AMR Corp.'s American Airlines unit agreed Thursday to buy Western regional carrier Reno Air Inc. for $124 million in cash, but analysts were divided over whether the deal would heighten the already competitive California airline market.
The proposed deal is a major step by American to reassert itself in California. The airline virtually pulled out of the intrastate market in 1993 when, facing massive financial losses overall and stiff competition from low-fare king Southwest Airlines Co., American closed its San Jose hub.
A prosperous American is anxious to rebuild its Western presence because, in the last five years, Southwest and UAL Corp.'s United Airlines--which launched its no-frills Shuttle by United in 1994--have strengthened their dominant shares of the West Coast market.
Southwest and United together have a commanding 77% of the market for people flying within California. American has a paltry 1% of the market, down from 20% in 1990, according to the research firm Roberts, Roach & Associates in Hayward, Calif.
Reno flies to 16 cities, and its hubs include its bases in Reno and Las Vegas. It also took over much of the San Jose service abandoned by American, and it is a partner in American’s frequent-flier program.
Reno’s other destinations include Los Angeles, Burbank, Orange County, San Diego and San Francisco, but virtually none of its routes overlap with those of American. Reno has about 2,500 employees and a fleet of 27 jetliners.
But it’s not just consumers flying within California that American wants to attract. United, the biggest U.S. carrier, also has used its Shuttle effectively to feed California passengers to its more lucrative East-West routes, namely its transcontinental and transpacific routes.
American wants to do the same.
“Our customers have told us they want the AA brand more accessible in the West, where we already have a strong East-West presence,” AMR Chairman Donald Carty said in a statement.
Reno Air would be the platform for that expansion, and its purchase by American would be a plus for consumers, said Alan Sbarra, vice president of Roberts, Roach. A resurgent American in the West would likely give travelers more flight choices and help keep a lid on fares, he said.
“The West Coast is one of the most hotly contested markets in the United States, which is why we’re blessed with low-fare service, and there’s no reason why [competition] shouldn’t spread” with this merger, Sbarra said.
Also, “Reno Air’s future wasn’t assured, so in the long term, American might have saved another competitor for this market,” he said.
But others said travelers shouldn’t look for big changes. “It’s a pretty stable move” for consumers, said Edward Starkman, an analyst at the investment firm Warburg Dillon Read. Reno often temporarily slashed prices to better compete with the low-fare leaders, but replacing it with American should result “in more stable pricing” trends, or fewer fare wars, he said, because American would not likely do the same.
American said it wouldn’t outline its plans until it gets regulatory approval for the merger. Southwest spokeswoman Carol Pearson said Southwest “has thrived in the West despite competition” and therefore is “not going to change anything” in view of American’s action. United declined to comment.
Under the merger agreement, AMR would pay $7.75 for each of Reno’s common shares outstanding and $27.50 a share for Reno’s 9% series A convertible preferred stock. After the announcement, Reno’s common stock closed at $7.38 a share, up 13 cents, on Nasdaq. The stock already had risen sharply in recent weeks amid speculation that a deal with American was in the works.
Against the likes of Southwest and United, Reno Air never carved out a sustained, profitable niche in the airline business.
Founded in 1992, Reno kept tinkering with different route networks and marketing strategies, but the airline continued struggling. The carrier lost $12.3 million last year, a disappointing performance in light of the industry’s overall good health.
Reno’s service also suffered, with frequent delays and cancellations. Early this year, its reservations system was so slow that 65% of callers to the system hung up in frustration before they could reach an agent.
In February, Reno once again changed chief executives by hiring Joseph O’Gorman from United, and O’Gorman made quick strides in cutting costs, improving service and boosting Reno’s earnings.
But even O’Gorman said last month that Reno had never found a niche that worked, and that he was looking to strike an alliance or merger with a larger carrier.
The American deal “is the right decision for our shareholders, our employees and the communities we serve,” he said in a statement Thursday.
American Airlines is buying Reno Air to bolster its meager presence in the West. Below are market-share figures based on passengers who start and end their trips within the state, and doesn’t count those travelers connecting to out-of-state flights:
1997 Share: 49.5%
1997 Share: 27.8%
1997 Share: 8.1%
1997 Share: 2.0%
Airline: America West
1997 Share: 1.7%
1997 Share: 1.1%
1997 Share: 9.8%
Source: Roberts, Roach & Associates Inc.