7 Min Read
* Southwest/AirTran merger sheds light on American Air
* American has held alliance talks with U.S. Air-sources
* Jet Blue, Alaska seen as good fits for American
* Pilots, costs to hinder American effort to tie knot
By Kyle Peterson and Soyoung Kim
CHICAGO/NEW YORK, Sept 28 (Reuters) - Maybe that long-predicted wave of U.S. airline mergers is finally here.
The impending merger of UAL Corp's UAUA.O United Airlines with Continental Airlines (CAL.N) and Southwest Airlines' (LUV.N) deal to buy AirTran Holdings AAI.N reshuffle the deck for the largest U.S. airlines and put new pressure on major carriers without a merger partner to find one.
For AMR Corp's AMR.N American Airlines, which lost the title of world's largest airline after the 2008 merger of Delta Air Lines (DAL.N) and Northwest Airlines, the outlook is getting murkier. Experts say American needs a merger partner and may already be losing a competitive edge.
"They find themselves facing the market from the bottom of the top three as opposed to from the top of the top three, and this really hurts you in the corporate travel marketplace," said Robert Mann, an airline consultant with RW Mann & Co.
Well-heeled business travelers, the bread and butter of the top U.S. airlines, gravitate to the carriers with the most extensive route networks, Mann said. American simply cannot make that claim anymore, he added.
"That's going to mean a tougher revenue marketplace for American," he said. "By contrast, I think you'll see United and Continental, as well as Northwest and Delta, have relatively favorable stories to tell in acquiring revenue in the markets that they extensively serve."
Dallas-based American has long argued that it does not need a merger to survive and thrive, saying it has confidence in its huge international network to lure premium travelers.
"Network breadth is important, and we have that in abundance," AMR Chief Executive Gerard Arpey said at an investor conference in July. "We can go to virtually any corporate account and offer them convenient access to all the markets that are important to them."
United Airlines plans to close its $3.17 billion all-stock purchase of Continental in the next few days, forming the world's largest carrier.
Southwest shocked the industry on Monday with news that it would buy AirTran for more than $1 billion in a bid to expand into lucrative East Coast markets. [ID:nSGE68Q0GW]
"It's not at all surprising that when one domino falls, other people have to reposition," said Bob Profusek, global head of M&A at Jones Day and lead lawyer for the UAL merger.
"It's kind of a game of musical chairs," Profusek said. "It's also just a function of industry conditions. Too many people chasing the same dollar means that it's not very efficient. I think there will be continued consolidation in the airline space."
But for American, the benefits of consolidation are drying up, said Mann. He said there are no potential merger partners that offer the complementary, end-to-end domestic networks that make the Delta/Northwest and United/Continental mergers good fits.
"All the good pieces are taken off the board," Mann said.
14 biggest airline, travel M&A deals since 2007: link.reuters.com/nyr75p
Airline rankings by traffic, revenues: link.reuters.com/qah65p
Behind-the-scenes efforts by American to find a partner may underline a growing recognition that scale does matter in the capital-intensive industry.
In 2008, American held merger talks with US Airways LCC.Nand alliance talks with Continental just after the Delta/Northwest merger, sources told Reuters previously.
But a merger is too hard to consummate for now because of American's relatively high labor costs and open contracts with its unions, experts say. The carrier has long complained it has the highest labor costs in the industry.
US Airways has its own challenges. It has yet to fully integrate its labor groups following its 2005 merger with America West Airlines.
Many experts believe, however, that carriers can use alliances to cut costs and boost revenue without all the baggage of a merger. They also note that alliances preceded the Delta/Northwest and UAL/Continental mergers.
American held talks with US Airways again after the United/Continental merger to lure its smaller rival into the Oneworld global alliance, people familiar with the matter said. Currently US Airways partners with United and Continental in the Star Alliance.
American entered a code-share agreement with JetBlue this year allowing passengers to connect with one ticket to American's international flights from New York and Boston.
American frequently spotlights its efforts to beef up international alliances to attract premium travelers.
The carrier also plans to concentrate service in New York, Los Angeles, Chicago, Dallas/Fort Worth and Miami, all markets with heavy business traffic.
These initiatives will pave the way for more than $500 million of annual revenue and cost benefits, the company said.
Beverly Goulet, AMR's vice president of corporate development, disputes the notion that business travelers pick airlines with the largest networks. The key, she said, is to be in the right cities.
"When you have a network that can compete, I don't think that the size of the company per se is going to drive the issue of success," Goulet said.
"We're big where it matters," she said.
Goulet said AMR is less vocal on the subject of mergers than some of its rivals, but the carrier believes consolidation is good for the "fragmented" industry.
She said AMR explores all its options. But she believes strategic alliances can produce tremendous benefits.
American, British Airways BAY.L and Iberia IBLA.MC won approval from the U.S. government in July to create a joint business governing flights between North America and Europe.
Meanwhile, American and Japan Airlines JALFQ.PK, Asia's largest carrier by revenue, hope to win regulatory approval for closer cooperation on trans-Pacific routes. (Reporting by Kyle Peterson and Soyoung Kim; Editing by Steve Orlofsky)