(TVLW) – Although many in the airline trade believe the stars have aligned for mainline consolidation to occur, industry sources told dealReporter that a tie-up of Delta Air Lines and United Airlines may not be realized despite discussions between the carriers.
Delta and United have been in the forefront of consolidation talks since 14 November when Pardus Capital Management – a top hedge fund shareholder of both carriers – pressed Delta to explore a merger with United. Both carriers publicly refuted the idea of any serious talks between them, but market chatter pegged on consolidation pervaded.
A source familiar with the potential consolidation wave did not rule out the possibility of a tie-up between Delta and another carrier, or United and another carrier. “Who’s to say it’s Delta and United?” he said.
Moreover, an industry banker cautioned that this might not be the best strategic combination, and among the most difficult to realize because Delta and United are, respectively, the second and third largest carriers in the US.
According to the source familiar, it is believed that Northwest is working with Morgan Stanley, United with Goldman Sachs, Delta with Merrill Lynch and Greenhill, and American Airlines with Rothschild.
The major carriers are linked with bankers to react to any consolidation, said the source familiar and an industry source. “They’re trying to figure out the different scenarios about who they prefer and who others prefer,” the industry source said, adding that this has happened before in the airline world. “I don’t see anything this time around that’s different from last time around,” he said.
Despite spiking oil prices, the source said he believed the airline industry is coping well, effectively filling seats and charging relatively high prices. He questioned whether it would make sense to disrupt the hot market with a merger only to worry about who would run the new entity, where it would be located, and how the pilot lists would be melded. “I’m betting against [consolidation]” the source said, although he conceded that the upcoming change of administration would likely propel a high sense of urgency and could spur some movements toward consolidation.
However, according to an antitrust lawyer with experience in the airline sector, almost no change occurs in the antitrust division’s analysis of airline mergers from administration to administration. The lawyer said is it the staffers of the TEA (Transportation, Energy and Agriculture) Section who call the shots on airline mergers.
As for citing rising oil prices as a reason to merge mainlines, the lawyer said there would be little fuel efficiency to be gained from a merger if better and less gas-guzzling planes were used, nor would two combined mainlines significantly affect the price of fuel. He noted that two mainlines would have difficulty arguing significant savings on pilots, flight attendants, and mechanics because most costs had already been squeezed through airline bankruptcies. “That does not save you big bucks,” he said. What makes these mergers most difficult to pull off is that the revenue of the new company would increase at the expense of swelling prices due to a lack of competition, he said.
The industry source and the lawyer said it is United CEO and chairman Glenn Tilton that is the most vocal about pursing consolidation. Although the industry source said United “is out there stirring things up trying to get something done,” he questioned whether other mainline carriers would be as interested.
The industry source said he did not believe Delta would be willing to take a back seat to any acquirer in terms of headquarters or management. Richard Anderson, Delta’s new CEO as of 1 September, would likely want to run his own company, the industry source said. There are not many examples where a CEO that has been at a company for such a limited amount of time was willing to do a deal, the source familiar noted.
As for timing, the source familiar said it would be unlikely that any merger would be announced by the end of December. The industry banker, meanwhile, said he thought an announcement would have to be made in 1Q08 and perhaps as early as the end of January. Timing constraints are based on having to allot sufficient time for the merger to be cleared during this administration, the banker said, while the source familiar noted that the regulatory window for clearance would close roughly in November 2008.
If consolidation were to occur, the optimal time to have pursued a merger would have been while Delta and United were in bankruptcy, said the industry source and the lawyer. A merger at that juncture could have been more easily realized as a defense for two failing companies, the lawyer said. The source said that in bankruptcy it would likely have been simpler to force change on unions, something that cannot be done in a consensual transaction.
In discussing whether the industry would be headed toward an inevitable batch of consolidation, a second industry banker said many obstacles remained on the road to such tie-ups. “I think you have to have people who want to do something in a way that works for them and the problem is that at the moment, a lot of people want to be wearing the pants in any combination,” he said.
Lufthansa’s purchase of a 19% stake in US discounter carrier JetBlue on 13 December was a strategic move on Lufthansa’s part should Delta and United successfully merge, said the source familiar, the industry source, and the second banker. Because Lufthansa and United are members of the same airline alliance, namely Star, taking a stake in JetBlue would make it more appealing to work with Lufthansa because JetBlue would become part of Star, the industry source said. However, if Delta and United were to merge and move to SkyTeam, Delta’s airline alliance, the industry source said the new stake in JetBlue would allow Lufthansa to have a separate hold on the US market.
As to whether one airline merger would cause a domino effect for American Airlines, the source said he did not believe American would be willing to surrender control of its company to any acquirer. However, the source said he believed Northwest would be willing to sell and relinquish control, but only at a high enough price. Continental, despite being 20% controlled by Northwest, could likely be open to a transaction, the source said, noting the financial savviness of its CEO and chairman, Lawrence Kellner.