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US Mergers, Another Scenario...

Tue Sep 16, 2003 11:20 am

OK, we all know that many of the airline mergers following deregulation in the US could be considered anti-competitive. So let's play out a different scenario based on history/reality/compatibility. Here's mine:

1) North Central/Southern/Hughes Airwest: A good combination, poorly implemented. Concentrate on MSP, DTW, MEM and PHX. I think the PHX operation was cut too soon, would have given them a more balanced network.

2) Texas International/National. Everyone knows what a disaster the Pan Am/National merger was, this was a better marriage. (Frank Lorenzo not withstanding) Hubs in IAH and MIA, and EWR with the ultimate buyout of PeoplExpress.

3) Northwest/Western. Compatible fleets and a good network with hubs in MSP, SLC, LAX and ultimately SEA with the probable purchase of Alaska.

4) USAir/Ozark/PSA. Again compatible and the STL hub would have provided the east-west link that the USAir/Piedmont/PSA combo lacked.

5) Delta/Continental. Good coverage across the country with hubs in ATL, CVG, DFW and DEN. Similar to the current network, and I believe CO's South Pacific network may have survived.

6) TWA and Braniff. Hubs in DFW, STL, JFK and MIA. Very similar fleets and would have had the benefit of two domestic hubs and two international gateways serving different markets. TWA's problems were linked to too large aircraft and a very seasonal network. This combo should have eliminated that.

7) Pan Am and Piedmont/Frontier/AirCal. Hubs in CLT, DEN, BWI plus major ops in JFK/SFO/LAX/MIA. Amd a compatible fleet to boot.

8) Eastern and Midway. ATL, MIA, SJU and MDW. DC-9's and good coverage nationwide.

9) American and America West. ORD, DFW, PHX and JFK.

10) United. They were the largest carrier at the time of deregulation but they still would have built their current domestic system plus assorted international routes from ORD and IAD. Wouldn't be a major player in the Pacific market.

Any other combos/outcomes you could think of?

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RE: US Mergers, Another Scenario...

Tue Sep 16, 2003 11:45 am

I realize its a scenarios but HALF these airlines are gone...unless your going back in time???

Good things come to those who wait, better things come to those who go AFTER it!
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RE: US Mergers, Another Scenario...

Tue Sep 16, 2003 12:17 pm

Now what would some of these marriages be called...

Twaniff International
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RE: US Mergers, Another Scenario...

Tue Sep 16, 2003 12:21 pm

Atrude777, note Ozark said following deregulation . These are carriers that existed around that time.
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RE: US Mergers, Another Scenario...

Tue Sep 16, 2003 12:26 pm

The 1980's merger scenarios you suggest, Ozark, are much more along the lines of what should have happened, than were those that actually did. Your scenario has complementary networks being joined, and preserving much more competition, than what actually happened.

USAir/Piedmont, TWA/Ozark, and Northwest/ Republic in particular were simply about destroying competition in order to remove capacity and gouge consumers. DOT, which had responsibility for vetting mergers at that time, should have scuttled every one of those damn mergers. God bless a lot of things about Reagan, but he blew air transportation antitrust policy big time.

Need a new airline paint scheme? Better call Saul! (Bass that is)
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RE: US Mergers, Another Scenario...

Tue Sep 16, 2003 11:03 pm

...which has made it much more difficult for legislators to entertain the possibility of current carriers merging even though that is precisely what is needed. None of the network carriers have the ability any longer to shut out competition so pose no threat to consumers. Given the diminishing pie for network carriers, mergers have to be allowed.

Fast-forward to today and lay out the scenarios that you see happening. I know we've done this before...

I see DL and NW having the most control over their destiny based on their relative financial strength and the two could merge themselves given their very contrasting route systems (and most other elements of their business except their mutual survivability skills). AA is emerging as a survivor. UA will probably survive, although restructuring will be different. CO clearly wants to be an independent. US probably wants to be bought and I would guess they could go w/ either AA or UA although AA is probably in slightly better position to make a deal in the next 2-3 years.

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RE: US Mergers, Another Scenario...

