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masseybrown
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CO Immune From Takeover?

Fri Nov 16, 2007 4:43 pm

http://www.chron.com/disp/story.mpl/business/5306523.html

The citation offers the opinion that CO, because of relatively higher costs, is NOT a candidate for merger with DL. That reasoning would also seem to offer some "protection" from acquisition by NW, UA, or US.

The reason the higher costs offer protection is that the resulting entity after an airline merger generally ends up with a cost structure derived from the higher of each predecessor's costs - at least in the labor category.

Does this make CO an acquirer? An LBO opportunity? Or an independent - until cost differentials go away over time? (Of course, any change allowing foreign ownership would upset all these apple carts.)
 
ikramerica
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RE: CO Immune From Takeover?

Fri Nov 16, 2007 6:28 pm



Quoting MasseyBrown (Thread starter):
Does this make CO an acquirer? An LBO opportunity? Or an independent - until cost differentials go away over time? (Of course, any change allowing foreign ownership would upset all these apple carts.)

CO has always said that they would be forced into merger talks if other airlines were to merge. I believe they would look to be the acquirer of smaller carriers, but that is just my opinion. CO does seem content to be the "little big boy" in that they fly to lots of destinations, but are much smaller than DL, UA and AA.

I've always said CO+AS would make a good combo. I've since added AQ as a third airline to acquire after the combo, though HA would also work (mixed fleet not-withstanding). The upside of HA is the widebody lift. The upside of AQ is fleet commonality. Either way, they'd both have unique inter island fleets CO would have to figure out what to do with. With AQ, they could put 735s over there and dump the 732s. With HA, they would just keep the 717s.
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EXAAUADL
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RE: CO Immune From Takeover?

Fri Nov 16, 2007 7:00 pm

Adding AQ or HA to a CO/AS combination adds absolutely nothing of value
 
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STT757
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RE: CO Immune From Takeover?

Fri Nov 16, 2007 7:03 pm

If CO were to merge they need to merge with someone who has a Strong International business, AS and AQ have nothing but leisure markets.
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calpsafltskeds
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RE: CO Immune From Takeover?

Fri Nov 16, 2007 7:44 pm



Quoting Ikramerica (Reply 1):
With AQ, they could put 735s over there and dump the 732s. With HA, they would just keep the 717s.

I understand that AQ was having problems with 733 and 735 engines based on the short hops and tight turns, so are doing the 732 for interisland.

I wonder if mergers are a must if others get together. When at PSA, as soon as AA bought AirCal, management looked for a merger. In hindsight, AA dismantled the AirCal system, meaning PSA lost a competitor instead of the expected squeeze that never happened.

If DL mergers with UA, I would think CO and NW would talk and see if the benefits of a large international operation in both Europe and Asia would compensate for the abundance of hubs in the NE plus MSP along with all the baggage that comes with NW and their labor and other issues like fleet commonality and the DC9. A takeover of HA may make sense and be less of an fleet problem as interisland fleets would be a separate operation shouldn't change while the merged carrier could pull some 763 aircraft from current HA operations and replace with 752 or 753 aircraft. A combo merger with AS could give the resulting carrier a strong west coast operation, be the largest carrier in the Hawaii market, augment GUM connections.

On the other hand If CO and AS merged, then maybe an AQ woud be better than HA for fleet commonality.
 
masseybrown
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RE: CO Immune From Takeover?

Fri Nov 16, 2007 7:54 pm

Mmmm ... I didn't mean for this to turn into a "which partner" thread. I'm more interested in whether the cost differential issue is a credible obstacle to merging with ANY of the recent bankruptcy graduates. Seems to me the cost issue could be mitigated (to a worthwhile extent?) by keeping airlines separate and taking economies in things like management, IT, maintenance, purchasing, etc.

If nobody has any opinion on that, ok, proceed with the "which partner" discussion.  Smile
 
FlyHoss
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RE: CO Immune From Takeover?

Fri Nov 16, 2007 8:02 pm

Quoting MasseyBrown (Thread starter):
The citation offers the opinion that CO, because of relatively higher costs, is NOT a candidate for merger with DL. That reasoning would also seem to offer some "protection" from acquisition by NW, UA, or US.

The reason the higher costs offer protection is that the resulting entity after an airline merger generally ends up with a cost structure derived from the higher of each predecessor's costs - at least in the labor category.

CO's costs are relatively high, but it's not due to labor. IOW, CO's non-labor costs are relatively high, a carry-over from the Lorenzo era (yes, still). An example would be the high lease rates for the 737-500s.

