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

PROMOTED VIDEO
Arts and Entertainment
AKB48 perform during one of their daily concerts at Tokyo’s Akihabara theatre
musicJapan's AKB48 are one of the world’s most-successful pop acts
News
Ian Thorpe has thanked his supporters after the athlete said in an interview that he is gay
people
News
The headstone of jazz great Miles Davis at Woodlawn Cemetery in New York
news
Arts and Entertainment
Brendan O'Carroll has brought out his female alter-ego Agnes Brown for Mrs Brown's Boys D'Movie
filmComedy holds its place at top of the UK box office
News
newsBear sweltering in zoo that reaches temperatures of 40 degrees
Arts and Entertainment
Professor Kathy Willis will showcase plants from the Royal Botanic Gardens at Kew
radioPlants: From Roots to Riches has been two years in the making
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Arts and Entertainment
TV The follow-up documentary that has got locals worried
Arts and Entertainment
Eminem's daughter Hailie has graduated from high school
music
Arts and Entertainment
Original Netflix series such as Orange Is The New Black are to benefit from a 'substantial' increase in investment
TVHoax announcement had caused outrage
Life and Style
Swimsuit, £245, by Agent Provocateur
fashion

Diving in at the deep end is no excuse for shirking the style stakes

News
One Direction star Harry Styles who says he has no plans to follow his pal Cara Delevingne down the catwalk.
peopleManagement confirms rumours singer is going it alone are false
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

Information Security Manager (ISO 27001, Accreditation, ITIL)

£70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...

Biztalk - outstanding opportunity

£75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...

Trade Desk Specialist (FIX, Linux, Windows, Network Security)

£60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...

Service Desk Analyst (Windows, Active Directory, ITIL, Reuter)

£35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...

Day In a Page

Super Mario crushes the Messi dream as Germany win the 2014 World Cup in Brazil

Super Mario crushes the Messi dream

Germany win the 2014 World Cup in Brazil
Saharan remains may be evidence of the first race war, 13,000 years ago

The first race war, 13,000 years ago?

Saharan remains may be evidence of oldest large-scale armed conflict
Scientists find early warning system for Alzheimer’s

Scientists find early warning system for Alzheimer’s

Researchers hope eye tests can spot ‘biomarkers’ of the disease
Sex, controversy and schoolgirl schtick

Meet Japan's AKB48

Pop, sex and schoolgirl schtick make for controversial success
Iraq crisis: How Saudi Arabia helped Isis take over the north of the country

How Saudi Arabia helped Isis take over northern Iraq

A speech by an ex-MI6 boss hints at a plan going back over a decade. In some areas, being Shia is akin to being a Jew in Nazi Germany, says Patrick Cockburn
The evolution of Andy Serkis: First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes

The evolution of Andy Serkis

First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes
You thought 'Benefits Street' was controversial: Follow-up documentary 'Immigrant Street' has got locals worried

You thought 'Benefits Street' was controversial...

Follow-up documentary 'Immigrant Street' has got locals worried
Refugee children from Central America let down by Washington's high ideals

Refugee children let down by Washington's high ideals

Democrats and Republicans refuse to set aside their differences to cope with the influx of desperate Central Americas, says Rupert Cornwell
Children's books are too white, says Laureate

Children's books are too white, says Laureate

Malorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
Blackest is the new black: Scientists have developed a material so dark that you can't see it...

Blackest is the new black

Scientists have developed a material so dark that you can't see it...
Matthew Barzun: America's diplomatic dude

Matthew Barzun: America's diplomatic dude

The US Ambassador to London holds 'jeans and beer' gigs at his official residence – it's all part of the job, he tells Chris Green
Meet the Quantified Selfers: From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor

Meet the 'Quantified Selfers'

From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
Madani Younis: Five-star reviews are just the opening act for British theatre's first non-white artistic director

Five-star reviews are just the opening act for British theatre's first non-white artistic director

Madani Younis wants the neighbourhood to follow his work as closely as his audiences do
Mrs Brown and her boys: are they having a laugh?

Mrs Brown and her boys: are they having a laugh?

When it comes to national stereotyping, the Irish – among others – know it can pay to play up to outsiders' expectations, says DJ Taylor