Another round of Airline consolidation is taking flight

Posted on 01. Jul, 2009 by in Featured

The recent opinions of the Department of Justice (DOJ) against Airline Joint Ventures (JV) will spark another round of consolidation. This may be the end game of the turbulent post-deregulation era. The world’s major carriers have effectively been doing virtual mergers via code share and joint ventures. These arrangements allow them to get around national ownership laws, as well as the high costs and headaches of a merger. To make it work they need antitrust immunity so they can legally coordinate schedules.

In a Joint Venture the carriers effectively increase their network, without buying airplanes or hiring employees through alliances by selling tickets on other airlines. The Star Alliance has been in the news lately due to the DOJ’s vehement objection to the antitrust immunity request by Continental and United Airlines.

USAir’s CEO, Doug Parker, has again broached the subject publically; his attempted takeover of Delta led to the merge of Delta and North West. Now it is apparent he is after a merger with American Airlines. USAir is in a tough spot, their network does not have the International reach it needs, and if the trend of denial and/or reversal of antitrust immunity continues, their code share agreements could be in jeopardy. They need a partner with International reach. I suspect, the last thing American Airlines parent company AMR wants, is to get in the middle of what is already a very messy and incomplete merge between America West and the original USAir.

But, the ultimate conclusion is indeed afoot; consolidation. I expect Continental to make a play for United. The CEO of United has had the fore sale sign out for years; they appear to be stripping the airline down for merge. However, to get it past the DOJ they will no doubt have to spin off some of the Far East routes (the main objection of the DOJ to the JV). American Airlines is the likely suitor, it would also have the effect of fending off USAir (DAL used the tactic). USAir no doubt will be in play; if they are left without a partner when the music stops, it would not be good.

The wildcard in this game is South West. They have ruffled the feathers of the pilots union by trying to connect internationally via code share. They have expanded by buying airlines in the past, but they have no experience in crossing the pond. It could get interesting.

On the Regional scene Republic bought Midwest Express and Frontier, I expect more consolidation and failures of the weak. New (coming soon from the FAA) FARs will make it increasingly hard to put the burden of profitability on the backs of pilots. Those carriers, on the fringe, will not survive. Consolidation on this end of the industry I suspect will continue to be bloody.

The ancient Chinese curse: “May you live in interesting times” comes to mind.

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