Tue Sep 16, 2003 11:46 pm

WorldTraveler, do you remember TWA? Well AA acquired them and after 9/11 it really put the hurt on them as they didn't need STL or the excess capacity. Don't look for AA to go off trying to merge with another carrier in the next 15 years after the TWA mistake. The only one that could be a possibility for US would be UA due to fleet commonality, and they won't make the mistake of trying to buy them again.
NW and DL's financial status is not what I would call ideal, and I don't see them merging....hubs at MSP, DTW, SLC, and guess is CVG and MEM would be eliminated as there would be no need for them....but think about this...A319's, A320's, A330's, 752's, 733's, 738's, 763, 777, 744, DC-9, MD-80....sorry but NW and DL won't happen
Honestly I don't see any majors doing anything drastic for a long time. They don't need to be getting into things that they don't know what they'll get out of in their current financial state. LCC's merging could be a possibility however.
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RE: US Mergers, Another Scenario...

Wed Sep 17, 2003 12:09 am

Exactly LambertMan. There is no reason for any of them to merge, acquire one another, or start creating hubs anytime soon. It is financially draining and drills havok on the stability of the carrier(s). And no doubt, airline anti-trust is like a disease without any research for a cure.
In the Alaska bush I'd rather have a two hour bladder and three hours of gas than vice versa.

RE: US Mergers, Another Scenario...

Wed Sep 17, 2003 12:24 am

Delta+Northwest+Continental = DNC

aka SkyChumps

You all know what a DNC is right?

Codeshare, go for it. Mergers? Haven't we had enough of them?

[Edited 2003-09-16 17:25:24]
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RE: US Mergers, Another Scenario...

Wed Sep 17, 2003 12:56 am

as far as any of the mergers AA has undertaken, they have really not given them anything they didn't allready have, other than shelling out a lot of cash, taking on more debt, and sending aircraft back to lessors and manufacturerers. For what purpose was AirCal, for what purpose was Reno Air, and as we are now seeing, for what purpose was TWA. The AirCal route structure has completely been destroyed, as has Reno Air, and now they are axing TWA.
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RE: US Mergers, Another Scenario...

Wed Sep 17, 2003 12:56 am


I agree with you, these mergers were bad ideas. That being said, hindsight is 20/20. But a lot of those mergers never should have happened.

PanAm/National could have worked, if they had just coordinated schedules better. TWA-Ozark was compatible, but didn't really give TWA anything new. Same with NWA/Republic. Compatible, but nothing new.

I think that a Midway/USAir or AmWest/USAir merger might have worked, giving USAir more access to the midwest and west.

TWA Braniff makes some sense, as it gives Braniff the large, long-range aircraft it so desperately wants and TWA gets a better domestic network with small- and mid-sized aircraft. Additionally, they both get central-US east-west hubs, TWA's JFK-Europe gateway, and MIA for south- and central-America. A later buyout of Alaska or other western-based airline might then improve Pacific and Asian travel markets.

As a side not, a merger between Braniff and TWA would have created an airline with reach across four continents (North America, South America, Europe, and Asia), and more than 200, perhaps (I am not certain) close to 300 aircraft.
Those who fail to learn history are doomed to repeat it in summer school.
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RE: US Mergers, Another Scenario...

Wed Sep 17, 2003 3:29 am

The TWA-Braniff merger just right after derregulation would have been a great match if the airline had good management. That is before Braniff's management went crazy flying to everywhere and anywhere they could just to expand for the sake of expanding. Around 1978 the combined fleet of the airline would have consisted of 303 of the following:
156 727
83 707
24 L-1011
14 DC-8
13 DC-9
13 747

The result of this merger would have been an airline that was second only to United in terms of fleet size and well above Eastern, Delta and American. It would be fourth in passengers carried (behind United, Eastern and Delta), however unlike those three this airline would have also had an extensive international presence that could have easily rivalled Pan American's.
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RE: US Mergers, Another Scenario...

Wed Sep 17, 2003 4:01 am

It is interesting to see the aversion to mergers expressed here. Although historical mergers have not done as much as they could have to build a strong industry, there are good examples that have succeeded. Although post-deregulation, most mergers have not done what they were stated to do, I ask you to consider Delta-Western and Delta-Pan Am, both of which expanded Delta's reach and which largely remain part of the Delta network to this day. American has had some good mergers early on but has had a bad run w/ Reno, Aircal, and TWA. Notice that mergers involving California have been particularly troublesome just as it was for US? I'm not sure I still understand why AA went after TW but ultimately AA is a well run company and has the best chance of filling in the two primary holes in their network - up and down the east coast and within the west coast. Notice also that the west coast was a blood bath at the time when everyone was trying to buy their way in; now it is pretty stable while the bloodletting is happening on the east coast.

