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Mergers In The Wings For Airline Industry

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By TED JACKOVICS, The Tampa Tribune

Published: February 6, 2008

TAMPA - Speculation about airline mergers has been heating up lately, and some industry observers believe there finally may be some real action for a change.

In the past, there's been plenty of talk but not much usually happened. The only merger of significance in the past two years involved Midwest Airlines, which was acquired in August by an investment group backed by Northwest Airlines.

But this year could be different, say James D. Parker and Duane Pfennigwerth of Raymond James & Associates.

High fuel costs and the need to reduce capacity could mean a return to airline industry financial losses in 2008, if nothing changes. That suggests consolidation is increasingly likely, the two analysts contend in their "Growth Airline Outlook 2008" report released last week.

"If two legacy carriers merge, others might be pressured to follow suit, leading to a game of M&A merger and acquisition dominos, dramatic capacity reduction, and most importantly, significant improvement in pricing power for the industry," Parker and Pfennigwerth said in their report.

Their report identified five trends it believes will shape the domestic aviation industry in the near term and an appraisal on the issues:

•Legacy airline consolidation is likely to be messy. More than a few bankers agree that consolidation must take place to restore the economic viability of the airline industry. But complications arise in trying to merge two airlines, with labor groups, in particular pilots, notoriously difficult to blend together under one roof.

•Domestic low-cost carriers such as Southwest Airlines will continue to gain market share. The leading low-cost carriers likely would choose to remain independent and benefit from the capacity reduction that legacy airline consolidations would produce.

•Low-cost carriers will compete internationally over time. The liberalization of international flying rights through open skies agreements and increasing presence of low-cost carrier hubs, such as Jet Blue's in New York and AirTran's in Atlanta, suggest an inevitable emergence of low-cost carriers into international markets.

•Airline products will range beyond selling seats on planes. Ancillary services, such as marketing car rentals and hotels, charging for checked bags and on-board sales of beverages, food, and pillows, provide additional airline revenue and help keep air fares low. The leading domestic model for this has been Allegiant Air, a low-cost carrier that operates from one of its main destinations at St. Petersburg-Clearwater International Airport.

•Airlines will have to stand on their own as momentum gains to separate business units within a holding company. Airlines will be required to generate their own cash and financing, enhancing shareholder value.

The latest merger prospect involves Delta Air Lines and Northwest Airlines in a deal that could be announced later this month.

Tampa International Airport director Louis Miller believes mergers between US Airways and United, or Continental and Delta, might be more logical from the standpoint of combining routes than a Delta-Northwest combination.

Regardless, Miller agrees that low-cost carriers will continue to get stronger.

"Delta used to be our largest airline, now they are number two behind Southwest," Miller said. "US Airways used to be a leader, now it's number three."

As for low-cost carriers, Southwest chief executive Gary Kelly told financial analysts at a Raymond James conference last week in New York that consolidation provides opportunities ranging from acquiring another airline or waiting for competitors to merge and seizing customers when others trim service.

Reporter Ted Jackovics can be reached at tjackovics@tampatrib.com or (813) 259-7817.

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