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



Japan Airlines Qantas

Star Alliance



US Airways

South African Airways

Air Canada

Air China

Air New Zealand

TAP Portugal



Scandinavian Airlines

Singapore Airlines



Start your day with The Independent, sign up for daily news emails
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Beige is back: The drab car colours of the 1970s are proving popular again

Beige to the future

Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own