The Oldest Game In The Airline Industry: United And US Air May Merge

There are two opportunities for companies in the airline business to improve their prospects in troubled times. The first is bankruptcy and the other is M&A. US Air (LCC) and United (UAUA) have decided to consider the second route.

The New York Times reports that the transaction would create one of the world’s largest airlines, just as the marriage between Delta (DAL) and NWA did two years ago.The purpose of airline mergers is always the same. Two large carriers can, in theory, lay off thousand thousands of workers, consolidate back office functions like reservations, and cut routes by cutting redundant flights.

The dangers of mergers are also clear. Customer service is often severely disrupted as combined IT systems and combined airport personnel make tentative efforts to put together disparate computer systems and rearrange ground operations at dozens of airports.

As a new airline works to cut jobs, unions with critical employees including pilots often strike to keep their positions and benefits. British Airways is currently faced with an ongoing labor stoppage for just that reason

Airlines are under extraordinary pressure. Only 20 months have passed since oil reached $145 a barrel, an event that threatened to raise fuel prices higher than many carriers could afford. The recession has cut deeply into the number of passengers who travel each year. Many of the most profitable seats in business class go unsold because of cutbacks in expenses at companies with workers who flew frequently.

The major US airlines have already made large cuts in capacity and laid off tens of thousands of workers. Some carriers will find it difficult to cut further while remain viable to fly important routes. The industry is still based largely on the “hub and spoke” system created by former AMR CEO Bob Crandall nearly three four decades ago. Its success assumes that an airline can feed enough passengers through two or three hubs in a way that increases traffic on flights inbound and outbound to those airports. That, in turn, should make each flight more efficient in terms of passenger load. The system requires a regular flow of passengers. As routes are cut, that becomes impossible.

Most carriers still face fairly high debt loads taken on largely because of the cost of maintaining new and fuel-efficient fleets of expensive airplanes. Just over a year ago, it looked as if one or more US airlines might have to declare Chapter 11 to get the creditor liabilities off of their balance sheets. Most large American carriers have been through bankruptcy at least once in the last decade.

If US Air and United merger, it is likely that American, Delta, and Continental will look for partners. The economy is still bad and the temptation to drive down costs too great, even if it is at the expense 0f customer service.

Douglas A. McIntyre