US Airways chief executive officer Doug Parker favors more consolidation among airlines and has said his Arizona-based company wants to be part of either a merger or a strategic partnership with another airline.
So, which are the likely partners for US Airways Group Inc.?
Wall Street analyst Helane Becker of Jesup & Lamont Securities said in a research note last week that three partnerships “make sense for US Airways.”
Each would help Philadelphia’s dominant airline keep pace with Delta Air Lines Inc., now the world’s largest airline, and the new combined United-Continental Airlines Inc., which, if a tie-up were approved, would top Delta as the biggest, the analyst said.
“There’s no reason US Airways has to be part of another airline,” Becker said in an interview. “US Airways has reported positive earnings surprises for the last couple of quarters, beaten expectations. I think they can continue to do that.”
Yet, US Airways management has emphasized that it believed in consolidation in the airline industry and wanted to be involved.
“We think the following three scenarios make sense: US Airways and Alaska Airlines; US Airways and American Airlines; US Airways and JetBlue Airways – or remaining independent,” Becker said in a client note.
“Perhaps the longer-term solution is for US Airways to continue to operate as an independent entity, and for United and Continental to merge and in five years come back and buy US Airways,” she said Friday.
Others do not see a logical fit for US Airways.
“I quite frankly don’t see anything near-term on the horizon,” said airline analyst Michael Derchin of CRT Capital Group L.L.C.
“I don’t see American and US Airways getting together. American is already pretty strong in the Northeast, and American has labor issues that could get even more complicated in a merger with US Airways, which still hasn’t been able to have its pilots unions get together” since the 2005 merger with America West, Derchin said.
As for low-cost carrier JetBlue Airways Corp.? It has nonunion labor and “a fairly different kind of operation,” said credit analyst Philip Baggaley with Standard & Poor’s. “It would be culturally the most difficult fit of the three,” compared with American or Alaska Air Group Inc.
A merger with Alaska “would add some route coverage with US Airways,” Baggaley said, but “would not be a transforming merger like United and Continental. And it does not give US Airways international routes, other than Alaska flies down to Mexico.
“I don’t see a combination that is as clearly logical as what we’ve seen with Delta-Northwest and now United-Continental,” he said.
Jesup & Lamont’s Becker said in a report that a combination with Alaska Airlines would give US Airways a “balanced route structure.” Currently, US Airways “lacks a strong West Coast presence. Alaska Air could easily provide that.”
The downside is that neither airline has a strong international network. Alaska goes mainly to Mexico, and US Airways serves major cities in Europe. The airlines also operate different types of aircraft: US Airways flies the Airbus 320, and Alaska operates Boeing 737s.
A combined American-US Airways would have the global reach of Delta and United. But American and US Airways have a large overlap in flight routes.
American’s labor costs are among the highest in the industry. US Airways and American have difficult labor relations with unions. The airlines also operate different aircraft, thereby reducing “some of the operating synergies seen in other mergers,” Becker said.
A merger with JetBlue would give US Airways a “strong East Coast domestic operation and a growing Caribbean network,” said Becker, and would allow US Airways to concentrate on long-haul international flights to Asia and Latin America, “where we see significant growth in the coming years.”
In addition, JetBlue and US Airways operate similar aircraft, A320s, in the United States, “adding to the cost synergies.”
A combined US Airways and Alaska would be “very strong in Mexico and very well-positioned using Phoenix as a jumping-off point to other points in South America, as well as Charlotte, N.C., and Philadelphia,” Becker said.
“Alaska is very tied in with Delta from Seattle to Asia. Of course, US Airways could get into that. Maybe then it makes sense for Delta and US Airways to get together with some carve-outs on the East Coast.”
Airline mergers must undergo antitrust scrutiny, and the current climate in the Department of Justice could make megamergers in the future tougher to pull off.
“The United-Continental merger is not a done deal,” said CRT Capital’s Derchin. “I think it will be approved, but it’s not for sure. Certainly, the Obama Justice Department is a lot tougher than the Bush White House on antitrust.”
Might United-Continental come back in five years and try to acquire US Airways?
“You would run into the same antitrust concerns that were raised when United and US Airways first proposed merging” in 2001, said S&P’s Baggaley. “Mostly around Washington, D.C., where US Airways has a significant position at Reagan National Airport and United at Dulles. It is possible because they are in the same Star Alliance. But I think United’s combination with Continental makes that a good deal less likely.”