Finally, airlines see hope
CHICAGO — After several years of financial darkness, U.S. airlines are seeing rays of hope. Passenger demand is stronger and costs are under control.
Despite numerous recent fare increases, however, ticket prices are still too low for airlines’ liking as they scramble to boost profits in the face of soaring jet fuel prices. The industry’s solution? Reduce the number of available seats by gobbling each other up.
A wave of U.S. airline mergers could mean higher prices for travelers as overlapping routes are eliminated, experts said Wednesday as discussions between United Airlines and Continental Airlines coincided with an announcement by AirTran to buy Midwest. And just last month US Airways began a hostile bid for Delta Air Lines.
Such deals are likely to draw regulatory scrutiny, and they raise the prospect for potential labor and service disruptions, as some consumer advocates warn.
Don’t tell that to Wall Street. Airline stocks surged on the flurry of maybe-merger news, including Air Tran’s hostile takeover bid for Midwest, with other carriers also examining how to combine to keep up with bigger competition.
Numerous regulatory and other obstacles remain before any deal can occur, but industry observers said all the talks and recent airline restructurings have set the stage for big changes in the business next year.
“We’re off to the races,” said airline expert Terry Trippler, who has been monitoring the industry for 38 years. “2007 is going to be a major year — we are going to see some major consolidation.”
UAL Corp.’s United Airlines and Continental Airlines Inc. declined comment on whether they are talking about teaming up. But a person close to the airlines who asked not to be identified said they have been exploring a possible combination in discussions that stepped up after US Airways Group Inc. made a hostile bid for bankrupt rival Delta Air Lines Inc. last month. The talks were said to be very preliminary, with no deal imminent.
The person did not want to be named because of the sensitive nature of the talks.
Putting together the nation’s second- and fifth-largest carriers would produce an airline superpower — the nation’s largest — merging United’s strengths in the Pacific and western U.S. with Continental’s successful operations in Latin America and the Atlantic market and its prosperous hub in Newark, N.J., a popular gateway to Europe.
That could enable United, slimmed down from a three-year bankruptcy restructuring that ended in February, and Continental to use their combined clout to reduce operating costs and become more profitable.
Analysts say other potential deal permutations that may be explored — if they haven’t been already — include AMR Corp.’s American Airlines linking up with Northwest Airlines Corp., and they stress that counterparts routinely talk with one other about consolidation options.
But would a mega-airline be good for consumers? That depends on who’s asked.
Most experts agree that less competition would boost fares, but some see boons for passengers, too.
Trippler, with the Web site MyVacationPassport.com, said consumers will benefit in the long run from healthier airlines and, as a result, a much more stable transportation system. He said competition should remain strong and fares shouldn’t climb much.
Kevin Mitchell, however, said ticket prices would rise significantly and the public can expect service disruptions, repercussions from labor strife and more job insecurity in the airline industry if the carriers merge. He said that if all the deals in discussion come about, there will effectively be three fewer U.S. network airlines in operation.
“Shareholders, advisers and other firms are the big winners here,” said Mitchell, chairman of the Business Travel Coalition, an advocacy group. “I would view it, if I’m a business traveler, on the customer service side as many years of unimaginable pain.”