Posts tagged airline mergers
The latest news in the airline industry is a possible merger between United Airlines and US Air. This is not the first time the two have considered a merger. United attempted to buy US Air in 2001 but was unable to get approval form federal regulators. Talks between the two collapsed in 2008 shortly after the Delta-Northwest merger. Although US Air is the smaller of the two airlines, it appears that it would try to purchase United in an all-stock deal. No word yet from the unions.
In the meantime, other sources say Continental may try to outbid US Air for United. And while all this is going on in the US, British Airways and Iberia have announced that they will merge and become the International Consolidated Airlines Group SA holding company. Each airline will continue to fly under its current brand name.
As all this goes on, the one airline that does not come up in merger rumors is American Airlines. American’s CEO, Gerard Arpey said “Inevitably, there will be consolidation around the world in terms of the airline industry, I think generally fewer carriers will be better for the industry, but it’s not a panacea.” He added that American would concentrate on building its hubs in New York, Los Angeles, Miami, and Dallas/Fort Worth, adding that he felt American was “well positioned” in the industry.
While American may not be merging, its list of partner airlines grows as the oneworld® alliance adds new partners. In the last few months financially troubled Japan Airlines (JAL) agreed to remain a member of the group, turning down a strong offer from Delta to join the SkyTeam alliance, a move that would have greatly weakened American’s presence in Asia. JAL and American have filed for anti-trust immunity to increase their co-operation across the Pacific.
The US Department of Transportation gave tentative approval in February to the application by oneworld’s transatlantic partners American Airlines, British Airways, Iberia, Finnair and Royal Jordanian for anti-trust immunity across the Atlantic – and the European Commission began market testing of proposed remedies in a key step towards approval of the proposed transatlantic joint business agreement between American, BA and Iberia.
Mexicana joined the alliance last year, adding its many routes to Latin America. Russia’s S7 airlines will join later this year, opening up many locations throughout Russia and the former Soviet Republics to alliance members.
Kingfisher, the leading domestic carrier in India, announced that it would join the alliance in 2011. This will give oneworld passengers access to 58 cities in India, home of one of the world’s fastest growing economies.
So this remains a busy and rapidly changing time in the airline industry. Airlines merge, alliances grow, legal waivers are requested. The only thing we cannot talk about is the industry being profitable. Hopefully all these changes will bring that about.
I posted a message about the proposed Delta/Northwest merger on April 27, and pointed out that, in the previous quarter, Northwest had lost $3.2 billion, and Delta $6.4 billion. Well, it turns out that sometimes a loss is a loss but maybe it’s not a loss.
According to an article in the Salt Lake Tribune, “Northwest, which agreed last week to merge with Delta, reported a $4.14 billion loss that included a $3.9 billion charge to reflect the slumping value of its stock. Last year, the airline lost $292 million.”
The article further states that “Delta’s loss was driven by a $6.1 billion noncash charge to goodwill. Goodwill represents the value of a company’s name that is on top of its assets… Subtracting the goodwill charge, Delta lost $274 million in the first quarter, compared with a net loss of $6 million a year earlier.”
So, the two airlines combined for a $10.5 billion loss, but the loss was due to slumping stock prices and a “goodwill” charge because its name is not as valuable as it once was.
Big businesses can do things that the average person cannot. If you have any doubt, call your accountant today and tell him your name is not as good as it once was, and you need a $15,000 tax deduction to make up for it.
So, did the airlines lose the money or not? Did they have to go into debt to pay off the money they may or may not have lost? I don’t know.
In the meantime, the proposed merger between United and Continental has collapsed, sending United into talks with US Airways. This morning the Times of London reports that British Airways, American Airlines, and Continental are in talks to create an alliance, with Continental possibly joining BA and AA in the Oneworld Alliance. Federal law prohibiting foreign ownership of an American airline would prevent a merger. Continental, after its deal with United collapsed, apparently feels it would do better in the Oneworld Alliance of airlines than it can currently do in the smaller Skyteam Alliance.
Things will get much more interesting before this is all settled
Last week Delta and Northwest Airlines announced plans to merge and become the world’s largest airline. At first glance the merger seemed to be a wonderful idea: Northwest offers many routes from the United States to Asia, while Delta offered strong service to Europe. Their main hubs are in different parts of the country which would minimize the number of routes on which they directly compete. It seemed a great idea.
I had never considered using either airline because they did not offer as many options from Austin as American Airlines does, but the newly created Delta Airlines would be so large that I realized I had to give serious thought to changing my mileage runs to them.
And then the quarterly reports came out. Delta announced that it had lost $6.4 billion in the previous quarter. Northwest lost a more mundane $3.2 billion, giving them a combined total loss of more than $10.5 billion in one quarter. The numbers are staggering.
Let’s look at Delta. There were 91 days in the quarter: that means that during that period Delta lost $70,329,670 per day! How do you loose that kind of money? Yes, fuel costs have gone up, but not by $70 million per day! In fact, Delta announced that its fuel costs for the quarter were $1.4 billion, admittedly a huge number, but even if their fuel had been free they still would have lost $5 billion in 91 days!
Compare their loss to that at other airlines for the same period:
- United Airlines — $537 million loss
- American Airlines — $328 million loss
- Continental Airlines — $80 million loss
- Southwest Airlines — $34 million profit
- Northwest Airlines — $3.2 billion loss
- Delta Airlines — $6.4 billion loss
Can anyone look at those numbers and reasonably think that combining the last two airlines on that list is a good idea? One can look at the losses at United, American, and Continental, and say “If it wasn’t for the fuel hikes, they would have made a profit.” But there is no way to say that for the last two!
Is there a problem with Delta management? Are there problems with Delta’s union contracts? I don’t know, but the size of the loss is beyond comprehension. And here is one thing that makes it worse: the newly merged airline would have its headquarters in Atlanta at Delta’s current headquarters, and Delta’s current CEO Richard Anderson would be the CEO of the new airline.
Richard Anderson of Delta and Doug Steenland, CEO of Northwest, testified before Congress last week, saying that the merged airline would be stronger and better able to compete with foreign carriers that sometimes operate with generous government subsidies. They said no hubs would be closed, and only 1,000 people, mostly at headquarters, would lose their jobs. They predicted the combined airline could save $1 billion a year in operating costs. Congress loves to hear things like this and the committee seemed supportive of the plan.
However, a $1 billion annual savings does not sounds so grand when compared to a combined $10.5 billion loss in one quarter. In the week since the merger, Wall Street has expressed its displeasure of the plan, selling off the stock of both airlines, creating drop in value of the two of more than $1 billion.
If the Delta-Northwest merger goes through, experts expect a merger between Continental and United, and American and US Airways. When that happens, the majority of air travel in the United States will be controlled by four major airlines (the three merged lines, and Southwest).
Is that good for the consumer? No.
The best analysis I have seen of the proposed merger and other possible airline mergers was posted on Inside Flyer.
Given all of this, I’ll be staying with American Airlines.
In other airline news, another airline has announced it is filing for bankruptcy and will cease operations Monday. Eos Airlines, a business-class only airline that offered service between New York JFK and London Stanstead filed for Chapter 11 bankruptcy. It is the fourth American airline this month (following Aloha Air, ATA and Skybus) to file for bankruptcy and cease operations. Frontier also filed for bankruptcy but has continued to fly.
In the meantime, fuel costs continue to rise, putting additional pressures on all remaining airlines.