Consolidation Stays on the Runway

Expectations of airline merger mania may be overblown. Local opposition, antitrust laws, and issues of control may keep airlines taxiing

by Dean Foust

For years, pundits have predicted a sweeping wave of consolidation in the airline business that would pare down the roughly 130 carriers that now fly the U.S. skies to a smaller group of companies. When US Airways Group (LCC) announced a hostile bid for Delta Air Lines in mid-November, it looked as if the long-awaited day of consolidation might finally occur (see BusinessWeek.com, 11/16/06, "Delta Creditors Man the Cockpit"). And published reports on Dec. 13 that United Airlines (UAUA) and Continental Airlines (CAL) were also in talks further fed speculation that merger mania was now at hand.

There are some powerful incentives for airlines to combine. Despite cutbacks by the major carriers in recent years, the industry is still glutted with too many planes flying too many routes between too many hubs—all of which conspire to crimp airline profits. "I believe the value of mergers is undisputed: There's still too much capacity in this industry," says Roger King, an airlines analyst for CreditSights, an institutional research firm based in New York. "Some of these hubs and routes need to be taken out and mergers are a way to do that."

Feeling the Pressure

And if one major merger occurs, other carriers may feel an urgency to partner up to make sure they're not left behind with an inferior route structure and too few expansion opportunities. "I think this is clearly a situation where no one wants to be left out," says Robert Fornaro, president of AirTran Holdings (AAI), the parent of AirTran Airways, which on Dec. 13 made an unsolicited $288 million bid for Midwest Air Group's (MEH) Midwest Airlines. "You can debate the merits of consolidation, but if it happens, no one wants to be left out," (see BusinessWeek.com, 11/16/06, "Now Boarding: Merger Mania").

But for all of the logic behind some of these deals, there are also several reasons not to consider consolidation a foregone conclusion—at least not on a scale that the fee-chasing investment bankers behind the news leaks would like to see. Before any airlines can partner up, they would first have to negotiate an imposing gauntlet of opposition: Pilots' unions who fear job losses and less opportunity for promotion when their airline combines with another. State lawmakers and attorneys' general who worry that mergers would result in the closing of smaller hubs like Charlotte, N.C., and Cleveland, and cutbacks in flights to smaller markets like Augusta, Ga., or Butte, Mont.

And not least, airlines will have to convince antitrust regulators who fear that mega-mergers like US Airways-Delta and United-Continental might result in sharply higher fares for consumers and monopoly control of too many airports. Indeed, experts note that the Justice Dept. already has a history of blocking large-scale mergers, as it did when it filed suit to block a proposed marriage between US Airways and United back in 2000, and similarly, when it blocked Northwest Airlines in 1998 from buying a controlling stake in Continental. "I think we could see several attempts at mergers, but I'm skeptical as to how successful they will be because of these antitrust issues," says Scott Hamilton, an aviation consultant in Issaquah, Wash.

Bankruptcy Blues

For their part, some airline executives would be quick to note that their industry has bled billions in red ink over the past five years, in part as the flying public enjoyed historically low fares.