Also, NW still has ownership of the one "golden share" that would prevent a change in control at CO. IIRC, that share was recently valued at around $550 million (no, I don't recall the source of that report).

[Edited 2007-11-16 12:04:59]
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masseybrown
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RE: CO Immune From Takeover?

Fri Nov 16, 2007 8:19 pm



Quoting FlyHoss (Reply 6):
CO's costs are relatively high, but it's not due to labor.

The Chron article says a DL/CO merger would raise combined costs by $171 million. I'm not sure where they got the number, but - purely my guess - it may have come from losing the advantage of CO's work rules and losing the savings in DL's pension costs.

Quoting FlyHoss (Reply 6):
IIRC, that share was recently valued at around $550 million (no, I don't recall the source of that report).

Possibly, but only if CO wanted to buy their way out of the arrangement, which is probably the circumstance your source had in mind. Otherwise, NW can't sell or encumber the share, nor is it redeemable at NW's option for more than a "nominal sum" according to the CO SEC filing.
 
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STT757
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RE: CO Immune From Takeover?

Fri Nov 16, 2007 9:32 pm

If DL were to merge with UAL (not NWA) then CO obviously should pursue a merger with NWA, however a merger with NWA would still leave the combined airline weak on the West Coast. For what it would cost to do a merger with UAL CO could probably merge with NWA and AS, CO+AS+NWA would be a great combination.

CO brings Trans-Atlantic via EWR, Latin America via IAH and Micronesia via Guam.

NWA brings in the Mid-West via Detroit, plus Tokyo from LAX, SFO, PDX and SEA where AS is strong domestically.
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drerx7
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RE: CO Immune From Takeover?

Fri Nov 16, 2007 9:33 pm

I thought the way around the NW "golden share" was if CO was the acquiring carrier in a merger scenario.
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ikramerica
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RE: CO Immune From Takeover?

Fri Nov 16, 2007 9:44 pm



Quoting Drerx7 (Reply 9):
I thought the way around the NW "golden share" was if CO was the acquiring carrier in a merger scenario.

From what I understand, it must be the acquiring carrier and the deal can not involve stock swapping. So it must be cash and debt financed. But it's never been fully clarified.
Of all the things to worry about... the Wookie has no pants.
 
TravelGuy
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RE: CO Immune From Takeover?

Fri Nov 16, 2007 10:58 pm

FWIW, I would think that another merger or mergers of domestic US carriers will inevitably happen, whether this year or next or at some point within the next decade. Over the history of the aviation industry these mergers happen, and sometimes between surprising partners. Some work out, some don't.

I feel that CO will probably look to strengthen itself organically and deepen its ties and relationships with other carriers short of a merger in the near to medium term. A way of boosting overall performance and scope without the baggage that M/A brings would be to pursue situations similar to the relationship with VS that CO created in mid 90's (correct time?).

CO needs to expand a bit on several fronts in terms of flight/cargo operations, the most lucrative of which are Asian (China/India in particular) and South American (A.B.C.) routings in my opinion .

Even though CO divested itself of he stake in CM, that doesn't preclude further action from the Isthmus on down.

Obviously route authorities and legal issues abound, but growth will come from international routes. I can't imagine that CO will commit resources to a merger domestically if they feel that those resources can give a higher return if they are used towards increasing their international presence.

CO will probably look to continue the (relatively) consistent upward financial and operational trend they've enjoyed over the past 2 decades and keep themselves in good shape for a more comprehensive (for them at least) M/A landscape over the longer term ( next 5-10 years).

As for the speculation on AS/AQ/HA, my level of knowledge on their finer points would preclude me from making any firm statements on the likelihood or compatibility of such a move other than to say that AS operates in a very good niche and would bring an ostensible amount of value to the relationship. AQ and HA I am not so sure of based on very brief glances over their particulars.

while cost structures may be an impediment initially to any M/A activity, I would think that the mandarins who make the decisions would look at the whole picture and decide of those higher costs will bring a higher yield. No doubt they feel they could also hammer down costs once any M/A has taken place also.

Just my thoughts on the discussion...
 
Falcon84
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RE: CO Immune From Takeover?

Sat Nov 17, 2007 3:46 am



Quoting Ikramerica (Reply 1):
I believe they would look to be the acquirer of smaller carriers, but that is just my opinion.

