Analysts split on airlines' merger

US Airways, America West discuss consolidation

April 21, 2005|By COX NEWS SERVICE

ATLANTA - The possible merger between US Airways and America West, which would create the biggest discount carrier, could herald a long-expected consolidation of the airline industry, but maybe not in the way the two companies hope.

Experts are divided about whether a merger of the two ailing airlines is likely or desirable. Still, the time has come for some carriers to disappear through mergers or liquidations, they say.

Some industry watchers think a merger could be an ideal marriage of America West's Western network with US Airways' Eastern routes. Others said it faces too many challenges to become reality.

The possible deal "isn't likely to go far," said Robert Mann Jr., a Long Island, N.Y., airline consultant.

But Mann and other experts say the industry can't support the current number of big players if fuel costs stay high and competition keeps fares low.

"Consolidation is going to happen one way or the other," he said.

Delta Air Lines Chief Executive Officer Gerald Grinstein expressed similar sentiments to a business group in Atlanta this week.

"There is going to have to be some sort of consolidation," said Grinstein, but "I am not talking about mergers and acquisitions." He said such deals are "absolutely futile" because costs go up, not down.

The possible deal was revealed yesterday as America West posted a first-quarter net profit but two bigger airlines posted losses. Delta is expected to post a loss today of about $670 million.

American Airlines said yesterday it lost about $162 million, slightly less than it lost a year earlier, because of a tax credit.

Continental Airlines said its loss grew to $184 million. Both airlines' results were better than analysts had forecast.

America West said one-time gains helped it post a $33.6 million profit, reversing a loss a year ago.

US Airways Chairman David Bronner confirmed this week that the bankrupt carrier is in advanced merger talks with America West, which reshaped itself as a discount carrier after Sept. 11, 2001. Bronner is chief of Alabama's public retirement system, which took a major stake in US Airways during its first bankruptcy case.

Bronner told the Associated Press that an agreement is not close but added, "A lot of things will happen in the U.S. airline industry in the next 12 to 18 months. We'll do whatever is necessary to survive; we'll examine a number of different alternatives."

America West CEO Douglas Parker told analysts yesterday that the companies had been "in and out" of talks, without providing specifics.

By combining US Airways' Philadelphia and Charlotte, N.C., hubs with America West's hubs in Phoenix and Las Vegas and trimming redundant routes, planes and operations, the two airlines hope a merged company would be more able to compete with financially healthy discount rivals Southwest Airlines and JetBlue Airways, experts say.

Southwest and JetBlue have remained profitable. America West lost $89 million last year, and US Airways, in its second pass through bankruptcy, lost $611 million.

The deal would face numerous hurdles, including approval by shareholders, unions, US Airways creditors, the bankruptcy judge and federal regulators.

America West's shares fell more than 6 percent, to $4.50, yesterday.

"We would note that in past decades, there has not been a single successful merger of two large airlines where shareholder value didn't suffer, though recovering airline management addicts regularly appear willing to belly up to the bar for another taste," JPMorgan analyst Jamie Baker said yesterday in a report.

Mann said the would-be partners don't have enough cash to bankroll costly integration efforts, which could take years.

"Given that they can't find $100 million [to fund US Airways' departure from Chapter 11], the chances of getting another $500 million to $600 million is even less likely," he said.

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