Should American and US Airways merge?

American could use a Charlotte hub, and US Airways could use a bigger partner.

By TheStreet Staff Nov 10, 2009 1:30PM

TheStreet.comairline Travel © Digital Vision / Getty ImagesBy Ted Reed, TheStreet.com

 

The rumor has circulated for months that US Airways (LCC) might merge with American.

 

It seems off base. Throughout the airline industry's merger cycle in 2007 and 2008, American never seemed to be seriously interested. Even as Delta (DAL) and Northwest pursued a deal, American stayed on the sidelines, despite Northwest's hub at Tokyo's Narita Airport.

 

"We looked very carefully at their presence in Narita," chief executive Gerard Arpey recently told the airline's fall leadership conference. "(It) wasn't the kind of scale we were looking for."

American could use a Charlotte, N.C., hub, too. US Airways has built Charlotte into the country's ninth-busiest airport. But would a carrier unwilling to chase Tokyo turn around and undergo merger turmoil to acquire less valuable Charlotte?

And yet, US Airways chief executive Doug Parker is a leading merger advocate, American's situation is in flux, and last week, Continental chief executive Jeff Smisek discussed the possibility of renewing merger talks with United.

 

A few days after Continental accepted United's invitation to join the Star alliance, Smisek said the carrier is happy to remain independent but would reconsider if the new Delta prospers.

 

"We are watching Delta to see whether Delta outperforms us financially," Smisek said, in a Bloomberg Television interview. "To date they have not done so. They've gotten bigger, they've gotten more complex, but they haven't gotten profitable."

 

Were Continental and United to merge, American, the largest carrier 13 months ago, would slide to third. Meanwhile, American is threatened by regulators' reluctance to give it and partner British Airways the same antitrust immunity that competitors have, and by Delta's bid to replace it as a partner to Japan Air Lines.

 

Perhaps events would compel American to act. The possibility seems realistic to Avondale Partners analyst Bob McAdoo. "I don't think it's crazy to speculate that if Continental and United got together, American would take a serious look at US Airways," he said.

 

"Would they find something interesting? I think they would. It would give them a presence in a part of the world where they are not all that strong" and bring more passengers to its international flights. American has failed twice to establish a Southeast hub; US Airways has one. American has sought to operate a Northeast shuttle: US Airways also has one of those.

 

US Airways' alternative is to stay in Star and possibly to be part of a merger involving United. That would be easier, says consultant Robert Mann. "It could be done quicker and it is kind of preassembled," he said. "US Airways and United already have a code share. The biggest issue would be egos."

 

Speaking recently to reporters in Charlotte, Parker reiterated his support for consolidation, saying the industry remains fragmented and financially weak. New Delta, the largest U.S. airline, has just 25% of the market. "It's not healthy (for) an industry this important to the economy to be this fragile," he said.

 

Asked whether a merger would be prevented by the inability to combine two pilot groups following the 2005 US Airways-America West merger, Parker responded: "All it means is that if indeed there was to be another merger, it would require yet again another seniority integration, (between) three groups instead of two."

 

Ever since Delta and US Airways agreed to swap slots in August, observers have been reading the tea leaves for merger implications. US Airways traded slots at New York's LaGuardia Airport for slots at Washington Reagan National and Narita. It also traded a Rio route authority for an unrestricted Brazil route authority. The deal requires regulatory approval.

 

Delta already has multiple Brazil authorities, and is not impacted by having one limited to Rio. US Airways, however, could fly from Charlotte to either Rio or Sao Paulo, or could alternate service. Already, the deal has led US Airways to say it will give up its Philadelphia-Beijing authority, preferring to focus on Phoenix-Tokyo as its Asian gateway.

 

US Airways is weakened in the New York area, but Parker noted that even today it has just 4% of the traffic. (Delta dominates LaGuardia, with American second.) But US Airways becomes stronger at National, with more than 25% of traffic. Theoretically, it could become tougher for US Airways to get regulatory approval to merge with United, which has a hub at Washington Dulles.

 

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