I think, stragetically, the best bet for CO, as has been mentioned on here and in other threads, would be a merger with AS. For two reasons. Acquiring AS strengthens CO in the one domestic area they're weakest, being the Left Coast, and CO then would most certainly make firm the options remaining on the 787's and use the new hubs in SEA and LAX to really make CO a big-time player in Asia, complimenting existing service via EWR and IAH. Beyond that, I don't know what else I'd like to see us do. I'd like to see us stay independent, and see CLE continue to grow. I think CO can stay independent by taking over AS and using those West Coast hubs to grow in Asia.
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steeler83
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RE: CO Immune From Takeover?

Sat Nov 17, 2007 4:00 am



Quoting Falcon84 (Reply 12):

That I would also have to say would be a pretty good bet for CO, and I really don't have anything else to add to that...
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eghansen
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RE: CO Immune From Takeover?

Sat Nov 17, 2007 5:40 am

I can't imagine why Continental would need to merge with anybody. The literally own Houston lock, stock and barrel, and have such a commanding position in Newark that I can't see how anybody could threaten them in either airport.

They do face competition from Southwest at Hobby, but with their extensive hub, international operations to Latin America and a fairly strong frequent flyer program (Skyteam) they should be fine.

In Newark, they are one of only two airlines with a sizeable hub in New York which is the busiest travel market in America. The only other major hub airline there is JetBlue and they compete in a much more limited market without much international service.

Continental seems to me to be just fine where they are, subject to change.
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COewrAAtysAZ
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RE: CO Immune From Takeover?

Sat Nov 17, 2007 6:03 am

I personally would like to see us merge with AS. I feel that we have a lot of things going for us on the international front as a stand-alone carrier. While a merger between UA/DL would bring each airline their missing part of the world with each other's help (Europe and Asia, respectively), I think that we at CO have a very good chance of growing to Asia independently of another carrier. Once we get those 787s in, we are really going to grow internationally. That being said, a merger with AS would allow us to strengthen in the West. I really feel that mergers and acquisitions between the big legacy carriers will be messy and "bloody". There will be a lot of turmoil for the two carriers to go through before any of the positive comes to light. In that time, we may be able to pull off a merger with a smaller carrier, and get our cards in order for what will hopefully be a very successful, independent international expansion to Asia.
Continental Airlines: Trabajar con empe�?��?�±o, Volar con Pasi�?��?�³n
 
COewrAAtysAZ
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RE: CO Immune From Takeover?

Sat Nov 17, 2007 6:10 am

To respond to the original question posed by this forum, NO, Continental is not immune from takeover. If there is one thing that we have learned at Continental, it is that costs aren't the most important thing out there. We have not cut many aspects of our service that many of our competitors have. That drives our costs up relative to theirs. Yes, we are paid slightly higher in comparison to our competitors (in some positions, this isn't an overall assessment). We still have our pension. All of this adds costs. And guess what... we're still making money just like our competitors. And after their bankruptcy, they're still hurting and begging for a merger. Why?? Because after all of that bankruptcy, they still can't make it on their own. So, I do not feel that our costs are going to make us immune. I think it shows that with a little bit of spending, you can still make money. The idea that a CO/DL merger would not work because it increases our costs is rubbish.

The only thing I ask for in all of this is that when we do merge... we're the acquirer. We've obviously done things right in the past 7 years, our competitors have not.

[Edited 2007-11-16 22:12:02]
Continental Airlines: Trabajar con empe�?��?�±o, Volar con Pasi�?��?�³n
 
masseybrown
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RE: CO Immune From Takeover?

Sat Nov 17, 2007 6:28 am



Quoting COewrAAtysAZ (Reply 15):
I personally would like to see us merge with AS.



Quoting Falcon84 (Reply 12):
I think, stragetically, the best bet for CO, as has been mentioned on here and in other threads, would be a merger with AS.

Everybody wants to merge with AS; but AS continues to go its own way. I'm not sure why; institutions own only about a third of the company and management stockholdings are tiny. There must be some other barrier, perhaps having to do with Alaskan subsidies, although I've never seen it discussed anywhere.
 
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ADent
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RE: CO Immune From Takeover?

Sat Nov 17, 2007 8:40 am

I vote for CO + F9.

Come back to Denver.
 
AADC10
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RE: CO Immune From Takeover?

Sat Nov 17, 2007 5:10 pm



Quoting STT757 (Reply 3):
If CO were to merge they need to merge with someone who has a Strong International business, AS and AQ have nothing but leisure markets.

Ack! That sounds like UA.

