Airline Mergers: Ready for Takeoff?

A fresh round of consolidation talk has the U.S. airline industry abuzz, but such deals are far easier to propose than to complete

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It happened with railroads, cars, and then oil. Steel followed in the 1980s and 1990s. Now many people are pressing for consolidation of the U.S. airline industry, where they see too many seats, too many redundant operations, and fliers chasing too many cut-rate fares.

After a four-year struggle to survive billions in losses, the industry has finally gained a little breathing room, thanks to fundamental restructurings and somewhat higher fares. That, in turn, has more than one airline executive mulling long-term structural fixes—and less competition via consolidation might just fit the bill. "It's the lemming nature of the airline industry that when somebody does something everybody else wants to do the same thing," says Joe Leonard, chief executive of AirTran Airways (AAI), one of the carriers in the current mergers and acquisition hunt. "I think there's a real fear of being left out."

As 2006 draws to an end, there are three main deals in play. And if one of the major carriers strikes a deal, expect others to follow, as none really wants to take on a rival that just got bigger.

Struggling Over Delta

The largest proposal, and the one that will set the tone for whether the industry sees any wholesale consolidation, is US Airways Group's (LCC) $8.5 billion hostile offer for Delta Air Lines (DALRQ). Delta wants to leave bankruptcy court protection as a standalone carrier by late spring or early summer. Both sides are girding for a fierce public battle, while also pitching Delta's creditors on their vision for how the company would best succeed.

At issue will be whether such a combination—which would create one of the world's biggest airlines—can be made acceptable to regulators. Moreover, US Airways says it can squeeze $1.65 billion in annual cost savings from a merged entity and is offering creditors a juicy incentive: Nearly half its bid, $4 billion, is cash. Delta contends that such a behemoth airline would never pass regulatory muster and has assembled a detailed PowerPoint scenario of job cuts, reduced flights, hub domination, and higher fares that would make almost any consumer advocate cringe. In its reorganization plan filed Dec. 19, Delta calculates its standalone value as high as $12 billion. Two days later, Doug Parker, US Airways chairman and chief executive, called the math "way out of whack."

The issue also presents a personal dimension for employees of a paternalistic Southern company that goes to great lengths to imbue workers with the idea of family. Delta workers have begun wearing "Keep Delta My Delta!" buttons and ribbons, and the airline has launched a petition drive on its Web site to gather supporters for its side. For 74-year-old Delta CEO Gerald Grinstein, a Harvard-trained attorney and accomplished executive who is retiring after the Chapter 11 case, the issue may also be a matter of legacy.

"You really want to be the guy who sold Delta?" says Gordon Bethune, the retired chairman and CEO of Continental Airlines (CAL). Still, he gives the deal "60-40" odds of happening because Delta's creditor committees will determine what's likely to return the most financial value. "They do math real well. And the judge is likely to go along with the mathematics," Bethune says.

AirTran Tries Again

In a second firm bid, the parent of AirTran Airways has submitted a $290 million offer for Midwest Air Group's (MEH) Midwest Airlines, its second overture in a year.