Airlines ripe for another merger, experts say

Now that the merger between Delta and Northwest is complete, other airlines are under the spotlight for potential consolidation.

Airline analysts think that the skies are too crowded with too many players, making another merger all but inevitable.

{loadposition in-article}

“We’ve got too many airlines and too many seats and too many hubs,” said Ray Neidl, an industry consultant. “In the next two to five years, we’re going to have less airlines, and it’s either going to be through mergers or bankruptcies.”

But don’t expect it to happen anytime too soon, he added — the ongoing recession is dampening the corporate appetite for risk.

“Nobody wants to spend the money to merge two carriers with the economy falling apart,” Neidl said. “With an economic recovery, if the airlines have a chance to build up some cash, then they would be able to plan for a merger the way Delta-Northwest did.”

If the recession deepens, the industry will probably lose a carrier the hard way, he said: through bankruptcy.

The International Air Transport Association forecast an industry-wide global loss of $5.6 billion in 2010, following an $11 billion loss in 2009.

Timing is everything

There are a couple of factors that would prevent a merger from occurring soon, analysts say.

For one, the industry is still getting used to the Delta-Northwest consolidation. That merger was financially finalized last year, but it was only on Jan. 31 that Northwest renamed all its flights under Delta Air Lines (DAL, Fortune 500).

Robert Mann, owner of airline industry analysis and consulting company R.W. Mann & Co., said that other carriers are watching the recent merger to see if it proves beneficial.

“[Delta-Northwest] have not demonstrated — and I think this is to Continental’s satisfaction — that the cost synergies or revenue synergies that were advanced as the reason to do a merger have been realized,” he said. “It’s probably too early to judge. In fairness, I think the clock is still running on that.”

Mann described 2010 as a “show year” during which Delta will demonstrate to its competitors whether it’s reaped benefits from the merger.

Daniel McKenzie, airline analyst with Hudson Securities, said that if consolidation doesn’t happen within a year or so, then it isn’t likely to happen for several more, due to the timing of labor contracts with various airlines.

“If we don’t see a merger by late 2010 or 2011, my view is that we don’t see a merger for another three years,” he said.

When consolidation occurs, merging airlines typically give their workers a raise along with a new contract. Continental Airlines (CAL, Fortune 500) is due for a new contract this year and will be under pressure to provide a raise, McKenzie said. The airline could use that opportunity to pursue a merger at the same time, allowing it to offer just one raise, not two, he said.

“In the terms of the economics and the labor, the wrinkle in all this is quite simply that it doesn’t make sense for management to give labor two bites at the apple,” he said.

Who’s next?

Mann, of R.W. Mann, said that a Continental-United Airlines merger makes much more sense than a United-U.S. Airways merger, because Continental and United already have a codeshare partnership and are “co-located” in Chicago, a major hub for both carriers.

Executives at United Airlines (UAL) and US Airways (LCC, Fortune 500) have both indicated that their companies are open to partaking in a merger, according to statements made at a recent Reuters conference.

But Continental spokeswoman Mary Clark said, in a subsequent e-mail: “Continental’s preference has always been to remain independent as long as we can stay competitive.”

You may also like...