WASHINGTON (Reuters) - U.S. airline industry executives are looking forward to the benefits of consolidation as U.S. Airways Group Inc. LCC.N makes a brash attempt to take over larger, bankrupt rival Delta Air Lines Inc.
Industry executives speaking at the Reuters Aerospace and Defense Summit this week said consolidation would take excess capacity out of the system, allowing them to raise fares and keep the industry’s recovery on track. But most were content to leave the painful, complicated mergers to someone else.
"This is still a troubled industry," said Tom Horton, chief financial officer of American Airlines parent AMR Corp. AMR.N. "If this Delta-US Air deal were to proceed and were to result in a rationalization of capacity, that could only be healthy for the industry."
US Airways says it could cut capacity -- the number of seats for sale -- 10 percent by merging with Delta. Capacity cuts generally make it easier for airlines to increase ticket prices, assuming competitors don’t immediately fill the void.
“I think anytime you talk consolidation you talk capacity reduction. No matter which combination you talk about there is some overlap of routes,” said David Neeleman, chief executive of JetBlue Airways.
PICKING UP THE PIECES
Carriers including Southwest Airlines Co. LUV.N, JetBlue Airways Corp. JBLU.O, and Frontier Airlines Inc. FRNT.O have voiced interest in picking up gates and landing slots that might be shed if US Airways' roughly $8.6 billion bid for Delta goes through.
“Our interest is going to be primarily in what we can do on the asset side,” rather than actively taking part in industry mergers, said Laura Wright, chief financial officer at Southwest Airlines, the largest U.S. discount carrier. “Our preference to grow has always been to grow organically.”
Wright’s comment echoes those of other airline leaders who support consolidation but don’t want to be part of it because of the complexity of merging fleets and labor forces.
But consolidation might be necessary to keep the industry recovery going. The current formula of packing passengers into planes with relatively low fares is reaching its limits.
“We’ve seen two eye-popping years on the key revenue metrics for the industry ... and I don’t think that’s something we can count on going forward,” said Bill Warlick, airlines analyst at Fitch Ratings.
‘A STRONG BID’
Airline executives say US Airways’ cash and stock bid, which would create the world’s largest airline, is an attractive offer, but the hurdles are still significant.
“We thought it was a pretty strong bid in terms of relative value and clearly something that the Delta creditors are going to have to consider,” said Southwest’s Laura Wright.
But resistance from Delta management and Delta's pilots as well as competition concerns, which in 2001 derailed a planned merger between the old US Airways and UAL Corp.'s UAUA.O United Airlines, could still scuttle the deal.
"Megamergers are very difficult to do in our business," said Paul Tate, chief financial officer at Frontier Airlines Inc. FRNT.O. "If I had to weigh probability, I would say it is well less than 50 percent that he (US Airways CEO Doug Parker) will be able to jump over all those hurdles that he has to."
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