A global recession and a surge in fuel prices sparked a frenzy of airline mergers and acquisitions over the last decade, as carriers joined forces to stay airborne amid economic turbulence.
Merger mania is not over. The biggest yet may now be in the works, combining American Airlines and US Airways into the nation’s largest airline with up to 1,500 planes in its main line and regional fleets and more than 120,000 employees.
Analysts say a merger between Fort Worth, Texas-based American and Tempe, Ariz.-based US Airways could be announced as soon as January. It would produce a mega airline with an estimated value of about $8 billion. At Los Angeles International Airport, American is already the largest airline.
Airline experts debated the financial merits of a merger, but they agreed passengers could face some short-term headaches if a deal happens.
“Mergers are never good for passengers because there are always disruptions,” said Joe Brancatelli, an airline expert and online columnist on business travel.
If merger history is any guide, the integration of American and US Airways could lead to reservation system glitches, labor disputes and a cut in services to some markets, experts say. Airline mergers, they add, mean fewer competitors and thus higher fares.
“I believe merging the two companies would be at least a two-year difficult period with many challenges,” said Ray Neidl, an airline analyst for Maxim Group, a New York investment banking firm.
Executives of the parent companies of US Airways and American Airlines are meeting behind closed doors and declined to comment publicly on a potential merger. But the union for American Airlines pilots, which supports a merger, says an integrated American-US Airways would fly more efficiently and offer more destinations.
Still, Tom Hoban, spokesman for the Allied Pilots Assn., concedes that “there are always going to be some operational challenges.”
Indeed, airline mergers rarely run smoothly.
Dozens of United Airlines flights have been delayed over the last year because of computer glitches, apparently resulting from efforts to switch over to the reservation system formerly used by merger partner Continental.
Integrating labor groups, such as pilots, can also lead to problems, such as strikes and job actions.
US Airways completed a merger with America West Airlines in 2005 but has yet to get pilots and flight attendants from the two airlines to agree on integrated employment contracts.
After filing for bankruptcy last year, American Airlines parent AMR threw out its previous labor contracts and jumped into strained contract negotiations with its pilots. AMR contended American Airlines pilots filed an unusually high number of last-minute maintenance work orders in September, delaying hundreds of flights, in a bid to coerce management into reaching a deal. The pilots’ union conceded that the pilots filed the maintenance orders but only because it was required of them. The pilots voted this month to approve a new labor contract.
By cutting competition, a merger between American and US Airways may push up fares but not significantly, said UC Irvine Professor Jan Brueckner, who coauthored a report on the effects of airline mergers. In the end, he said, cost savings created by the merger would more than make up for the higher fares.
“This impact is likely to be dwarfed by the network benefits enjoyed by passengers and by the cost synergies of the merger, some of which will eventually be passed on to consumers,” Brueckner said.
Whatever those challenges, frequent fliers don’t seem too worried.
Mitch Smith, a frequent flier from Minnesota, said he isn’t expecting higher fares. “There will still be United, Delta and Southwest to compete with,” he said.
Karen Constine, a public affairs and cultural management consultant from Los Angeles, is hopeful a merger could improve American, an airline she often flies abroad.
“If this helps bring more services for customers, then that certainly is great,” she said.
American, the nation’s fourth-largest airline, has been the subject of merger talk since AMR filed for bankruptcy in November 2011.
US Airways, the fifth-largest airline, has pushed for a merger, arguing that the two airlines can combine to better compete against bigger carriers such as Delta, which merged with Northwest in 2009, and United, which merged with Continental in 2011.
US Airways submitted a merger proposal in November that would give AMR creditors 70% of the new mega airline, leaving US Airways 30%, according to news reports.
US Airways went so far as to convince three of American Airlines’ unions to back a merger. One of the key arguments for a merger is that US Airways’ extensive service on the East Coast can help boost American’s sparse presence in the region.
Although American Airlines executives say they want to exit bankruptcy before considering a merger, Neidl estimated that the odds of a merger with US Airways before American exits bankruptcy are 75%.
“Both can survive on their own for the foreseeable future,” he said, “but over the long run, each would erode in their competitive positions.”