Merger fever chills in the US

Washington DC
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US airlines will pursue further agreements that yield merger-like results without formally brokering deals to fully integrate their operations, according to Seabury Aviation & Aerospace managing director Kevin Degan.

Challenges including organized labour, overcapacity, political difficulties and lost money are among the reasons more carriers have not followed Delta Air Lines and Northwest Airlines lead with merger plans, Degan explained today to attendees at the US Valuation Conference today in Washington, DC. ATI sister publication Commercial Aviation Online organised the event.

Instead, expect new marketing alliances that achieve some of the revenue benefits without the hassle of a merger, Degan says.

Codeshares take companies a third of the way there without a merger and true joint ventures--with merged frequent flyer miles and joint scheduling--can get companies 90 percent there, he adds, noting the example of Continental Airlines and United Airlines.

After shuttering merger plans, Continental and United brokered an extensive US domestic codeshare and extensive joint ventures through Continental's entry into the Star Alliance, which will result in the Houston-based carrier exiting SkyTeam Alliance. Continental and United are crafting a deal with frequent flyer reciprocity and coordinated processes for reservations, ticketing, flight connections, check-in and baggage transfer.

Even Delta and Northwest sought US DOT approval to expand their transpacific codeshare as US anti-trust regulators review their merger proposal. DOT approved the agreement effective last month.

Delta's code will appear on Northwest's transpacific flights from Detroit, Minneapolis/St. Paul and Honolulu. Northwest will carry Delta's code on Northwest flights from Tokyo to Seoul, Singapore and Bangkok, as well as on three of Northwest's Narita-Asia routes. Northwest's code will appear on daily Delta service between Atlanta and Tokyo.

As the preference for carriers to merge cools, Degan predicts low-cost carriers could feel increasing pressure to merge as integration with smaller carriers would not be as extensive.

Smaller carriers have more to gain in terms of increased purchasing power, whereas once an airline has reached the size of a US major, there is not as much increased purchasing power to gain through a merger, Degan explains.

Foreign interest in US carriers remains remote, says Degan. He does not expect the US government to expand ownership rights of US carriers for foreign entities during the current administration or early on during the next administration, so long as fuel prices do not rapidly escalate again.