Legacy Carriers Have Urge to Merge

Airline mergers have fallen out of favor, but US Airways and United still believe.
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The heads of at least two legacy airlines still support industry consolidation, even if the concept has temporarily fallen out of fashion.

During conference calls last week,

United

(UAUA)

CEO Glenn Tilton and

US Airways

(LCC)

CEO Doug Parker both continued their strong support for airline mergers. The two carriers attempted one in 2000 but failed to secure Justice Department approval.

At the moment, merger momentum is lagging for a variety of reasons. The industry environment is reasonably strong, and mergers typically occur in a down cycle. Also, the ability to acquire bankrupt carriers and reduce costs in court has subsided as

Delta

(DALRQ)

emerged last week and

Northwest

(NWACQ)

prepares to do the same next month.

The industry's story of the moment is that Delta successfully emerged after fighting off a merger with US Airways. In fact, battling a common enemy helped to galvanize Delta employees in support of the airline's efforts.

Enthusiasm for airline mergers has slipped so far that last week, Joe Leonard, CEO of

AirTran

(AAI)

, sought to distance himself from the concept, even though he is avidly

pursuing a hostile merger with

Midwest

(MEH)

.

"We view

the proposed merger not as a consolidation story as much as an accelerated growth story," Leonard said during a conference call.

Leonard said only four routes in the proposed combination overlap, highlighting a big difference from US Airways' failed effort to take over Delta, its largest competitor. That effort seemed unlikely to win Justice Department approval, given that it involved the elimination of overlapping routes in hundreds of markets.

Nevertheless, the industry's two leading voices for consolidation remain undeterred, despite acknowledging during the conference calls last week that the world does not yet see things their way.

While industry CEOs, including Delta's Jerry Grinstein and US Airways' Parker, have suggested that mergers are unlikely in the current environment, United's Tilton said that "consolidation is a strategic imperative in the industry" but that "for me to be able to effect it, I need somebody else to agree with me and to step up," should the opportunity present itself. Over time, he said, that would happen.

"It is a little puzzling to me for someone to think about it in a passive context, as if you had nothing to do with it," Tilton said.

Parker, however, reiterated that it will take a downturn -- or at least "a change in mentality"

-- for consolidation talk to return. "

That's "not because that's when it should happen, but when companies are doing better than they used to, it's hard for boards and management teams to get excited about doing something dramatic because they feel good about the trend," he said.

Carriers emerge from bankruptcy after wiping out shareholders, chopping aircraft lease rates and extracting billions of dollars in concessions from employees. For consolidation to occur, Parker said, those carriers must reach the point where they realize that "our company still isn't doing as well as we would like."

"Some carriers," he said, without mentioning names, "are already there." And others will get to that point, he said.