Posted on: Saturday, May 21, 2005
Airline merger could help industry reduce losses
By Mary Schlangenstein and Lynne Marek
Bloomberg News Service
DALLAS — Delta Air Lines Inc., American Airlines and other U.S. carriers may benefit from less competition and an improved ability to raise fares as the planned combination of America West Airlines and US Airways Group Inc. grounds some planes now vying for passengers.
America West and US Airways will return a total of 60 aircraft to lessors, primarily a unit of General Electric Co., as they eliminate or put smaller planes on unprofitable routes and cut the frequency of flights in some markets. The changes will reduce capacity of the combined company 15 percent and will begin in a few months, America West said.
The merger, announced Thursday and funded by $1.5 billion from outside investors, suppliers and others, comes as U.S. airlines struggle to end more than four years of losses exceeding $33 billion. The growth of generally profitable low-cost carriers since 2001 helped increase capacity and reduce fares.
"The short-term benefit will clearly be the reduction in capacity," said Daniel Kasper, an airline economist with LECG LLC in Cambridge, Massachusetts. Taking planes out of the system will help "keep capacity from growing faster than demand and that, in turn, should help firm up pricing," he said.
The merged airline's headquarters would be in Tempe, Ariz., outside of Phoenix, where America West is based. It will be headed by America West Chief Executive W. Douglas Parker, 43. US Airways is based in Arlington, Va.
The combined airline, with an expected $10 billion in annual revenue, will drop a few cross-country flights now made by America West and reduce by about half US Airways' coast-to-coast flying, J. Scott Kirby, America West executive vice president, said yesterday. The rest of the reductions will be spread across its route system, he said.
Delta, AirTran Holdings Inc., UAL Corp.'s United Airlines and Continental Airlines Inc. may benefit the most from the capacity decline because their systems have the most overlap with US Airways, Kasper said.
Any capacity reductions will benefit the industry as a whole, American Chief Executive Gerard Arpey and Delta Chief Executive Gerald Grinstein said at their company's annual meetings this week, before the merger was announced.
The plan is "a step, not a leap, in the right direction," Jamie Baker, a JP Morgan Securities Inc. analyst, said.
AMR Corp.'s American also could benefit as the new airline pulls capacity from cross-country markets, said Helane Becker, an analyst at New York-based Benchmark Co.
JetBlue Airways Group Inc., a low-cost carrier based in New York, also competes on those routes. Kirby called them "fiercely competitive."
US Airways, the seventh-largest U.S. carrier based on miles flown by paying passengers, faced a possible liquidation if it didn't secure financing to bring it out of bankruptcy. Nearly all of its assets already have been used to guarantee previous loans.
The ability of airlines to raise fares over time may improve because the merger would remove one competitor from the industry, said Philip Baggaley, a Standard & Poor's analyst in New York.
"Fewer major players have to go along" with fare increases, and it's "easier to avoid fare wars because there are fewer individual airlines that might trigger reductions," he said.
Creditors in the US Airways bankruptcy, unions at both carriers and America West shareholders must approve the merger agreement. It also must win approval from U.S. antitrust regulators and the Air Transportation Stabilization Board, which backed loans to both carriers after the 2001 terrorist attacks. Almost $1 billion in loans still is outstanding.
The merger would be the first among major airlines since American purchased Trans World Airlines in April 2001. A planned purchase of US Airways by United fell apart in 2001. US Airways and United both are operating under Chapter 11 bankruptcy protection.
America West shares rose 36 cents, or 7.5 percent, to $5.17 at 4:02 p.m. in New York Stock Exchange composite trading. US Airways shares fell 29 cents, or 23 percent, to 95 cents in over- the-counter trading.
