Prospects for domestic airline consolidation and a new industry order heightened today amid reports of merger talks between Continental Airlines and United Airlines as well as AirTran's failed $290 million offer to buy Midwest Airlines.
Analysts, consultants and travel buyers last month predicted US Airways' bid for Delta would propel attempts at domestic consolidation, and with recent bids and discussions, more are coming to light. United has been a vocal proponent of airline consolidation, and the industry for some time has pointed to Continental as a good fit with the carrier, given complementary route structures and fleets. However, according to industry watchers, a deal is not imminent, but many expect more merger and acquisition proposals in the domestic market.
Calyon Securities airline analyst Ray Neidl said executives at United and Continental likely are awaiting the outcome of US Airways' bid for Delta—which perhaps accelerated their discussions, he said—but if talks progress, a merger would have to satisfy "a series of operational issues as well as antitrust concerns."
The US Airways-Delta merger proposal sparked concerns among travel buyers of higher fares and fewer frequencies in the domestic market, but also signaled that the ailing air industry is becoming financially healthier
(BTN, Dec. 4). Business Travel Coalition in a statement today said the same concerns would apply to the latest merger candidates. BTC "believes that corporations that fund business travel activities would pay higher ticket prices as capacity would be removed as a consequence of these proposed mergers."
Should talks progress between Continental and United, Northwest Airlines would have a major say in the deal's fate. A Northwest spokesperson today said the carrier "has a share of Continental Airlines preferred stock giving the airline certain rights regarding certain merger activities." Neidl referred to Northwest's stake as the "golden share" that would enable the carrier "to block a merger of Continental with another carrier, if the merger requires CAL's shareholders' vote."
Northwest last week disclosed that it has hired financial advisor Evercore Partners to work on contingency planning. The carrier said it had selected the company for "its experience and qualifications in providing financial advisory services and strategic advice in complex restructurings, mergers and acquisitions," but in a statement a spokesperson said this "does not mean that the company has received or is looking for a merger or acquisition opportunity."
Anthony Sabino, professor of law and business at St. John's University, in a note said, "A marriage of United and Continental would create, in effect, a mega-carrier, with the heft and solvency to stave off domestic and foreign competition. A merger of United's transcontinental and Pacific routes with Continental's structure to Europe, Latin America, and the Eastern half of the nation would be a snug fit, with just a little overlap to be sold off to assuage antitrust concerns." Sabino added that if a merger came to fruition, it would be only the beginning of consolidation, forcing mega-carriers to find partners.
"Additionally, according to reports, United may also be looking at Delta, which makes sense in our opinion," Neidl said in a research note. "Both Delta and Continental systems fit in well with the United system. This leaves American and Northwest out of the current scenarios."
However, JP Morgan airline analyst Jamie Baker in a research note said Continental is "the industry's highest-cost producer," noting a degree of bewilderment as to why the market deems Continental a good fit for consolidation.