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The Honolulu Advertiser
Posted on: Sunday, August 20, 2006

Carriers again explore industry consolidation

By Mark Skertic
Chicago Tribune

CHICAGO Someday very soon, there may be fewer airlines listed on airport arrival and departure screens.

Which names could disappear is the subject of intense industry speculation. But with most of the larger carriers again reporting profits, merger and acquisition talk is gaining momentum.

Delta Air Lines and Northwest Airlines, both operating in bankruptcy, often are seen as the two most likely targets for a suitor. But United Airlines, Continental Airlines and US Airways' names also have come up as possible partners.

Even the recent threats of terrorist attacks haven't dimmed interest in consolidation, although stock prices have fallen since the alerts were issued.

In a note to investors, Calyon Securities analyst Ray Neidl advised that a Continental-United marriage is among those some speculate would make sense. Neidl cautioned that it may be too earlier in the industry's economic recovery to begin mergers, but added that a deal between United and Continental, healthy airlines with largely different market strengths, "would set off a chain reaction in the industry."

The industry is primed to contract, airline analyst Michael Roach said.

"There are too many legacy carriers. ... Everyone agrees there are too many," Roach said.

That could include combining either Northwest or Delta with a healthier operator. Or, some analysts predict, Northwest and Delta could merge, hoping that the resulting carrier would be stronger financially.

Good arguments can be made for those moves and more, but each also brings unique problems, said Joe Brancatelli, editor and publisher of a newsletter for business travelers.

"They all make sense, but I see problems with all combinations," he said. "There's a lot of stuff that goes on when you try to merge cultures and corporations."

In 1980, in the era before airline deregulation, Pan American World Airways and National Airlines merged. The plan was intended to give Pan Am the domestic-route network it lacked, increasing passenger traffic to its international routes. The deal made sense when looking at route maps, but expensive problems quickly emerged.

"The fleets were completely incompatible. The systems were completely incompatible," said airline analyst Robert Mann. "And they had paid a real premium ... to control National. They had paid too much and done it without taking a real pencil to the cost of integration or the real time frame for integration."

The National Airlines name disappeared soon after it was acquired by Pan Am. Pan Am survived about a decade longer, declaring bankruptcy in 1991. In its effort to stave off financial problems in its final years, it sold many of its valuable assets, including Asian routes, to United Airlines.

In addition to routes, fleets and operations, other challenges come when combining airlines. Most of the larger carriers have unionized work forces. Reconciling sometimes vastly different labor deals can take years.

American Airlines bought TWA in 2001, after that carrier sought bankruptcy protection. The agreement saved the jobs of more than 20,000 TWA workers, but at a cost. They lost seniority when they were integrated into the American Airlines unions, resulting in many being among the first to be laid off when the industry began suffering financially a few years later.

The most recent large merger took place last year, when America West Airlines combined with US Airways. The new US Airways faces challenges, including integrating different reservation technologies and resolving labor issues, but the rejuvenated carrier has quickly begun outperforming many of its peers financially.

Merger talk has gained ground because many analysts believe there are too many carriers vying for travelers' business.

"If one major airline were to disappear, all this talk of mergers would damp down quite a bit," said Aaron Gellman, professor at Northwestern University's Transportation Center.