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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59 Comments on "US Airways is Open to Mergers, But Nothing is Happening Soon"

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dan powers
Guest

from APC…funny but true…In related news, US Airways denied they were “acting slutty and willing to go with anyone”.

“We’re just putting ourselves out there – sure, we had to put on a push-up bra and control top panty-hose, but we’re just as attractive as anyone out there. I think we’re a 9. At least a solid 8. Ok, high 7 but wait until we get into that dark room. We have all sorts of tricks!”

Chris
Guest

Atlanta and Charlotte are the only two viable hubs in the southeast? Is Miami not considered viable?

David SF eastbay
Member

MIA yes for Caribbean/Latin America but at the bottom of Florida it not an ideal place to run a hub and spoke system for those traveling just in the USA.

SEAN
Guest

Obvious typo.

Tim Cailloux
Guest
I suspect that Delta will buy Alaska (AS), and probably in the next 2-3 years. Back to your point for a minute: the reason that the DL/NW merger went so well is that Delta did everything it could to make the merger work, before they announced the acquisition. They went so far as to hire the CEO from NW (Richard Anderson). If that wasn’t a clear signal of intentions, I don’t know what more they could do. Delta’s making similar moves with AS today. AS has market penetration in Alaska that no other airline can pull off profitably. In some… Read more »
Nick Barnard
Member

I think Alaska getting bought by anyone is just a non-starter. For two reasons:
1. Alaska codeshares with everyone. This gets them a bunch of revenue. As soon as they get bought by Delta the airlines who aren’t in Delta’s network are going to terminate Alaska’s codeshares as fast as possible.
2. They have the costs issue. Alaska’s costs will rise in this scenario which will make parts of their network unprofitable.

Tim Cailloux
Guest
Alaska codeshares for passenger volume. They have an uncontested niche and are successful because they remain focused on their market. If DL purchased AS, it grows DL’s topline revenue without cannibalizing the route structure. It’s slightly neutral for AS investors and positive for DL’s. DL’s costs are marginally lower than AS’s (excluding fuel and special items). DL’s CASM is 8.52 cents per mile versus 8.80 cents per mile for AS (FY2010 values). But they’re basically neutral. However, I think DL probably doesn’t want to go through a new round of labor issues. That is probably a bigger stumbling block than… Read more »
James Williams
Guest

DL and AS reciprocal upgrade elite members. That could be seen as somewhat of a prelude to merger. Sort of kicking the tires, going out on a couple dates, etc. If we go back in time, DL/CO/NW did reciprocal upgrades and stuff like that. CO only went into UA arms when DL/NW merged. I think if they can make it work separate, they will (DL and AS, that is).

David SF eastbay
Member

AA could buy US and destroy it like they did AirCal, RenoAir, and TWA. One less carrier to deal with that has a hub between DFW and the western states.

SEAN
Guest
The three hubs that US has are not desireable compared to other airline networks. 1. Phoenix is stuck between Los Angeles, Salte Lake City, Houston & Dallas Fort Worth. 2. Charlotte is so close to the monster Atlanta, that it cant get out of it’s way. 3. Philadelphia is litterally being crushed by a two headed giant Washington dC & New york including it’s mini me’s Baltimore & Newark. Can you be in a worse compettitive posission then that as far as networks are concerned? And forget about mergers no combonation with the big three would pass muster with the… Read more »
Andrew
Guest
Agree with Cranky on Phoenix: hard to raise prices on local traffic, although PHX is a good geographic location for a western hub. Not sure what Sean is talking about with CLT; CLT is several hundred miles from ATL, so they aren’t competing for O&D traffic at all; In fact, geographically, CLT is situated almost halfway between DC and ATL, so it’s a perfect hub location…you’re basically equidistant between most east coast destinations…but as Cranky says, the city itself just isn’t nearly as big, so not a ton of O&D traffic. As for Philly…it’s the 5th largest city in the… Read more »
James Williams
Guest

@Sean, I agree on most points except that Baltimore is a minime of DC. At under 40 miles from airport to airport(DCA – BWI), they are well within the same metro area. For the most part DCA is the int’l hub and BWI is a Southwest hub.

Southwest already attacked the Philly fortress once. They would do it again.

@Andrew, I don’t presume to speak for Sean but it is several hundred miles away, indeed. But ATL’s shadow looms large. With the ATL superfortress and all the hub-captives, it’s hard for CLT to compete.

David SF eastbay
Member

Isn’t there a joke in the south about when you die you’ll have to go through Atlanta to get to heaven. The joke is go through Charlotte to get to heaven, so even by locals in the southern states they think of ATL instead of CLT and USAir has been a part of the south/east coast for decades so maybe peoples minds are just geared to ATL and it would be hard to sway them away.

Frank
Guest

No one wants to touch this carrier with it’s pilot’s dispute. That’s been ongoing in the courts for several years now. They’re a poster child to: How NOT to merge.

Nick Barnard
Member

Frank, its a poster child from the Union’s perspective of how not to merge. From the airline’s perspective it is pretty good. Not having a single union is saving them lots of money every year.