I agree w/ your assessment of the winning and losing hubs but the RJ makes it possible for just about any city to be a hub to a certain degree - just look at CO's operation in CLE or DL in DFW - both of which are largely run w/ RJ's. The intention is to hold onto that carrier's local traffic while shifting connecting traffic to a larger city in which it is cheaper to operate.

Finally, keep in mind that airlines are just about the only industry in which there are still six major nationwide players. How many other industries can you name that have so many major competitors? The GE principle is that only the top 2 or 3 competitors in any industry can be profitable in the long run and that is certainly true in most industries. The only reason it hasn't happened in aviation is because artificial barriers have limited competition. The growth of low cost carriers and the introduction of domestic codesharing (now appearing at every network carrier except AA) will make it less possible to exist as a small carrier. The push will be to bigger, worldwide carriers - just as it is happening in Europe.

don't underestimate Delta and NW's ability to pull off a merger either to each other or w/ someone else. I don't ultimately know what they will do but both companies clearly are sitting on a boatload of cash which they won't need in the near future (although every airline will need lots of cash beginning in about 2005 to pay for borrowing over the past couple years). It simply makes good sense that Delta and Northwest will do something to solidify their industry positions since both have major holes in their route systems. One reason a company pursues financial strength is to be able to expand their business at the expense of others who aren't quite as capable.

Also, I think you'll see the next round of mergers facilitating fleet simplification. ie if AA bought US and DL bought NW, AA could take the Boeing fleet while DL could take the Airbus fleet or vice versa. Bottom line is that when multiple mergers are involved (as will likely happen - part of why AA hastily jumped on TW was because UA tried to jump on US) , fleets can be moved around between carriers to create what is best needed in the long run - transition costs are high to retrain lots of pilots and mechanics but long term costs are ultimately cheaper. Also, DL and NW both have a fairly high number of older fleet types compared w/ CO, AA, and UA and thus could quickly dump some to make a merger work in the long run.
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RE: US Mergers, Another Scenario...

Wed Sep 17, 2003 10:20 am

Let's not forget one thing....Northwest Airlines is still in debt to the State of Minnesota to the tune of about $400 Million USD +. That, coupled with the fact that Northwest is Minnesota's largest employer makes for the possibility of another carrier buying out Northwest virtually nonexistent. The State of Minnesota does not want to see its largest employer schlept off to Atlanta leaving its employees waiting in the wings for the show's final act.

Of course, I say that now, but stranger things have happened.....

Aviation is proof that, given the will, we have the capacity to achieve the impossible.
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RE: US Mergers, Another Scenario...

Wed Sep 17, 2003 10:30 am

What about thinking of todays carriers. Would there be any sucessful ones?

Deltanental: Gotta love the Name. Could it happen? Maybe? I would guess yes if it had to be. You would have ATL, EWR, JFK, CVG, SLC, DFW, IAH, CLE, and BOS. The A/c types are similar, yet Delta's fleet is pretty old. If they had to drop hubs I would guess CLE, and DFW and maybe limit at JFK. I think they would form a hub at LAX with a combo of DL and CO gates. Guam.....I dunno about that.

Just thinking  Smile
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RE: US Mergers, Another Scenario...

Wed Sep 17, 2003 11:41 am

Deltanental or ContiDelta has been pursued several times and CO has repeatedly said no. CO probably has the guts to make it on their own. I do think DL's JFK and CO's EWR transatlantic operations would create problems from an antitrust perspective.

every carrier is clearly any debt to a bunch of people and has made commitments that any carrier has to honor. I doubt if any acquirer would want or need to immediately pull up jobs from an acquired carrier except for at their headquarters. as fleet types are simplied, supporting facilities for the eliminated fleet would be removed but that simplification often takes alot of time. Also, hub consolidation would likely have to be over a period of time because of the lease commitments carriers have made at their hubs plus to get gov't approval (which is why KLM will likely persist as a separate carrier w/ a considerable semblance to their present self for at least several years, if not more). approval process for a merger in the US would require similar commitments. At the same time, AA has shown that you can get the taxpayers to help keep jobs at your facilities as they did in TUL.

