Takeoff for Airline Mergers?

Hardly. The America West-US Airways talks may be an anomaly, not a sign of deals to come. Fact is, combining airlines is costly and chaotic

By Christopher Palmeri

Is the long-anticipated era of airline industry consolidation about to take off? News that America West Holdings (AWA ) is in talks with US Airways Group (UAIRQ ) has prompted speculation that mergers may accelerate in the perennially unprofitable airline business. Don't bet on it, says Michael Boyd, president of Boyd Group, an airline consultancy. "Flights are full already," he says. "The problem right now is fuel costs."

Wall Street has already given its opinion on the merger talks, knocking America West's stock down 5%, to $4.50, at the closing bell on Apr. 20. This came even as the company reported reasonably strong first-quarter results. The fear among many industry watchers: The Phoenix-based company will get weighed down with US Airways' problems, which include high costs, complaints about poor customer service, and a fiercely competitive market on the East Coast. US Airways has been operating in bankruptcy since September, 2004, its second trip there in the past three years.


  In a conference call with investors on Apr. 20, America West Chairman and CEO W. Douglas Parker, wouldn't confirm the US Airways negotiations, but said: "We believe consolidation is inevitable. We intend to look aggressively at transactions as they arise."

Parker said the timing was right for airline mergers in general because labor negotiations have been friendlier, regulators are unlikely to oppose combinations, and bankrupt airlines are allowed to get out of unprofitable aircraft leases, reducing costs and capacity. Still, he added that he wouldn't enter into any deal that hurt America West customers, shareholders, or employees. "Consolidation that results in the same number of planes flying around would not be helpful," he said.

Parker has walked away from opportunities before. In the conference call, Parker confirmed that America West took a look at buying bankrupt ATA Holdings (ATAHQ ) last year, but passed when it became clear that America West wouldn't be able to obtain enough of the right planes to service the market.


  The track record of airline mergers, meanwhile, hasn't been great. Many carriers, US Airways and American Airlines among them, hit turbulence after merging with others. The challenges involve combining different computer systems, cultures, and flight operations. "They're very costly and very messy," says Ray Neidl, an analyst at Calyon Securities. "I'm not a fan of airline mergers."

Compared with much of the industry, America West has been flying in the right direction. Settling into the pilot's seat in month of the September 11 attacks, Parker has been an industry leader. His company was the first to take advantage of low-cost government funds in the wake of the terrorist attacks. It was also the first to start charging for meals and instituted lower-price, last-minute fares. America West has managed its network efficiently, keeping its planes full at night with passengers moving through its Las Vegas hub.

On Apr. 20, it reported a $34 million profit in the first quarter, a better performance than many of its peers. AMR (AMR ), parent of American Airlines, posted a first-quarter loss of $162 million. Houston-based Continental Airlines (CAL ) said its first-quarter loss increased to $184 million, compared with $124 million in red ink a year earlier.


  American Airlines Chief Executive Gerard Arpey declined to comment on whether his company would join in bidding for any US Airways assets. But on the subject of consolidation in general, he says he welcomes any move that takes capacity out of the industry, boosting revenues for remaining companies. "If it preserves capacity that would otherwise go away, that would be a bad development," Arpey says.

Continental Chairman and CEO Larry Kellner would say only that his company is "constantly looking at the marketplace," but it's focused on its own strategy of growing internationally while maintaining a solid domestic network.

All in all, not exactly the words of airline heads itching to make a deal.

With Wendy Zellner in Dallas, Lorraine Woellertin Washington, Michael Arndt in Chicago, and Steve Rosenbush in New York

Christopher Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau

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