High fuel prices could spur airline mergers

Mergers would allow
airlines to eliminate
overlapping routes and hubs.

NEW YORK (AP) — Airline executives have talked about consolidation in their industry for several years, even though they know successful combinations are about as elusive as an on-time flight on a Friday afternoon.

But the profit-sapping effect of a relentless rise in fuel costs may finally force them to action. That helps explain why the board of Delta Air Lines Inc. is meeting Friday in New York to decide on what was once viewed as the unthinkable at the Atlanta-based carrier — allowing management to open formal deal talks with one or more of its rivals.

Pulling off a deal would mean surmounting likely antitrust challenges, the difficulty of combining rival labor groups, and the pride of executives in running their own company. But airline officials and analysts believe consolidation may be the only way for carriers to cope with high fuel prices because it could lead to lower costs and a reduction in total flights, which would give airlines more power to raise fares.

Oil prices soared 58 percent last year and briefly rose above $100 per barrel last week, leading to a corresponding rise in jet fuel prices. Meanwhile, competition and an uncertain economy have limited carriers’ ability to cover the higher expense by hiking fares.

Airlines “don’t have any pricing power with higher oil costs,” said Ray Neidl, an analyst with Calyon Securities.

Analysts surveyed by Thomson Financial believe that most major carriers lost money in the fourth quarter — the airlines start reporting those results next week. Prospects for the new year are uncertain.

Airlines believe combining will let them eliminate redundant back-office functions, reservations and computer systems.

But the real payoff could lie in eliminating overlapping routes and hub airports. If Delta and UAL Corp.’s United Airlines combine, Delta could scale back on routes currently flown by both.

“It’s all about reducing competition and having pricing power,” said longtime airline consultant Darryl Jenkins.

Airlines might save money from combining, but many experts think it would cost consumers.

“I think that consolidation is likely to lead to reduced capacity and higher fares,” said Jim Corridore, an analyst with Standard and Poor’s.

Some airline mergers appear to have been successful. The 2005 acquisition by America West of US Airways, which created US Airways Group Inc., produced a carrier with the healthiest margin of unit profits over costs in the industry, according to SH&E, an airline consulting firm in Cambridge, Mass.

Through the third quarter of 2007, the difference between US Airways’ unit revenue and costs — a measure of financial health — stood at an industry-high 1.78 cents per mile flown by paying customers, SH&E found. Only three other carriers, Northwest Airlines Corp., Delta and United had a margin of more than 1 cent per passenger mile in that time.

Other deals haven’t worked out so well. AMR Corp., the parent of American Airlines, bought bankrupt Trans World Airlines at the worst possible time — a few months before the 2001 terror attacks.

Both the US Airways and American-TWA deals highlight another obstacle to airline takeovers — the ride can be bumpy when rival labor groups are pushed together and begin fighting.

Pilots for US Airways and the old America West are still sparring over who gets more seniority. The former US Airways union sued its counterpart at America West.

When AMR bought TWA, American’s flight attendants stuck TWA attendants at the bottom of the combined seniority list, regardless of experience. The former TWA workers were thrown on the street when American cut thousands of jobs after the 2001 terror attacks.

The treatment of TWA’s St. Louis-based employees led Missouri’s two U.S. senators to push successfully last month for a federal law that would use binding arbitration to settle seniority disputes between unions.

If the law had existed in 2001, the American Airlines union could have been barred from shuffling TWA workers to the back of the seniority line. The pilots union at American publicly objected to the provision, but only after it had been signed into law.

After another acquisition in 1999, American’s pilots conducted a sickout that caused cancellation of thousands of flights.