US Airways is Open to Mergers, But Nothing is Happening Soon

I spent last week at two of my favorite events – US Airways Media Day and the Phoenix Aviation Symposium. As usual, one or two big headlines will come out of these things, and they’re usually reported incorrectly. This year was no exception. So let’s talk about US Airways and why it won’t actually be merging anytime soon despite some misguided stories.

US Airways Dating Game

Many outlets picked up on the fact that US Airways CEO Doug Parker once again spoke about how the airline believes that eventually the legacy carrier world will come down to three main players – American, Delta, and United. And again, Doug mentioned how US Airways could merge with any of these at some point. That’s not a surprise. He’s been saying this for years. But apparently there’s enough turnover in the people covering the airline industry that some treat this as if it’s actually some kind of news. Take a look at Shira Ovide at the Wall Street Journal, for example:

Doug Parker is flagging he’s more than willing to break out the “for sale” sign on his lawn. It’s also a sign that US Air, which combined with Parker’s then company — America West — more than five years ago, didn’t get the kind of scale it wanted from that deal.

*sigh* That “for sale” sign has been out there for a long time, and it shouldn’t come as a surprise to anyone who has even remotely paid attention to this industry. But the chance of a merger happening anytime soon is slim at best. There simply isn’t a good opportunity for US Airways with any of those three right now.

American
Let’s start with the one that everyone points to . . . American. Since Northwest and Delta linked up as did United and Continental, that means US Airways and American will as well, right? Wrong. It would be a disaster of epic proportions if American tried to merge with US Airways now.

US Airways is never shy about pointing out how it survives as an airline. Its hubs are in less desirable locations than the big three airlines and that means it is able to generate less revenue from them. How does it compensate? It has lower costs than the big three to offset the revenue deficiency. That’s how the math comes together. If American buys US Airways, it buys a route system that doesn’t generate enough revenue to cover American’s costs, but American would naturally bring US Airways costs up to its level. That is bad.

I can only think of two ways this works. One would involve American buying US Airways and running it as a separate airline under a holding company. This would not only be a wasteful distraction for American but it might not work. If the feds decide that the airlines have single carrier status (just as Republic/Frontier/Lynx/Shuttle America/Chautauqua just received) then it would mean a single workforce and costs would start to rise. American would also get little benefit. If it really wanted this kind of benefit, it would be better off just agreeing to a codeshare.

The other way is more plausible. If American continues its downward slide and ends up in bankruptcy, I would look for a US Airways bid just as it did with Delta. Then US Airways could rework American before it took it out of bankruptcy and come out with a highly competitive airline. Right now, this is the only plausible merger scenario I see, but American isn’t going into bankruptcy anytime soon.

Delta
The Delta/Northwest merger went so smoothly that some wonder if the airline could handle another one? I imagine it probably could, if it so chose, but there are too many problems and not enough benefit. Forget about the cost issue and look at the route overlap. The feds are unlikely to allow Delta to control Atlanta and Charlotte – the only two viable hubs in the southeast US. Also, the feds were so concerned about the US Airways/Delta slot swap because it would concentrate power in Washington and New York that they blocked it. Just imagine how concentrated the power would be if the two merged. In addition, Phoenix and Salt Lake would only work to hurt each other in the same airline. This would simply be about eliminating competition and nothing else. I just don’t see it happening now.

United
These guys are so tied up with the Continental merger right now that I can’t imagine them being interested in taking on something further. Besides, how do you think the feds would look at a Newark/Philly/Dulles hubbing situation? And there are a bunch of cities in the west where US Airways and United provide the only two options (e.g. Yuma, San Luis Obispo). There could be plenty of concern in the near term.

But overall, the cost issue is going to be the biggest one for any of these airlines. Does that mean that a merger can’t happen? Of course not. There have been plenty of stupid airline mergers of the years. But the chance of one happening anytime soon is remote, and that’s being optimistic. Down the line, things can always change, so will US Airways be around in 5 years? That one is much harder to predict.

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