United Airlines looks to mergers

Consolidation needed, UAL chief says, just as with telecom industry

`What's possible ... has changed'

February 18, 2005|By THE DALLAS MORNING NEWS

DALLAS - In bankruptcy for two years, United Airlines has a new role in mind if it can reorganize: industry consolidator.

Taking cues from the telecommunications industry, the money-bleeding airline business needs to consolidate to regain its health, Glenn F. Tilton, chairman and chief executive of United parent UAL Corp., told investors in New York yesterday.

Look for his carrier to act, he said.

"For the industry to get to a position where it can genuinely make some progress through the current level of dysfunctionality, there need to be fewer network legacy carriers," he said at the J.P. Morgan Airline Conference. "Just as telecom is plagued with overcapacity and commoditization, so is the airline industry, which must follow and consolidate."

UAL lost $1.6 billion in 2004.

But it's primed to be an acquirer because it has the best assets and will have used the bankruptcy process to strengthen its finances for mergers, Tilton said.

"The perception of what's possible in the industry from two years ago has changed," he said. "Two years ago ... you would have not thought possible what we have already done."

For a carrier struggling to attract financing to emerge from Chapter 11, talk of buying out competitors might have seemed audacious. But for an industry in such peril, all kinds of different approaches are being broached.

Still, analysts such as Jamie Baker with the conference's host, J.P. Morgan, questioned whether the industry's problems would be solved through mergers.

He said previous deals haven't lowered costs or eliminated excess capacity, and he termed United's previous attempt at buying US Airways Inc. in 2000 a "massive distraction."

Federal regulators rejected that effort because of antitrust concerns.

Many barriers remain to airline mergers, according to other industry executives, including Gerard J. Arpey, chairman, president and CEO of AMR Corp., American Airlines' parent.

"Given what industry has been through since 9/11, there is very little balance sheet strength left and it takes a lot of money to successfully integrate two complex large organizations," he said. "I think you could argue that the government barrier [to airline mergers] might be lower, but I think the financial barrier might be higher."

Bought TWA assets

American was the last major carrier to merge with another airline, buying the assets of bankrupt Trans World Airlines Inc. in 2001 in a move that has paid few dividends in a deep industrywide slump.

"I can definitely comment to you that it's real hard," Arpey said.

Still, regulatory hurdles may be lower because of the rise of low-cost, low-fare carriers, which have stripped traditional network carriers of their pricing power, UAL's Tilton said.

The bigger problem has been blending labor unions together, which causes fierce seniority wars and savages morale.

With United poised to terminate all its pension plans, unions are becoming "more and more aware of the realities" of the industry's dire economics, Tilton said.

Analysts agree unions have lost their ability to dictate wages and working conditions.

"We think unions must acknowledge that there aren't any more golden eggs to squeeze out of the airlines," Ray Neidl, of Calyon Securities, said in a recent research report.

The last obstacle, integrating different computer systems, facilities and aircraft fleets, "is just work," said Tilton, whose background is in the oil industry. "I think there are synergies to be had."

With six large hub carriers fighting fast-growing low-cost competitors, the industry will remain awash in overcapacity for years to come with no clear way to get planes out of the sky.

The largest carriers are expected to lose more than $1 billion this year despite record demand for air travel.

Even top dog Southwest Airlines Co. has felt the pain of too many seats. Its average fares fell 5 percent in January compared with last year, Chief Financial Officer Laura Wright said at the conference. Southwest's competitors will add an average of 10 percent more capacity on competitive routes this year, she said.

"There's just a tremendous amount of seats in the market," she said. That's not stopping Southwest from increasing its schedule by 10 percent this year compared with 2004 by increasing its fleet by 29 planes.

Southwest has taken its first consolidation-type step since it acquired Morris Air in 1993, buying six gates from bankrupt ATA Airlines Inc. at Chicago's Midway Airport.

Joint sales

The two carriers formed an alliance to sell seats on each other's planes out of Midway, and the setup is working as planned, Wright said. The arrangement should create $25 million to $50 million in extra revenue for the carrier, which had $6.5 billion in total sales last year.

Some executives say that if consolidation comes anywhere among airlines, it likely will start first among the smaller low-cost carriers such as struggling ATA.

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