With More Airline Mergers On The Runway, American Could Be Next
Image by Andrew Morrell Photography via Flickr
In the wake of the latest tie-up, after Delta and Northwest completed their merger in Oct. 2008 and United and Continental closed on the formation of United Continental Holdings Oct. 1, the few American carriers that still haven’t found a dance partner are likely eyeing one another.
To wit, an Oct. 4 note from Morningstar analysts Basili Alukos and Adam Fleck highlighted two combinations that make sense in the wake of Southwest-AirTran and warned that American Airlines needs to make a big splash to compete with competitors that have grown far more formidable through M&A.
“Once the industry’s largest carrier, [American Airlines] is now the third-largest…and any scale advantage it may have garnered is gone,” the Morningstar analysts write. “Ironically, AMR is at a substantial disadvantage, given that it steered clear of bankruptcy during the recession,” Alukos and Fleck say, pointing out that American’s labor rate is the industry’s highest on an equivalent basis.
That leaves American in a tenuous position, particularly considering its peers are unlikely to sit on their hands amid signals that the consumer market is turning a corner and business travel is picking up. One of the two potential combinations Morningstar points out is Delta and Alaska Airlines, a deal presaged by a 2008 expansion of the pair’s market alliance.
At the time such an acquisition would have been impossible, given that Delta was in the midst of digesting Northwest, but with that deal more fully absorbed, acquiring Alaska would fill out Delta’s West Coast presence.
Given that it lags behind United Continental and Delta, Morningstar figures American is ripe for consolidation and would make a solid fit for partner JetBlue. The two cooperate on domestic and international flights at JFK and Boston’s Logan Airport, and JetBlue’s lighter cost structure would help American be more competitive while beefing up the combined company’s international business.
To be sure, airline takeovers are riddled with complications. Everything from the pace of economic growth to fuel price forecasts and the challenges of reaching deals with pilot unions make it tricky to put mergers together in the first place, and lengthy regulatory reviews keep many deals in limbo for long stretches.
Scott Rostan, founder of Training The Street and a former M&A banker at Merrill Lynch, says the synergies airlines can wring out by joining forces makes the headaches associated with such deals worthwhile. Of the two most recent deals, “United and Continental are looking for more access to business travel, while Southwest/AirTran is more focused on grabbing share in leisure travel.”
Further deals in the space would come as little surprise, Rostan says, given the typical domino effect that takes place when M&A in a particular space heats up. “Three dominoes have fallen – Delta/Northwest, UAL/Continental and Southwest/AirTran,” Rostan points out, and the high-profile deals in recent years may inspire companies like Alaska, Frontier Airlines and JetBlue to make moves.
There’s also pressure on U.S. Airways, which “has an out-of-whack cost structure” and tried to buy Delta out of bankruptcy in 2007. That deal fell through and Delta ultimately emerged from Chapter 11 leaner and wound up buying Northwest.
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