Ultimately, network carriers are going to try to maintain the greatest advantage over their competitors (esp. the low cost variety) as possible and a massive network is the greatest advantage. as LCC's grow, network carriers will try to get proportionately larger. Codeshares and alliances only gain you access to some markets but not all because of legal restraints and they do little if anything to reduce costs and may in fact increase costs by marketing some services twice or more (once for each carrier).

I don't see how the network carriers or the gov't can avoid consolidation. The current model clearly demonstrates that the number of carriers is not sustainable for the long term. At some point, carriers start falling off the cliff - a process that would have already happened here (as it did w/ Sabena in Europe) if the government hadn't provided substantial aid to the US airlines.
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RE: US Mergers, Another Scenario...

Wed Sep 17, 2003 1:31 pm

I don't see how the network carriers or the gov't can avoid consolidation. The current model clearly demonstrates that the number of carriers is not sustainable for the long term. At some point, carriers start falling off the cliff - a process that would have already happened here (as it did w/ Sabena in Europe) if the government hadn't provided substantial aid to the US airlines.

Despite 9/11 and torrents of red ink, the network carriers should still not be allowed to consolidate. They would probably go from 6 to 3 if they had it their way, and that's still and antitrust problem. Yes, airlines are one of the few industries that still has so many major players, but that's because of their historical track record of screwing the living daylights out of consumers, communities, and states, when they're allowed to consolidate.

The places that were raped by the 1987 consolidation binge raised hell when UA-US was attempted, and I think the arrogant suits at these carriers were genuinely clueless and surprised by the uppity serfs with pitchforks. The network carriers have *no one* but themselves to blame for the public's and the gov't's well-founded antitrust hostility to consolidation.

Rather, the free market should be allowed to take its course. There is still, by most estimates I read, 15-20 percent too much network-carrier capacity in the air. If two of them fail, which I think a free market would allow, four would remain. That's probably enough (along with the presence of LCC's) to keep network carriers from squeeing capacity below what the economics of the industry can rationally support.

So the gov't should stop bailing out the network carriers when they get in trouble. Let the free market settle the question. UA and US would already be gone by now if that were the case, and the network-carrier industry would be about the business of rationalizing its costs and capacity.

Whether US wants to be bought is unclear, but I agree WorldTraveler that it's a possibility. Wolf wanted to sell from the day he occupied the paneled office in Arlington, but Siegel really seems to be building a survivor airline. At this point it's unclear to me who the four survivors would be.

Need a new airline paint scheme? Better call Saul! (Bass that is)
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RE: US Mergers, Another Scenario...

Wed Sep 17, 2003 1:42 pm

The mergers have been a mess over the years. Like many have said, there's not much left of the 80's mergers. Some that have survived and grown are Delta/Western.....Northwest/Republic.....and most of USAir/Piedmont.

American has just bought and spit out airlines due to their tyrannical tendicies (maybe they should have some Prozac)

A good merger in my opinion would have been America West/Piedmont. They both had compatible fleets at the time...both were top notch in customer service and statistics. Their route structure would have been quite extensive. Would have made a seamless merger. Piedmont was making good profits at the time they were acquired by the sinking USAir....should have been the other way around really!

If only airline execs saw things the way we see them.....sigh.
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RE: US Mergers, Another Scenario...

Wed Sep 17, 2003 1:49 pm

Some further questions:

What USA network carrier would actually *want* to buy one of their competitors right now? AA is suffering severe agita from the TWA purchase as some have noted, and TWA wasn't even one of the Big Six.

It seems to me more likely that every one of them has more to gain from waiting for Chapter 7 shutdowns, and buy *just the pieces each wants* at pennies on the dollar through the bankruptcy court. Let the remains get parked at Marana. If anyone has numbers to suggest otherwise, please share them. I don't ask that provocatively, just am interested to know.

The LCC's can probably grow from their current 20 percent market share to 40 or 45 within the decade. The economics of the industry have changed permanently, the Cartel can't possibly expect to get rapine '90s pricing power back. Thus some of them will need to go under. At 55-60 percent of market share, four lean network carriers should be able to survive.

And the states and Congress, who can't stand to see their home airlines die, *must not bail them out with taxpayer money.* That's where the rest of the country will need to exercise discipline. Let the best managed survive. The demand for the network product is there--just for less of it.

