WASHINGTON (TVLW) – Delta Air Lines could trigger a much-needed wave of airline consolidation, the chief executive of rival US Airways Group said on Wednesday.
Speaking at the Reuters Aerospace and Defense Summit in Washington, Doug Parker, who tried and failed to merge his airline with Delta, reiterated his view that the overcrowded industry is in desperate need of consolidation.
He added, however, that Delta, despite earlier resistance to consolidation, is uniquely positioned to be the catalyst for what could be a wave of airline mergers.
“Delta will be the trigger if they want to be,” said Parker, who engineered the 2005 merger of America West and US Airways. “When they decide to do something, that will be the trigger.”
Parker and other airline leaders see industry consolidation as a way to cut costs and capacity and stabilize the volatile industry. A common view is that if two of the big airlines merge, others will scramble to find partners of their own.
US Airways made a hostile takeover bid in 2006 for then-bankrupt Delta. Delta rejected that bid in January, saying it was more valuable as a stand-alone company.
Since then, there have been no public merger proposals by major airlines, although speculation swirled last month that UAL Corp, parent of United Airlines, and Delta were in talks. Delta denied it but said it had hired advisers to help it explore strategic options that could include mergers.
The U.S. airline industry is recovering from a years-long downturn triggered in part by low-fare competition and exacerbated by soaring fuel prices. In 2006, the industry began cutting the number of seats for sale and raising fares.
But trouble is on the horizon for the industry as the U.S. economy softens and high oil prices, which hit record levels in recent weeks, drive up the cost of jet fuel. Some industry leaders also believe travel demand — mainly business travel — could buckle under the weight of a softening U.S. economy.
Mergers could be a way out of the industry’s looming troubles, but so far, it’s just talk.
But Parker believes that will change. He said Delta’s the likely trigger because US Airways and Northwest Airlines Corp are too small to kick start the process, while United is willing but has been unable to pull off a deal. Meanwhile, American Airlines parent AMR Corp and Continental Airlines Corp appear unwilling to initiate the process.
While Parker believes consolidation will come, he said that if airlines do not make merger proposals by early 2008, they likely will have to wait.
A new presidential administration in early 2009 will need time to fill positions at the U.S. Department of Justice, which could result in costly delays in the approval process.
“There is a bit of a timing issue in that there is going to be a change,” Parker said. “If there is not something announced very early in ’08, I think you will see everything put on hiatus.”
US Airways said on Wednesday that its passenger revenue per available seat mile increased between 2 percent and 4 percent in November, which was seen as weak by Wall Street and US Airways and could be an early sign of demand weakness.
“We believe this is a disappointing result relative to street expectations,” said Kevin Crissey, UBS airline analyst.
Parker agreed the November results were “lower than we would have liked.” He warned that a weaker U.S. economy may dampen travel demand and that fuel costs are likely to remain a major burden for airlines.
“I do think 2008 is going to be a difficult year,” Parker said, adding that airlines are better prepared to survive an economic downturn today than they were in years past.
“I think the definition of a difficult year in our business has gotten more manageable,” he said.
Shares of US Airways, which have fallen more than 60 percent so far this year, closed down 8.1 percent at $18.04 on the New York Stock Exchange on Wednesday. The Amex airline index .XAL, is down more than 30 percent in 2007.