As the old saying goes, “always a bridesmaid, never a bride”. That’s probably how US Airways (NYSE: LLC) feels as the trend toward airline industry mergers and acquisitions has, at least so far, passed it by. But hope springs eternal – particularly as rising fuel prices make the value proposition of mergers look far more appealing for US Air.
At a company media event last week, US Airways CEO Doug Parker said the airline industry has just one big airline merger left – and that deal would involve US Airways. Any one of three airlines – United Continental (NYSE: UAL), AMR Corp.’s American (NYSE: AMR) and Delta (NYSE: DAL) could find US Air to be a good fit.
Of course, possibilities exist for acquisitions of Alaska Airlines (NYSE: ALK) and JetBlue (NASDAQ: JBLU), but Parker believes that the industry would gain efficiency by largely consolidating into a few dominant carriers. Still, if US Airways can’t find the right partner, the airline will be just fine on its own, Parker said.
Why should airlines consolidate? There are significant benefits to a more consolidated airline industry. Those include economies of scale, a reduction in capacity and greater control over pricing. And those issues are particularly important as expensive oil threatens to reduce the demand for travel and derail the economic recovery. Another key benefit of consolidation is greater access to routes – particularly profitable international destinations.
US Airways (NYSE: LCC) took a trip down the aisle in 2005 when it merged with America West Airlines. Since then, the carrier has watched deal after deal from the sidelines. Since US Airways completed the America West merger, nine other merger-acquisition deals have been executed. Three of those mergers involved major U.S. carriers.
Delta (NYSE: DAL) and Northwest completed their merger at the end of 2009; United and Continental (NYSE: UAL) completed their deal last October. Southwest (NYSE: LUV) and AirTran (NYSE: AAI) have agreed to merge but the deal has not yet been finalized.
Taking thethree top candidates into account, here’s how the odds stack up for US Airways’ merger prospects:
United Continental Airlines and US Airways: These two have been flirting with one another on and off for three years, with US Airways making its first move in 2008. The most serious courtship was the second, which would have had to be structured as a US Airways acquisition of United because of a provision in pilots’ contracts. Because of that and other insurmountable obstacles, US Airways was left at the altar last year when United opted to go a different way and hooked up with Continental. Odds: 7-1. United still has its hands full integrating Continental into its operations and there may be too much history between the two airlines to make an effective pairing.
Delta Air Lines and US Airways: Speaking of history, US Airways has some with Delta too. Back in 2006, US Airways ponied up $8 billion to acquire Delta in a hostile takeover while the latter was emerging from bankruptcy and the former was still working to integrate America West. After being rebuffed by the airline, US Airways dropped the bid in January 2007. Delta wound up merging with Northwest. Odds: 3-1. Somewhat likelier than United, but Delta needs US Airways a lot less today than it did in 2006.
American Airlines and US Airways: This might be the best potential pairing since there is less bad juju between these two airlines over past breakups and US Airways gains from American’s international routes. Each airline would, however, contribute its own challenges with pilots. Odds: Even. Industry insiders recently have been passing out rumors that a deal could be under discussion. But even if the talk turns serious, don’t expect to see a deal done this year.
As of this writing, Susan J. Aluise did not hold an interest in any of the stocks named here.