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High Hurdles Await Airlines

Ted Reed

Some deals are already on the table in the airline industry, where a long-awaited round of consolidation seems to be nearing, and more deals are being discussed. The only catch is there's no assurance that any of them will get done.

In the past month, US Airways(LCC Quote) and AirTran(AAI Quote) have bid for other carriers. United(UAUA Quote) has talked to Continental(CAL Quote) about a combination, and Northwest(NWACQ Quote) has hired a merger adviser.

Each case is facing its own substantial barriers. The US Airways bid for Delta(DALRQ Quote) is a hostile one, opposed by the target company's management, as is the AirTran proposal for Midwest Air(MEH Quote).

United, chasing a merger, has already been rebuffed by Delta, and the talks with Continental might hit a dead end, too. On Wednesday, Continental CEO Larry Kellner indicated he wasn't interested in merging with another major U.S. carrier, saying he was "satisfied with the airline's position in the market as it stands," the Jerusalem Post reported.

"There has been a lot of consolidation activity recently but we prefer that Continental remain independent, as we feel we are very well-positioned in the market at the moment," Kellner said at a Tel Aviv press conference, according to the newspaper.

US Airways' offer for Delta is opposed not only by management, but also by Delta's pilots, who say their contract would prevent a deal from getting done. US Airways denies it, but at the least, the contract would delay some of the cost and operational efficiencies that might otherwise be achieved.

Antitrust concerns are also an issue, since a combined US Airways-Delta would operate the two major connecting hubs in the Southeast. Charlotte, N.C., which would suffer in any competition for resources, was considered a plum by United when it put together a failed bid for US Airways in 2000.

Atlanta, the other hub and the city where Delta is based, is home to the world's busiest airport for several years running, Hartsfield-Jackson.

The AirTran bid for Midwest seems to skirt some of the problems in the US Airways proposal. In an interview, AirTran CFO Stan Gadek said the deal is the "exact opposite." Importantly, he pointed out that his company's plan is devoid of overlap and bankruptcy complications, but in his view that isn't the only benefit.

"Pilots at Midwest are limited in their opportunity to get from first officer to captain [because] the fleet is barely growing," he said. "Midwest doesn't have the wherewithal to place a large aircraft order."

Additionally, Gadek said, doing a deal in bankruptcy involves "multiple constituencies," including a variety of creditors, as well as the company itself.

Of course, Midwest opposes a deal and disputes Gadek's suggestions that it lacks critical mass or that its strategy to offer premium service is threatened by the spread of low-cost, low-fare competitors, including legacy airlines.

Midwest Senior Vice President Carol Skornicka acknowledged that this is a time for consolidation talk. "Everybody seems to think it's the flavor of the day," she said. "Generally, it makes sense, but our product is so differentiated, and so unique, and [a merger] would mean elimination of the brand.

"We've survived 22 years being small, so when people say 'you can't survive,' we don't believe it," Skornicka said.

As for Northwest, industry watchers assume that American wants to acquire the Minnesota-based carrier because of its strong presence in Asia. Thus far, there has been no indication that American buys into this theory. In recent years, American has suffered rather than benefited from acquisitions of Reno Air in 1999 and TWA in 2001. It may have had enough.

American CFO Tom Horton, in a recent interview, said, "In the airline business, mergers are really complex [and] fraught with difficulty in terms of labor issues and other issues. There's a mixed record with respect to mergers in this industry."

In October, Delta CEO Jerry Grinstein told reporters he expected that in two years, the major carriers would be aligned in pretty much the same way they are now. Asked about the possibility of consolidation, Grinstein said: "I don't look for it to take place in the near term. ... I don't look for it to take place anytime."

A month later, Grinstein heard on the radio that US Airways was launching its hostile bid, the move that triggered the current round of merger speculation. Grinstein has been battling the takeover effort ever since.