RICHARD PINKHAM ATLANTA, GEORGIA
American Airlines' recent announcement that it would purchase the holdings of ailing Trans World Airways and work with United Airlines to divide large portions of US Airways between them has thrown the industry into a frenzy.Mere weeks ago, TWA's fate was on no- one's radar screen. A buy-out seemed the carrier's only hope for survival in any form, but few believed a buyer would emerge. Now, TWA finds itself at centre stage. Viewed as the lynchpin to wholesale industry consolidation, it is the focus of bids by American, Continental and Northwest Airlines. At stake is not so much the future of the St Louis-based carrier, as the ability to determine the shape of the entire US industry.
In looking at the proposed moves, critics say they would make for an airline industry that harms consumer interests. Advocates claim the deals would save two failing carriers and enhance efficiency to everyone's benefit. So what would American's purchase of TWA and a significant chunk of US Airways' portfolio really mean for consumers, the industry and the balance of power between the world's two largest airlines?
To begin with, American Airlines would first seek to take control of TWA in exchange for $500 million cash and the assumption of approximately $3 billion in debt (mostly aircraft leases). Then - subject to United's purchase of US Airways for $4.3 billion cash and $7.3 billion debt - American would purchase key parts of the US Airways portfolio for slightly more than $1.5 billion.
In the latter deal, American would purchase several of US Airways' key holdings from its vital East Coast network. Specifically, American's haul would include vital assets at New York's LaGuardia Airport, where it would assume control of 36 slots and five gates. At Washington's National Airport, American would buy 49% ownership of US Airways' proposed spin-off "DC Air", affording it major gate and slot gains.
American would also agree to serve five routes on which United and US Airways are the only options - routes such as Charlotte-Chicago and Philadelphia-San Jose, CA - to ensure continued competition.
Most remarkably, American would take half-ownership of the US Airways Shuttle. An hourly service linking Boston, New York-LaGuardia, and Washington-National, the Shuttle is US Airways' crown jewel and was one of the compelling reasons for United's acquisition of the struggling East Coast mainstay. In addition to slots, gates and other intangibles, US Airways/DC Air would also transfer 86 aircraft to American.
The deals have elicited reaction from stakeholders at every level, as consumers, government and industry analysts have all opined on what the developments mean. Consumer groups, predictably, are against the deal, which would see United and American possess combined domestic market share of over 50%. They argue that not only will increased industry consolidation stunt competition and raise prices, but that fewer airlines will mean increased reliance on just one or two carriers. This is a dangerous proposition in light of recent workforce actions that have left travellers stranded en masse.
Government reaction
Similarly, most government representatives - except those from regions that stand to benefit from the deals - have weighed in against the mergers. In their case, it is the likely prospect of constituents receiving less air service and paying more for it that provokes their stances against the trend. Senators Mike DeWine and Herb Kohl released a joint statement that sums up the feelings of their camp, saying: "It's hard to imagine how this can be good for consumers."
Industry insiders are split on what the deals mean and who got the best from them. Managers at the affected airlines believe that American's purchase of TWA was proposed with ulterior motives. Specifically, they believe the side-deals cut with United were sufficiently attractive that American suddenly had a vested interest in seeing industry consolidation not stopped dead in its tracks.
Those who follow this line of reasoning think American realised that buying terminally ill TWA would be politically popular and would make the United/US Airways deal - which was thought to be foundering at the Department of Justice - much more likely to gain approval.
Michael E Levine, former executive vice president at Northwest Airlines and a professor at Harvard Law School, thinks it unlikely that American all of a sudden feels it can turn TWA's holdings - principally its St Louis hub - into profit-making assets. He notes in particular the difficulty of competing head-to-head with Southwest Airlines, which is well established in St Louis. This leads him to conclude that the only real benefit of such a purchase is to be found in its public relations value for the cause of continued airline industry consolidation, of which American would now be a beneficiary.
But others believe the TWA purchase would be a great deal on its own merits. Darryl Jenkins, of George Washington University's Aviation Institute points to the small fortune in cost savings set to accrue from applying American's credit rating to TWA's fuel and air- craft bills.