Frank
Guest

to the tune of almost ONE billion dollars: http://www.youtube.com/watch?v=DcDE2e1whKM

dan powers
Guest

the way this could play out = some airlines will have BIG issues with Republic and the scope clauses now that the FEDs have declared the Bryan Bedford group a single carrier…chataqua will be sold to skywest or pinnacle…Lynx only has a few airplanes and will disapear…shuttle america will be divested…and frontier will merge with usair-east…america west…or both

Sanjeev M
Guest
Love the pic, Cranky! I have for a while said that US Airways-Frontier combo would work if the pilots situation works out. US Airways & Republic have been buddy-buddy for years. PHL + CLT + MKE + DEN/PHX (if they can do both) is not a bad domestic network. On a related note, Charlotte is such a strong hub for US, and a beautiful airfield means it suffers few of the problems that ATL has. However, it seems that airlines have extracted 99% of the cost savings possible from implementing fees, cutting services and wages. So any subsequent merger is… Read more »
CP
Guest

Is there a hidden commentary on MEM as a hub in your articulation of ATL and CLT as the only two “viable” SE hubs?

DesertGhost
Guest
If I remember correctly, a US exec said specifically that the “for sale” sign was NOT being put out. US simply wants to be ready (i.e. has its house in order) in case something comes up. I found it interesting that they’re not interested in smaller airlines like jetBlue of Alaska, but no mention was made of Republic or Hawaiian. Maybe I’m reading too much into that. I do believe Hawaiian would make an ideal merger partner for US and vice versa. It’s a totally end-to-end combination that would improve both networks. I also like the idea of a merger… Read more »
DesertGhost
Guest

Oops! My last paragraph sould read “A merger between American and US” not Delta. That’s what I get for being a windbag.

Ken
Guest
HA/US makes some bit of sense (much like HP/HA made sense years ago). I have concerns about HA using the A332 to fly the big East coast markets, especially as fuel prices continue to go up. The airlines with big hubs on the East coast don’t even fly that much to the Aloha State with the feed they have. US could provide the feed primarily through PHX but also through their transcons to the West (LAX/SFO/SEA/SAN). HA would provide access to Asia, something that would be very attractive to US. Not saying its going to happen, but I think there’s… Read more »
Sean
Guest

Is an Alaska & US Airways merger possible? They seem to have relatively complimentary route maps…

Davester
Guest

US Airways + SouthWest = finally getting MetroJet right

Nick Barnard
Member

I’m not sure there was anything ever right about MetroJet.

Jim
Guest

Cranky, this is a very interesting article and I enjoy your perspective.

I am just wondering why you say that “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.” If US Airways currently has lower costs, why would those costs magically increase just because of a change in ownership? Why could AA not continue to operate US’s routes at current costs?

Nick Barnard
Member

Jim, generally and historically in airline mergers the highest labor rate is the one that is adopted by the merged entity, thus all those US Airways flights that are breakeven or marginally profitable become losers at American’s labor rates.

DesertGhost
Guest

That’s why AMR would need to file for Chapter 11 (or find some other way to lower its labor costs) for a merger with US (or any other network carrier that went through bankruptcy – i.e. any of them) to work. That’s also why a merger is unlikely in the short term. AMR isn’t in a position to have to file for BK in the near future, but it’s closer than anyone else.

Bill from DC
Guest

AMR is closer to bankruptcy now because it hasn’t already been in bankruptcy during the past 5 years, as has every single one of its competitors.

DesertGhost
Guest

I don’t disagree. That doesn’t alter the fact that American needs to get its labor costs more in line with its competitors.

Bill from DC
Guest

Sad that the (legal) process of shirking debt obligations and screwing over retirees has become a competitive necessity in this industry.

Henry
Guest

Maybe JetBlue could buy US Airways.

CF, do you see any impediments?

Eric
Guest
I do not understand why Parker & Co. are putting capital into their hard and soft products while continuing this ‘take my airline, please’ dance. Is it psyops with the unions? Is he trying to put LCC stock in play? Is it giving into pressure from LCC institutional investors (86%) who want to see some ROI? We all know that PHL, CLT and PHX are not JFK, ATL and LAX…but they are hardly ABE, CHO and YUM…they are viable business centers and (in the CLT/PHX cases) growing metro areas. IMHO the only ‘do-able’ merger scenario would involve RAH and F9… Read more »
Brad
Guest

I agree with Eric, you can’t really say “someone please buy us” and then give your CapEx a significant bump at the same time. words < actions

DesertGhost
Guest
US would be foolish not to invest in its product. There’s a parallel in the railroad industry, in fact two parallels. They were the Rock Island and Milwaukee Road. Both were heavily involved in mergers. Both relied too heavily on the pending mergers to save them. Neither invested in its infrastructure. When the mergers fell through, both went bankrupt. The Rock Island was liquidated and 2/3rds of it was parcelled out among other carriers. The Milwaukee was purchased by the Soo Line (part of Canadian Pacific and 2/3rds of it was abandoned. Both would have been bought out but they… Read more »
Brad
Guest

setting aside the AA bankruptcy scenario or relaxed foreign ownership restrictions for US airlines, I don’t see how US can continue as a major carrier. I see it putting the majority of its network on the block and merging with whichever carrier matches up best with the remaining entity.

DesertGhost
Guest

It’s funny. Alaska is less than half the size of US, yet very few say the same thing about it. US may not be as large as American but it is a player in the market. It has a rate of return on investment that compares well with other carriers.
It has a niche market it serves well, just as Alaska and Hawaiian do. US doesn’t have to be broken up as much as some want that to happen. Some base their US hate on a past that hasn’t existed for nearly six years. It doesn’t make sense to me.

Skydragon
Guest

I hope USA does merge with Alaska Airlines……and ALPA gets back on property….then they can vote the corrupt USAPA off of the property. Then the fed’s can investagate that whore of a union.

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