More Turbulence Ahead as Airlines Plot Merger Route

American Airlines is threatening to put two airline trends on a collision course that could mean greater pain for already annoyed U.S. travelers: the carriers’ desire to merge and organized labor’s growing use of job actions that leads to canceled or delayed flights.

American, the main unit of AMR Corp., did as many expected and proposed buying a smaller competitor. The company may announce as early as this week that it’s acquiring near-bankrupt Trans World Airlines.

American’s proposal is in response to plans by United Airlines and its parent, UAL Corp., to buy most of US Airways Group for $4.3 billion. American also would buy a big piece of US Airways that United will surrender to get antitrust clearance for its own deal.

And with United and American--the nation’s No. 1 and No. 2 carriers, respectively--now pursuing mergers, it’s expected that there will be more marriages involving Delta, Northwest, Continental and perhaps smaller airlines such as America West and Alaska. That could lead to just three or four domestic mega-carriers.

Whether that, in turn, could lead to less service and higher fares is hotly debated. Those concerns could cause federal regulators to block the mergers. And there’s also the fact that the airlines’ urge to merge comes after more than 1 million passengers have endured at least four major job actions by unionized workers at United, American, Delta and Northwest over the last 2 1/2 years.

Those slowdowns contributed to crew shortages that led to thousands of flights being delayed or scrapped altogether, creating chaos at airports nationwide. The most recent action slowed Delta’s operations during the Christmas holiday as Delta and its pilots kept haggling over a new contract. (Delta’s union on Monday authorized a strike ballot of its members.)

So what happens if there are more job actions at those airlines after they’ve grown twice as large?

“I wonder how the flying public would feel if the disastrous holiday season they just endured was about to become the industry standard?” Rep. Louise Slaughter (D-N.Y.) said in a statement Monday. “It would be a travesty for the new [Bush] administration to let this go forward.”

Other lawmakers, analysts and trade officials cautioned that an airline merger wave is by no means guaranteed.

A key reason, again, is labor. Airline mergers are relatively rare in large part because there’s always the threat that unhappiness with the way companies try to integrate their labor forces--which operate under complex union contracts--could prove the deals’ undoing.

American Airlines’ operations were paralyzed for days in 1999 after it bought Reno Air--a tiny airline compared with the storied but ailing TWA. That’s because American’s pilots used a sickout to object to how American planned to integrate Reno Air’s pilots into its system.

There’s also the prospect that U.S. antitrust officials would block the mergers because they’d hamper competition for consumers, either on grounds that so few airlines would reduce service and lead to higher fares, or because the prospect that U.S. travel could be badly disrupted by a labor dispute at one of the new mega-carriers.

With the new Bush administration coming in, it’s even more uncertain how regulators will look at having only three or four giant U.S. airlines.

“The fact that American wants TWA now [in order] to have the same critical mass as United certainly doesn’t mean everyone is happy” with the proposed merger, said Ron Kuhlmann, vice president at Roberts, Roach & Associates, an aviation consulting firm in Hayward, Calif. “It just means American doesn’t want to be the small guy [next to United] anymore.”

Congress, too, might get tougher about airline mergers, especially after last summer’s travel debacle in which tens of thousands of flights were canceled or delayed in good part because of a dispute between United and its pilots.

“We were concerned that the [United] merger would trigger a round of further, defensive mergers by United’s competitors. Today’s news suggests that the process has begun,” Rep. James Oberstar of Minnesota, the ranking Democrat on the House Transportation Committee, said in a statement Monday.

Though Oberstar said he’s withholding a final opinion until more details are announced, “once this process starts, it is likely to reduce the industry to three major airlines that would be unlikely to compete vigorously.”

Neither American nor TWA on Monday confirmed the published reports about their merger. However, American management confirmed its talks with TWA to senior officials of American’s pilots’ union, the Allied Pilots Assn., union spokesman Gregg Overmann said Monday.

The airlines’ stock were mixed Monday in response to the reports. AMR fell $2.25 a share to $41.50 on the New York Stock Exchange, while TWA slipped 15 cents to $1.32 a share on the American Stock Exchange. US Airways jumped $4.50 to $44 a share, apparently as investors saw AMR’s deal helping US Airways complete its buyout by United. But UAL fell $1.94 to $43.06 a share. Both trade on the NYSE.

The reports said TWA is expected to file for U.S. Bankruptcy Court protection for the third time in its history and then be acquired by AMR. Though it’s lost money for years, TWA has an attractive hub in St. Louis that appeals to American.

AMR also would buy roughly 20% of US Airways--including a piece of its Boston-New York-Washington shuttle service--and 49% of a new regional carrier called DC Air, which would have landing slots and gates in Washington. United and US Airways proposed DC Air to alleviate antitrust concerns about United’s heavy market share in the Washington area after it buys US Airways.

Some analysts dispute the notion that having only three or four airlines would harm consumers. In fact, they contend that the mergers would help the surviving airlines keep a lid on costs--and thus help keep a lid on fares--and that travelers would have more destinations available to them, not fewer, from their local airports.

These deals also would not reduce the stiff competition provided by such low-fare rivals as Southwest Airlines, they noted.

“Consolidation offers a glimmer of hope for this economically challenged industry,” by enabling the survivors to better utilize their jets, eliminate overhead costs and centralize their buying of supplies, according to a report Monday by Stern Stewart & Co., a New York-based consulting firm. No airline helped pay for the report, said Justin Pettit, one of the firm’s partners.

And the Air Travelers Assn., a Washington-based trade group representing passengers, said it supported the American-TWA deal because it was concerned about TWA’s survival. The group also discounted the threat of soaring fares.

“As long as the [Department of Transportation] ensures that these low-fare carriers can fairly compete with the big carriers, then competition will be preserved in the airline marketplace,” ATA President David Stempler said in a statement.

Regardless, American’s merger plans “could prove to be quite difficult to consummate with the two key stumbling blocks being labor and the Department of Justice,” Merrill Lynch & Co. analyst Michael Linenberg said in a bulletin to clients.

Among other things, American’s pilots or its other labor groups might object to TWA’s work force taking seniority positions from them, and if negotiations failed to resolve the dispute, that might again lead to a work slowdown that affects travelers.

But ALPA’s Overmann said the union wasn’t yet taking a position on American’s merger plans until it could review their details, which are expected to be disclosed as soon as this week.