More mergers may be on industry’s radar
Record fuel prices and weakening demand for air travel are taking a toll on profits of major U.S. airlines, raising prospects of a consolidation in the industry this year.
Recent merger talks and Thursday’s announcement by American Airlines Inc. that it would double its fuel surcharge to $40 on round-trip tickets signaled that passengers could soon see higher fares industrywide.
Some analysts say high fuel costs, increased competition from low-cost carriers and a slumping economy are creating conditions ripe for mergers among large airlines after years of failed attempts and false starts.
American Airlines, the nation’s largest carrier, posted a loss in the fourth quarter, citing high fuel prices and weather-related disruptions. Similar results are expected for other major airlines after six consecutive profitable quarters.
Although airline executives and investors would gain from a merger, passengers probably would be hit with higher fares and further cuts in service and flight schedules.
“Customers will lose because they always lose in a merger,” said Joe Brancatelli, who runs a website for business travelers, joesentme.com. “I don’t care what they say; mergers have been bad for customers.”
The latest merger mania got a jump-start last week when shares of Delta Air Lines Inc. soared on reports that it was looking at combining either with United Airlines parent UAL Corp. or with Northwest Airlines Corp. to create the nation’s largest carrier.
“It’s likely that we will have a reduction in the number of large carriers,” said George Hamlin, managing director of ACA Associates, an aviation consulting firm. “We’ve had several airline executives saying there are too many carriers and too much capacity with higher fuel costs exacerbating the situation.”
But while Wall Street and airlines are clamoring for consolidation, federal regulators and Congress may block mergers because of antitrust concerns, though some analysts contend that they may be less resistant than in the past.
Early last year, U.S. Airways dropped an $8-billion bid for Delta partly after Congress raised questions about how overlapping East Coast networks could lead to higher fares in that region. The proposed deal prompted some members of Congress to call for increasing regulation of the industry.
Prospects for consolidation in the industry dampened, only to be revived last summer after Delta named a former Northwest chief executive as its CEO. Then last fall, amid a slump in airline stocks, a hedge fund owning shares in Delta and UAL wrote to the airlines to urge them to consider a merger.
Calls for consolidation have grown as the industry faces declining travel demand with fears of recession and signs that fuel prices are likely to remain high. At the same time, lower-cost and regional airlines have been stepping up competition in markets that the major carriers have dominated.
On Wednesday, Alaska Air Group Inc.’s Alaska Airlines said that in April it would increase nonstop flights from Los Angeles International Airport to Seattle to 15 a day from 12. And Southwest Airlines Co. announced last week that it would add six flights from LAX to Denver, a major United hub.
“Our fuel problem shows no signs of abating, the economy in the United States may be sliding into a recession, and we are facing ever more intense competition here in the U.S. and in markets around the world,” American Airlines Chief Executive Gerard Arpey said Wednesday in a letter to employees.
In doubling the fuel surcharge, the carrier said its fuel costs rose nearly 30% in the fourth quarter, with fuel accounting for a third of the airline’s expenses.
Rick Seaney, chief executive of FareCompare.com, said other airlines were likely to match the fuel surcharge. “Air travelers contemplating a purchase should buy their tickets before full-fledged matching occurs over the weekend.”
On Thursday, Continental Airlines Inc. Chief Executive Larry Kellner said the nation’s fourth-largest carrier would respond to merger opportunities.
“If we see something, we won’t hesitate to act aggressively,” Kellner told analysts. “We like our position as the industry stands today. I suspect things will change either on consolidation or fuel prices. It’s difficult to speculate.”
Delta, which has maintained that it wants to be the one acquiring an airline, is hoping to wrap up a deal while the White House is under a Republican administration, which may be less resistant to blocking a merger than if there were a Democratic president.
Consolidation appears “inevitable,” Hamlin said, adding that with the exception of a merger between the two largest carriers -- American and United -- regulators and Congress may have fewer reasons to block any deals. The U.S. could be left with three so-called legacy carriers, down from six, when the dust settles.
A merger between Delta and Northwest, for instance, would create few overlaps in domestic routes, while their international networks are complementary. Delta has extensive service to Europe and Northwest’s overseas focus is Asia.
Delta and Northwest together account for about 10% of the passengers at LAX. A merger of United and Delta would boost the new carrier’s share to nearly 23% and leapfrog past American Airlines, currently the largest single carrier at LAX with about 15% of passengers.
Although consolidation would hurt the flying public in the pocketbook, Brancatelli said that this year, “people who are against the merger on competitive grounds will have a much harder time.”
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