Airline Mergers ‘90s-Style Might Stand a Better Chance This Time

Delta Air Lines’ reported merger talks with Continental Airlines are reviving speculation that the entire airline industry is poised for a new round of takeovers.

So far, Delta and Continental aren’t commenting, and many analysts are skeptical that a deal will happen. The same speculation was heard a year ago when USAir Group put itself up for sale, but USAir wasn’t sold and no other deals occurred.

Some analysts also dismiss the current speculation on grounds that the Clinton administration’s antitrust regulators wouldn’t allow a rash of deals that might stifle competition.

If, say, a Delta-Continental combination sparked the other big carriers to merge, the industry could be left with only three or four survivors that would control 80% of the U.S. airline business, and “that ain’t gonna fly,” said analyst John Pincavage of the investment firm Dillon, Read & Co.

But the speculation persists because the airline market is a mature, slow-growth business, and mergers present one of the few ways for a carrier to quickly expand its share of the market.

If the industry does consolidate further, could the airlines reverse their sorry history of failed marriages?

Possibly.

The airlines today are much more financially disciplined than they were 10 or 15 years ago, when many were on shaky financial ground yet still struck dubious mergers that further weakened their performances.

The acquiring airlines either found themselves hobbled with excessive debt that became more crushing when the economy soured, or found it a nightmare trying to merge the different airlines’ labor contracts and employee work rules.

Pan American World Airways struggled for years after buying National Airlines in 1979, as did Northwest after buying Republic in 1986. Delta labored after buying Pan Am’s international routes in 1991. Texas Air Corp. collapsed after merging Eastern, People Express and Continental in the mid-1980s.

USAir is an amalgam of merged airlines (Piedmont and Pacific Southwest among them) that has survived, but it remains among the weakest of the big carriers, with exceptionally high operating costs.

“There’s a greater chance” future mergers will succeed “if only because everyone knows what flops the previous mergers had been,” said Jeffrey Long of J.P. Morgan Securities Inc.

USAir notwithstanding, most major airlines today operate with sharply lower costs than they did a decade ago and, with the help of a vibrant economy and strong passenger traffic, their combined profits are expected to hit a record $2.5 billion or more in 1996.

The airlines also have, for now, laid off their old habit of constantly slashing fares, a tactic that protected their market shares but wreaked havoc with their profits and helped saddle them with more than $10 billion of losses between 1990 and 1994.

They’re also wisely using their current, swollen earnings to pay down their debts and have only cautiously ordered new aircraft so as not to fly too many empty, expensive seats.

There’s another element that’s seemingly changed: The egos of airline executives. Whereas airline chiefs once thrived on making their carriers the biggest at whatever cost--on the assumption that size would enable them to drive smaller players out of the skies--today’s executives appear concerned more with making their airlines turn a profit, analysts said.

In some cases that’s not surprising, because the executives are part of investor groups that bought control of the airlines and are seeking a sizable return on their investments. Case in point: Texas financier David Bonderman, whose group controls Continental.

Indeed, Continental Chairman Gordon Bethune has publicly made the point that what counts today in the airline business is not size, but making money. Yet a merger of Atlanta-based Delta and Houston-based Continental would create the largest U.S. airline in terms of passengers carried, surpassing UAL Corp.’s United Airlines.

For all the changes that would seem to improve the prospects for airline mergers, analysts said there’s still one big reason to worry that the deals won’t succeed: The people factor.

Merging big airlines means melding tens of thousands of (often unionized) pilots, flight attendants, mechanics, reservation clerks and other workers who often have sharply different salaries, benefits and ways of doing their jobs.

It’s a difficult, complex task that often disrupts employee morale and erodes the surviving airline’s service and performance. Few airlines have accomplished it successfully.

“Yes, today’s executives are different, but you’re dealing with the same airline employees, the same unions and the same clashing cultures,” said Raymond Neidl, an analyst with the investment firm Furman Selz Inc. in New York.

“Integrating [two airlines’] labor forces is difficult, and that’s why no airline merger has ever gone smoothly,” he said. “There’s no reason to believe it can be done [now] any more smoothly than before.”