As expected, merger discussions among U.S. airlines intensified in recent weeks, following a US Airways proposal to acquire and integrate DeltaAir Lines. This week, published reports suggested Continental Airlines is in the midst of merger talks with either United Airlines or Northwest Airlines, with rumors related to the former getting more play. AirTran Airways joined the frenzy this morning by announcing a proposal to purchase Midwest Air Group.
At this point, both official merger proposals have been rebuffed by the acquisition targets: Delta maintained it will complete a bankruptcy reorganization on its own and emerge next year as a standalone competitor, while Midwest Air Group similarly asserted its independence. But these developments point to an increasing likelihood in 2007 for what many believed was a foregone conclusion following the Sept. 11 terrorist attacks: a shakeout in the U.S. market that ultimately would result in three major network carrier groups and a handful of national and niche-market operators. Since Sept. 11, U.S. carriers collectively lost more than $35 billion, according to the Air Transport Association, but have recently started to reverse their fortunes. Excluding bankruptcy restructuring and/or reorganization charges, the aggregate net profit for the U.S. industry this year will be between $2 billion and $3 billion, ATA predicted.
"It seems the whole industry, including government regulators, are more willing," said Tom Wilkinson, president of TRW Travel Consulting. "The perceived wisdom is that there's now more room for consolidation."
"Everyone is in kind of a wait-and-see mode, but if the history has shown us anything, it's that you'll go through periods of consolidation and whether we're at the dawn of one of those is unclear," added Tower Travel Management president John Smith.
That dawn was delayed earlier in the decade when United and US Airways scrapped merger plans amid heavy regulatory scrutiny, even as American Airlines was working to integrate assets purchased from Trans World Airlines.
Consolidation activity in the U.S. market then cooled for several years--at least among major carriers--until last fall when America West and US Airways cemented a merger. Certain unresolved issues from that effort, notably integrating the two carriers' labor groups, as well as the lingering effects on managed travel programs, portend the hurdles any new major carrier combination would face.
"With US Airways and America West, they made all US Airways operations fit into the America West model, in terms of pricing, contracts and discounts," said Bose Corp. corporate travel manager Gary Polito, echoing similar criticisms from other travel management professionals. In new merger scenarios, he said, "I could see that happening again, and it would be difficult to work through."
Even so, Polito, for one, would view airline consolidation as a positive that could minimize the frequency and size of federal government bail-outs. "All these concerns about competition usually work themselves out," he added. "Keeping [preferred airlines] honest has to do with the type of relationship you have with your vendors, as long as they are covering the routes and are willing to have discussions with you."
Moreover, many companies have increased their volumes on the likes of AirTran, JetBlue and Southwest, as those airlines bring their purportedly lower fares to more markets and minimize the number of routes monopolized by network carriers.
"Everyone is talking like it's the end of the world fare-wise if these guys merge, but I very much think that fares depend on what Corporate America is willing to pay," said Polk Majestic Travel Group CEO Robert Polk. "I don't think we'll go back to the 2000/2001 fare structure. Today, [major network carriers] can't stray too far from the low-cost carriers."
But others anticipated larger issues. Business Travel Coalition chairman Kevin Mitchell suggested "overwhelming competition problems resulting from merger acceleration among major network airline competitors."
"The Coalition 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," he continued. "Five major network airline competitors would have been reduced to two in a relatively short period of time, should all proposals proceed."
The industry still is far from such an outcome. Neither United nor Continental publicly acknowledged merger discussions (though United CEO Glenn Tilton has been vocal in his general support for industry consolidation), and Delta management continued to deflect the US Airways take-over attempt, at least outwardly.
Meanwhile, Northwest Airlines, progressing through its own bankruptcy restructuring, also would likely play a role in any larger consolidation trend. "Northwest could be a buyer or a seller in a potential deal," wrote Calyon Securities analyst Ray Neidl in a recent research note. "The market believes Northwest will exit bankruptcy shortly as a profitable airline."
While no tie-up between major U.S. carriers can be viewed as anything but speculative at this juncture, AirTran's interest in purchasing Midwest Air Group has been formalized and presented to Midwest's management. AirTran chairman and CEO Joe Leonard said the combination would create "a truly national, low-cost, high-quality airline, well-positioned for future growth opportunities."
Through Midwest Airlines and regional Midwest Connect operations, Midwest currently serves 47 cities from hubs in Kansas City and its Milwaukee headquarters. The combined carrier would use Milwaukee and AirTran's Atlanta hub as primary connection points, with Kansas City, Orlando, Baltimore and Chicago serving as a secondary focus cities.
AirTran executives cited complementary route networks, a degree of fleet commonality and similar corporate cultures. Leonard described each as "a small company, scrappy, and able to adapt to the changing environment." Leonard also said he expected no objections from federal regulators; suggested the transaction, if Midwest gets on board, could close by the end of the first quarter; and indicated that integration could be completed within 12 months. "We've been working at this for more than a year," Leonard said. "This is an absolutely perfect fit. There is not a better combination out there."
AirTran vice president of planning Kevin Healy told Management.travelthat the carriers' corporate sales approaches also are complementary. "Midwest tends to focus mainly on Kansas City and Milwaukee-originating business, while we compete a lot on products and services and the value-added aspects," he said. When asked if AirTran negotiates discounts with any corporate clients, Healy said, "Not really. We dabble in it."
For now, Midwest said it would not pursue an AirTran merger.
Leonard also suggested that AirTran would continue to eye additional opportunities as other merger proposals surface around the industry. "Regardless of who teams up with who, there will be a reduction in capacity, which benefits us, and assets available. We do not view [the Midwest proposal] as mutually exclusive and we'll be playing in some of those other camps, as well."
For example, AirTran likely would be interested in East Coast assets divested by either US Airways or Delta should those two carriers merge. [AirTran had considered growth through acquisition as early as two years ago when ATA Airlines was searching for partner. ATA eventually chose Southwest Airlines.]
"Most corporate travel managers understand that the stronger we get, the better off they are, because helping competition grow is good for them," Healy said. "We are the primary carrier for some number of corporations and not for a great many others, but we have grown at 20 percent or more for the past three or four years. Sharing the vision [of AirTran's growth plans] is not what customers want to hear. It is more about, 'What can you do for me now?' "