British airways key to US merger mania

Instead of fighting each other for market share, global carriers have found a better way to stay healthy: consolidation

New York

If you have flown to, or within, the US in the last year or two, you might have found yourself shocked at how ticket prices have gone up. Whatever your reaction, you won't have been half as surprised as the guys on Wall Street who analyse airline stocks.

US airlines have been in and out of bankruptcy, seemingly with the regularity of a group of people dancing the hokey-cokey. One trader, a regular on business television on this side of the Atlantic, whenever he was asked about the industry, used to say: "Market's open, a good time to sell airline stocks."

But not now. With the glaring exception of American Airlines, whose parent company AMR filed for Chapter 11 bankruptcy protection in November, US airlines are in the black and determined to stay there. They are pursuing a "shrink-to-fit" policy, axing unprofitable routes and cutting the number of flights on the rest, reducing competition so they can jack up prices. It's an expensive development for the travelling public, of course, and an uncomfortable one for flyers who find themselves in the middle seat on sold-out flights, but it means AMR's could be the last big bankruptcy in this industry.

After years of carriers fighting each other for market share, no matter the cost, the industry has changed. The reason: consolidation. And the strategy in the industry for staying healthy: more consolidation.

The AMR bankruptcy has triggered a new round of calculations about who should merge with who, and which out of the remaining possible combinations would be best for cutting costs and building the most efficient global network. It could be 18 months before AMR decides if it wants a marriage, but its dance partners are preening, and the dating game could be of crucial importance to British Airways.

American is the lynchpin of BA's Oneworld alliance of global airlines. Speculation over AMR's future has reopened questions about the long-term viability of Oneworld, and even raised the possibility that BA's parent, International Airlines Group, might pump hundreds of millions or billions of dollars into AMR to prop up the transatlantic alliance.

"Oneworld is not even a close No 3, after Star Alliance and SkyTeam," says Robert Mann, founder of the airline consultancy RW Mann & Co. "Part of the problem is that it centres on Heathrow, which has always been a tough airport with a lot of problems and many carriers want to avoid it. Also, prices for flights via the UK are high, so if you are flying to continental Europe it is cheaper to use a continental hub."

Oneworld pulls together American, BA and its sister company Iberia, and Cathay Pacific, among others. It accounts for just 11 per cent of transatlantic travel, compared to 36 per cent for Star Alliance and 25 per cent for SkyTeam, which are anchored by the No 1 and No 2 US carriers, United and Delta Airlines, respectively.

"American has gone from being No 1 to being No 3 in five years, and it is not on a good trend. I don't think it knows how to compete from the No 3 position," said Mr Mann.

Since the twin crises of soaring energy prices and recession hit in 2007, Delta acquired Northwest and United leapfrogged everyone with the just-completed acquisition of Continental. American has no single partner that could push it back up from its No 3 spot, and its collapse into bankruptcy has turned it from predator to prey.

Doug Parker, the US Airways chief executive, has been arguing the benefits of consolidation for as long as he has been on the industry stage. His airline is an example of those benefits, having assembled itself through a string of mergers to become an international carrier with revenues of $13bn (£8.2bn) a year. It is strong in the second-tier cities of the East Coast but not on international routes, and it wants to gobble up AMR, with its major hubs in New York, Chicago and Los Angeles. Mr Parker boasted last week that he had hired Barclays Capital and others to advise him on the possibility of a deal.

AMR may have other ideas. Or, more accurately, it may have no ideas at all, since it is only at the beginning of a long and difficult financial restructuring. Under Chapter 11, it will be allowed to reorganise its debts and other obligations. In just one example of the battles to come, this week the government-run pension insurance scheme in the US filed claims over AMR's international assets to cover a $10bn shortfall in the company's pension funds. Pensioners, employees, suppliers and bondholders all now have to fight it out at the negotiating table and in the courts, to agree a financial restructuring deal that sets AMR up to compete in the future.

In order to mitigate the losses, AMR could ultimately seek a sale of the business or an infusion of cash, which is why rivals are "lawyering up and advisering up", in the words of one analyst. Delta has also hired advisers, it is believed, to consider a move of its own, possibly for AMR but more likely – given the less onerous competition hurdles involved – for US Airways.

Any takeover of AMR could have big implications for British Airways and the rest of the Oneworld alliance, which began a revenue-sharing deal for the $7bn transatlantic business in late 2010. If US Airways is the buyer, it is most likely to opt into the Oneworld alliance, but there are no guarantees, analysts say. If Delta were to buy AMR and pull American into SkyTeam, that would be curtains for Oneworld.

In recent days, it has emerged that a private equity group with a history in the airline industry, TPG Group, is also examining the possibility of funding AMR in return for taking control of the company when it exits bankruptcy. TPG invested in Continental in the Nineties, and America West in the Naughties, before it was sold to US Airways. It also once teamed up with BA to make a joint bid for Iberia five years ago. It is believed to have approached BA again about taking a minority stake in AMR to ensure it stays within the Oneworld alliance, and give BA greater power to shape and improve the alliance.

As AMR's restructuring talks progress, however, analysts expect extensive consideration of the options.

Analysts are in no doubt as to the benefits, which were on show last week when the major carriers released their results. United said it had cut seats by 2.5 per cent in the fourth quarter and been able to jack up fares by 9 per cent. Delta's revenue per available seat mile was up 12 per cent.

"All along, we thought low barriers to entry and highly elastic supply would prohibit airlines like Delta from raising prices," said Basili Alukos of Morningstar. "However, the reduction in capacity over the past few years is having a positive impact. So long as the airlines remain disciplined, the long-elusive pricing power could stick."

Alliances: Who's who

One World

British Airways

American Airlines

Cathay Pacific

Finnair

Iberia

Japan Airlines Qantas

Star Alliance

bmi

United

US Airways

South African Airways

Air Canada

Air China

Air New Zealand

TAP Portugal

EGYPTAIR

Lufthansa

Scandinavian Airlines

Singapore Airlines

SWISS

THAI

Start your day with The Independent, sign up for daily news emails
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine
Letterman's final Late Show: Laughter, but no tears, as David takes his bow after 33 years

Laughter, but no tears, as Letterman takes his bow after 33 years

Veteran talkshow host steps down to plaudits from four presidents
Ivor Novello Awards 2015: Hozier wins with anti-Catholic song 'Take Me To Church' as John Whittingdale leads praise for Black Sabbath

Hozier's 'blasphemous' song takes Novello award

Singer joins Ed Sheeran and Clean Bandit in celebration of the best in British and Irish music
Tequila gold rush: The spirit has gone from a cheap shot to a multi-billion pound product

Join the tequila gold rush

The spirit has gone from a cheap shot to a multi-billion pound product
12 best statement wallpapers

12 best statement wallpapers

Make an impact and transform a room with a conversation-starting pattern
Paul Scholes column: Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?

Paul Scholes column

Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?