Need a new airline paint scheme? Better call Saul! (Bass that is)
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RE: US Mergers, Another Scenario...

Thu Sep 18, 2003 12:25 am

you have answered your own argument in saying why the objection to mergers in the 80's was strong, most of which can largely be viewed as to eliminate competitors rather than to strengthen a carriers network. LCC's have grown to the point (as you say) that network carriers no longer have pricing power. Further, there are very few markets left where a network carrier can shut out competition. Look at every major network carrier hub and you'll find that there is either a LCC carrier there, in a nearby airport, or one which serves the key O&D's at least by connection served by the network carrier nonstop. Slot controls are falling and airports are prying gates out of network carrier's hands in order to allow new competitors. We're not totally there yet in terms of completely open competition but there are very few places where network carriers can hide and charge high fares.

Most mergers have reduced competition, not enhanced it. That is why Delta's post-deregulation mergers stand unique in this industry since Delta had very little overlap w/ either Western or the Pan Am assets they acquired. Keep in mind also that there was no Airtran or JetBlue in the late 80's, the LCC's of the time were poorly run, and Southwest was far from a national carrier. Further, Frontier and Airtran are to a great extent really network carriers that just operate w/ much lower cost and at a much smaller size so they serve as just as viable competitors as UA and DL - along w/ all of the connect markets that they overlap w/ network carriers on. There are now more airlines w/ significant national coverage than there were before the mergers of the late '80's and fares are much larger. All of the LCC's are taking on the big transcon markets. It would be very hard to argue that any merger today (except perhaps between UA or AA or between CO and AA) could reduce competition. None of the big six overlap each other in a predominant way like Republic and NW did, although there are some regional overlaps (like DL's SLC hub vs UA's DEN hub).

I agree that it is not likely than any carrier will move forward w/ a merger as long as the possibility of a liquidation exists in the industry. Given that enough gov't aid has been given to the industry, it is becoming less and less likely that any of the big six will fail outright. Also, gov't and civic leaders will be far more inclined to support a merger or significant acquisition even if a carrier is in bankruptcy and on the throes of failure rather than run the risk of a shutdown of one or more carriers - even though we need one or two carriers' worth of capacity to leave the industry. Creditors, on the other hand, would far rather see airlines acquire each other in an orderly process where one carrier assumes the liabilities of another which is why UA is very unlikely to fail outright - the ramifications to leasing companies and banks is too huge.

I certainly haven't seen any plans from any carrier to merge but know that many carrier's execs are saying exactly that consolidation must occur and capacity must be removed from the network carrier industry. Network carriers w/ the best financial flexibility (again relative to each other - not necessarily to LCC's or industry as a whole) like DL and NW have the best ability to dictate their future. AA and CO are in the next camp - very tight balance sheets but generally well run over time and w/ a proven ability to deal w/ the changing environment. US and UA will be least likely to call the shots given their recent trip through (or in) bankruptcy.

I also wouldn't rule out the possibility of LCC's merging - or even acquiring some of the excess hubs from network carriers. Bottom line, is that the line between legacy network carriers and LCC carriers will become increasingly blurred. The primary difference will be that legacy network carriers will have bigger, well-developed international route systems. Legacy carriers will bring costs down while current LCC's will see costs go up as workers age (Southwest is now 30 years so employees are starting to retire from a full career w/ them), new fleets are added (single fleets are becoming harder to use to build a nationwide route system), and some LCC's start flying overseas and with it higher costs.

Finally, European carriers are consolidating and excess carriers and hubs are being eliminated. It's hard for the US to argue that we should have so many unique carriers when Europe can allow it to happen and there are national sovereignity issues involved over there.

I would expect that you'll start seeing movement toward industry consolidation as soon as next spring to summer.
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RE: US Mergers, Another Scenario...

Thu Sep 18, 2003 12:51 am

World Traveler,
Sitting on a boat load of cash??? Makes me laugh.....
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RE: US Mergers, Another Scenario...

Thu Sep 18, 2003 6:20 am

I'm not sure what your definition of a lot of cash would have to be, but ~ $3B for a $10-15B company is quite alot. Just for perspective, NW and DL have more cash than Boeing, a company that is twice as big. NW and DL are holding cash equal to 20-30% of their annual revenues. For you and me, that translates into having a bank account w/ 3 months worth of gross salary in it-something very few people have. That's alot of cash by just about every else's definition.

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