CO+UA, DL+NW, AA+AS, B6+F9, WN+TZ.

I would find it hard to believe that any of the old big 3 (AA, UA, DL) would be allowed to merge with each other. Anybody else is probably fair game. At least whomever merged with UA would take over management.

Air travel was so much better under regulation.

Quoting CALPSAFltSkeds (Reply 4):
I understand that AQ was having problems with 733 and 735 engines based on the short hops and tight turns, so are doing the 732 for interisland.

WN seemed to do okay making short hops and tight turns on 733s. AQ needs to spend what little money they have on the fleet that flies to the mainland. The 732s survive because they cannot afford to replace them and their high fuel burn is less important on short interisland trips.
 
masseybrown
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RE: CO Immune From Takeover?

Sat Nov 17, 2007 5:20 pm



Quoting COewrAAtysAZ (Reply 16):
The only thing I ask for in all of this is that when we do merge... we're the acquirer.

That's what every airline wants.  Smile And that is one big reason why there haven't been as many mergers as the bankers would like to see.

Personally, I don't buy the theory that says three competitors is the magic number at which the industry will function best. Look at the steel and auto industries that devolved to this number; the next step was implosion, followed by the massive destruction of jobs, profits, and investment. The more airlines we have, the better for all - except for Wall Street, and even then only in the short run.
 
steeler83
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RE: CO Immune From Takeover?

Sat Nov 17, 2007 7:50 pm



Quoting ADent (Reply 18):
I vote for CO + F9.

Come back to Denver.

I wonder if that would produce a codeshare with FL, since FL and F9 have a codeshare with each other...
Do not bring stranger girt into your room. The stranger girt is dangerous, it will hurt your life.
 
Falcon84
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RE: CO Immune From Takeover?

Sun Nov 18, 2007 3:13 am



Quoting ADent (Reply 18):
I vote for CO + F9.

Come back to Denver.

For what CO needs, F9 doesn't help as strategically, I think, as AS would. Yes, both would help fill in the West Coast, where CO is weak, but the F9 hub in DEN cannot help CO get big into Asia, like AS's LAX and SEA hubs would, in launching Asia service. That is where AS has the advantage for CO that F9 cannot offer.
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WesternA318
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RE: CO Immune From Takeover?

Sun Nov 18, 2007 3:23 am



Quoting Falcon84 (Reply 22):
For what CO needs, F9 doesn't help as strategically, I think, as AS would. Yes, both would help fill in the West Coast, where CO is weak, but the F9 hub in DEN cannot help CO get big into Asia, like AS's LAX and SEA hubs would, in launching Asia service. That is where AS has the advantage for CO that F9 cannot offer.

First off, F9 has nothing to offer CO, as noted above, but I think it would ironic, considering the REAL Frontier Airlines was purchased by PeoplExpress, which in turn was bought by Texas Air and merged into the current day CO.
 
ordflier
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RE: CO Immune From Takeover?

Sun Nov 18, 2007 3:38 am

Maybe UA should buy F9 or B6.
ORDflier
 
steeler83
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RE: CO Immune From Takeover?

Sun Nov 18, 2007 3:48 am



Quoting Ordflier (Reply 24):
Maybe UA should buy F9

That would give them one huge DEN hub.
Do not bring stranger girt into your room. The stranger girt is dangerous, it will hurt your life.
 
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ADent
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RE: CO Immune From Takeover?

Sun Nov 18, 2007 8:30 am

UA wouldn't be allowed to buy F9 - until F9 is about to go under. That would give UA a huge lock on DEN.

F9 would get CO a DEN hub. Lots of people tired of UA, but F9 is not quite right. I agree that is not so good an idea, esp with WN moving in aggressively. But CO would get to use almost the whole A concourse.

CO used to be bigger in LAX back in the day (70s), IIRC. I would think they would want to keep away until Delta gets bored with LAX again. DL has seemingly stirred up UA a bit, and of course WN is there too. How many flights/gates does CO & AS have at LAX?

SEA has never been shown to be a power house asia hub, but it seems like an OK idea.
 
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STT757
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RE: CO Immune From Takeover?

Sun Nov 18, 2007 4:00 pm

AS has a whole terminal to themselves at LAX, unfortunately it needs to be totally replaced. However it would give the combined AS/CO a new modern 12-15 gate Terminal, they could add a FIS to the new terminal.

At SFO they could move to the former International Terminal.

Basically AS gives CO plenty of expansion opportunities to grow organically.
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