Michael Boyd of the consultancy Boyd Group/ASRC contends that geographically prime St Louis would greatly aid American in efficiently flowing its crucial East-West traffic, while operations at grid-locked Chicago O'Hare and snow-bound Denver will continue to give United headaches. Other observers cite decreased competition at the lucrative JFK and San Juan, Puerto Rico bases as potential big bonuses for American.
UA vs AA: who wins?
| The proposed deals: what if? | ||
| Airline group revenues ($billions) | ||
|
| Before | After |
| United Airlines | 18.0 | 24.6 |
| American Airlines | 17.7 | 23.0 |
| Delta Air Lines | 15.1 | 15.1 |
| British Airways | 14.4 | 14.4 |
| Japan Airlines | 14.4 | 14.4 |
| Based on 1999 revenue figures | ||
| US domestic market share | ||
|
| Before | After |
| United Airlines | 20% | 26% |
| American Airlines | 18% | 25% |
| Delta Air Lines | 17% | 17% |
| Northwest Airlines | 12% | 12% |
| Continental Airlines | 10% | 10% |
| Source: Atlantic Journal Constitution | ||
The deal that raises the stakes of the TWA transaction to a level of consequence is United's partial sale of its US Airways booty to American. The conventional wisdom is that United, watching its chances of taking possession of US Airways diminish by the day, acted in desperation, inviting its arch rival to share in the spoils in a bid to create the illusion of competition. Consequently, most industry watchers feel that American got the best of the deals.
To begin, many in the airline community hold that in its zeal to stake a claim for East Coast primacy, United - at $60 a share - probably overpaid for US Airways. Then, they say, in a panic at seeing its deal about to be quashed by the government, United presented American with a package that would see the balance of power in the high-stakes East Coast market go American's way.
The Shuttle and DC Air deals are seen as giving American the edge in the key travel markets of Boston, New York-LaGuardia and Washington-National, but with the Dallas giant paying considerably less than United did to gain its foot-hold in the region. Brian Harris, airline analyst at Salomon Smith Barney, estimates that compared with United, American would get 70% of the benefits, but pay only half the price.
The deals raised another key question. How would the other carriers react? Would they try to block the deal? Would they set off another spate of mergers, racing to avoid being left out?
Continental and Northwest both submitted preliminary proposals to the bankruptcy court handling TWA. Apparently feeling that a bid to merely replace American as TWA's purchaser would keep American and United's plans still on track, both submitted proposals to buy parts of the dying major, while maintaining its status as an independent carrier. Continental's bid focuses on purchasing TWA's slot holdings at constrained airports, and Northwest's on TWA's 26% stake in the Worldspan computer reservation system.
The carrier most involved in further merger speculation is Delta, as, if passed, the mega-deals would send it from its current position in the market share hunt only a few points behind American and United, to being an also-ran, lagging well behind the bulked up carriers' expanded national market shares.
Delta has said it is "looking forward to taking part in industry consolidation" and president Leo Mullin says he is exploring partner opportunities, but the question is: "Who remains?" The logical answer is Continental Airlines, with whom its route network would match up well. Indeed, Delta was barely beaten by Northwest Airlines in a bid to buy the Houston-based carrier a few years ago. But Northwest, whose stock holdings allow it a veto over any possible Continental purchase, is unlikely to allow such a deal - a probability heightened by its reaction to the American/TWA deal.
Continental chief executive Gordon Bethune has railed against the efficacy of airline consolidation and predicts that the acquisitions would result in a Continental windfall, as customers dissatisfied with merger-related confusion at American and United would turn to his carrier for reliable air service. "If Delta or any other big airline was thinking about buying us, we'd give them John Dasberg's telephone number," he says, pointing to the experience of his counterpart at Northwest in attempting to buy Continental.
Although smaller America West and Alaska Airlines are also in play, Northwest alone remains as the type of carrier that could deliver the degree of impact which Delta would need in a consolidated competitive landscape. It would offer Delta badly needed strength in Asia and the Midwest USA, but would also bring with it a disgruntled, heavily unionised workforce and a fairly incompatible fleet.
In the end, the ultimate decision as to whether this round of industry consolidation goes through will not be made by financial analysts or in airline boardrooms, but by an administration that has yet to be fully formed. Until the cases find their way before President Bush's Attorney General, it seems the only thing that can be predicted with any certainty is that heavy turbulence lies ahead for the US industry in 2001.
Source: Airline Business
