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Airline Industry Consolidation

United, US Airways open to merger

Jui Chakravorty  Feb 25, 2010

Top executives at two of the five largest U.S. airlines said on Tuesday they are open to a merger, adding that the airline industry needs to consolidate to return to profitability.

Speaking at the Reuters Travel and Leisure Summit in New York, United Airlines chief financial officer Kathryn Mikells said the third-largest U.S. airline is open to merging with U.S. or foreign carriers.

"UAL has been supportive of consolidation for a long time," Mikells said at the summit. "It is something we will continue to look at."

US Airways Chief Financial Officer Derek Kerr, in a separate interview at the summit, said his airline was open to merging with another U.S. carrier.

The fifth largest U.S. airline is not interested in merging with a foreign airline, Kerr said, because that would not help the domestic market.

"I don't think that will make a difference," he said. "Domestic is where there is too much fragmentation and there are too many airlines."

Either way, both executives are looking for the right merger, and the two had come close to merging with each other in 2008, sources had then told Reuters.

The airline industry has lost $50 billion in the past 10 years, including $11 billion of red ink in 2009 alone, according to the International Air Transport Association.

The trade association expects the industry to take at least three years to recover from the slump in demand caused by high fuel prices and a pullback in spending amid a weak economy.

"Consolidation is one of the major ways this industry can become profitable," Kerr said.

When asked why US Airways was not approaching another carrier, Kerr said: "It's difficult for the No. 5 player to make a move on No. 1 through 4."

The four largest U.S. carriers are Delta Air Lines, American Airlines, United and Continental Airlines.

Neither United nor US Airways are strangers to mergers: US Airways was acquired by America West in 2005 and it tried, and failed, to buy Delta in 2007.

Sources had told Reuters that US Airways had parallel talks with United and Continental about a possible merger in 2008, when Delta was merging with Northwest. The talks ended as United decided to pursue an alliance with Continental instead.

"It's five major carriers, it's too fragmented," Kerr said of the U.S. airline industry. "You have too many hubs, all chasing the same passengers trying to connect through the country. We believe that it needs to be consolidated."


Mikells said barriers preventing foreign airlines from entering the U.S. market were blocking global mergers at a time when airlines needed scale. Current U.S. law restricts foreign ownership of U.S. airlines to 25 percent of voting stock.

"Clearly, outside of the U.S., consolidation is under way," Mikells said. "Not being able to participate in that in a more material way just really positions the U.S. companies detrimentally, relative to international carriers."

Absent mergers, the airlines are focusing on making the most of alliances. United and US Airways are both part of Star Alliance, a global network of carriers that allows them to streamline costs while sharing revenue.

Star Alliance, which competes with Oneworld and SkyTeam, is seeking more partners, Kerr said. United's Mikells also said the carrier was looking to add members to its alliance, especially in regions such as South America and Africa.

Kerr said alliances are not complete substitutes for mergers but do help in getting some synergies. "One thing that is very hard to do across alliances is cost-cutting," he said.

United, US Airways open to merger
Derek Kerr, Executive Vice President and CFO of US Airways / Image via REUTERS/Lucas Jackson


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