily allow this and may supervise proceedings.

DOJ would allow a network/ niche carrier merger like US-HP though, as some have suggested. That one would make for a great route map but cultural conflict.

--25 percent ownership rule, sadly, will probably not be lifted. "Flight of jobs overseas" is becoming an issue in USA politics, and will loom larger as 2004 presidential election approaches. Never mind that allowing majority foreign ownership would only benefit consumers, and probably lead to more airline jobs in the USA for American citizens. Both parties will look for an easy way to look "tough on job flight."

--Don't look for *any* USA network carrier to buy *any* LCC. They don't have the cash, and aren't going to have it in this decade. Herbert Kelleher once threw a Wall Street analyst physically out of his office and threatened to shut the airline and its special operating philosophy down before allowing it to be bought. "Sent a message to Wall Street," he told Colleen Barrett afterwards. Parker would do same, as would David Neeleman at JetBlue. LCC's are profit engines as they are, have no motive to sell out.

--MattD, your analysis of People Express is completely off base. People Express was a profit maker until 1985. But they were poorly managed. Don Burr & Co. did not watch costs closely, did not invest in computer equipment; didn't have the hard heads to go with their big corporate-culture hearts.

Then People finally killed themselves with Burr's fatal misjudgment to buy Frontier and "get big" during the 1986 industry consolidation. People Express overleveraged itself to buy Frontier, and their operation meanwhile got sloppy. Word got round among consumers that People's product was eroding. Meanwhile, Robert Crandall at AA had spent billions on computers to build yield management with which to fine-tune capacity to finish off uppity PE.

The "wait til LCC's get older and the network carriers will win" scenario some folks around here like to predict, ain't happening. Southwest, JetBlue, and AirTran are well-managed carriers who plan for things like rising seniority, maintenance, etc. Heck, Southwest has been dealing with those things for nearly two decades and their CASM is still 7.4. The structure of the industry has changed, and the network carriers aren't going to "take back" anything.

Jim



Need a new airline paint scheme? Better call Saul! (Bass that is)
User currently offlineDCA-ROCguy From United States of America, joined Apr 2000, 4514 posts, RR: 34
Reply 16, posted (11 years 3 months 3 weeks 13 hours ago) and read 1741 times:

DOJ would allow a network/ niche carrier merger like US-HP though, as some have suggested. That one would make for a great route map but cultural conflict.

Sorry, mistake here...HP of course is a major. Alaska is a 'niche' carrier, DOJ would probably allow someone to buy them. US-HP, though is the one possible combo of two majors that seems legally possible in my view, because they're smaller than most and very-regional in nature.

Jim



Need a new airline paint scheme? Better call Saul! (Bass that is)
User currently offlineCapt078 From United States of America, joined Jul 2003, 421 posts, RR: 1
Reply 17, posted (11 years 3 months 3 weeks 13 hours ago) and read 1741 times:

DCA-ROCguy: i find more and more that you and i are on the same page. i don't think people realize the inflexiblity of certain u.s. legislation. as i stated above, there will be no consolidation among the top five carriers, and in fact, i also predict the downfall of one of the top three (ual). i do think however, that if ual dissolved that would resolve most of the current capacity issues. also, like i said, i think us airways would have to merge with america west if it wants to maintain its long-term stature as a major carrier.

Jessman: while i do not believe it would happen, if nwa and delta were to merge, i absolutely believe that detroit would be maintained over cvg. first of all, with all of the recent expansion and construction, dtw has better facilities and runways than cvg. also, from an efficiency perspective, given the significant difference in the sizes of the two respective operations, it would be much less costly to downsize cvg than dtw. most importantly however, dtw is in a much better location for east-west travel from the northeast, as it is on a relatively closer latitudinal axis with new york/newark than is cvg. this would cut out travel time, a marketing plus for an airline.


User currently offlineN670UW From United States of America, joined Jul 2003, 1606 posts, RR: 8
Reply 18, posted (11 years 3 months 3 weeks 13 hours ago) and read 1703 times:

Jessman: while i do not believe it would happen, if nwa and delta were to merge, i absolutely believe that detroit would be maintained over cvg. first of all, with all of the recent expansion and construction, dtw has better facilities and runways than cvg. also, from an efficiency perspective, given the significant difference in the sizes of the two respective operations, it would be much less costly to downsize cvg than dtw. most importantly however, dtw is in a much better location for east-west travel from the northeast, as it is on a relatively closer latitudinal axis with new york/newark than is cvg. this would cut out travel time, a marketing plus for an airline.

Not to mention the fact that DTW's O&D traffic is superior to CVG's. It certainly helps being the eighth-largest U.S. metro area.  Big grin


User currently offlineAa757first From United States of America, joined Aug 2003, 3350 posts, RR: 8
Reply 19, posted (11 years 3 months 3 weeks 12 hours ago) and read 1670 times:

What about US Airways joining Star Alliance? I read in Airways they are considering joining. I don't think US can make it. AA and UA probably will not buy them, especially since UA employees have to vote on mergers. AirTran, I think that they will be around for the next 5 or 10 years, but if jetBlue starts seriously competing with AirTran, I don't know. Delta Song I don't think will stick around. Just my two cents.

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