Source: Chicago Tribune
Author: Julie Johnsson

Rumors of airline industry consolidation going full throttle

He's preached about the need for airline consolidation for years.

So it must've been baffling for United Airlines Chief Executive Glenn Tilton to see Delta Air Lines CEO Richard Anderson in the spotlight as merger mania finally took hold in earnest last week.

With media and analyst attention focused on Delta's merger ambitions, Tilton on Friday sent a reminder in a companywide message that his hands are on the controls, too, as the industry contemplates a massive shake-up.

"Our position has always been that we control our decisions; no one makes them for us," Tilton said. "The advantage of our situation is that we have the choices that we continue to consider with our board."

United's directors were in Chicago last week for a regularly scheduled board meeting in advance of the quarterly earnings announcement, slated for Tuesday. A United spokeswoman declined to say whether merger plans were on the agenda.

United, the nation's second-largest carrier, is in merger discussions with Delta, sources say, as is Northwest Airlines. Analysts expect Continental Airlines and United to link up if Delta opts to combine with Northwest. A deal by Northwest would free Continental of a "golden share" that gives Northwest significant say in any deals pursued by Houston-based Continental.

Continental CEO Larry Kellner told investors Thursday that he would move quickly if deals start to roll. "If we see something, we won't hesitate to act aggressively," he said.

"I'm sure everyone is talking to everyone," said one airline executive, who spoke on the condition that he not be identified.

United executives have long felt confident that they would be in prime position if massive consolidation were to take hold, given their global network, their massive hub at O'Hare International Airport and the fact that merging with either Continental or Delta would create a global power, sources say.

The Chicago-based carrier was on the verge of combining with Delta a decade ago, but the deal fell apart over labor issues, sources say. And United has talked repeatedly with Continental but could never sort out ego concerns, like which team would run the company.

That's less of an obstacle this go-round, since Tilton appears more open to ceding control, say people close to United.

But that creates uncertainty as to whether Chicago's hometown carrier still would be based here after a merger.

Chicago Mayor Richard Daley, who has a track record of aggressively wooing companies to the city, wouldn't let United go without a fight.

"I don't think Chicago would take it lightly," said aviation expert William Swelbar.

In 2006, the City of Chicago offered United $5.5 million in tax-increment financing and up to $10 million in fuel-tax relief as incentives to move its corporate headquarters downtown rather than out of state. In exchange, United agreed to remain at 77 W. Wacker Drive, staffed with at least 325 full-time workers, for at least 10 years.

If United were to merge, "any successor entity would be bound by the terms of the agreement," said Kate Sansone, a spokeswoman for the City of Chicago. United has not contacted the city about its merger plans, she said.

A deal between airlines would be incredibly complex and difficult to complete, especially because of labor issues, and there are no guarantees that any merger under discussion will occur despite the compelling economic reasons.

But the latest talks appear to be more substantive than the merger rumors that seemingly have materialized with every change of season for the past two years, industry sources say.

"I think the odds of a merger are higher now than they have been in the past," said Philip Baggaley, managing director and airline credit analyst with Standard & Poor's. "We have more chief executives who seem open to mergers, and the clock is ticking on how long the Justice Department in a Bush administration would be around to oversee a merger."

Also spurring the urge to merge: investor worries that soaring oil prices and a slowing demand for travel as the economy sputters mean that airlines are headed for another downturn.

By joining networks, airlines hope to generate new sales by linking a broader array of global destinations. With labor costs slashed to the bone and workers restive, carriers also need to find new savings to cope with the tougher economic environment.

With a tie-up, they can combine headquarters staffs and operations centers, while shrinking or dropping hubs and reducing flights on unprofitable routes.

Smaller cities likely would be most affected by capacity cuts by new megacarriers, experts say. But the airlines likely would reduce the number of daily flights rather than eliminate service, a red flag for antitrust regulators, experts say.

"I don't look for widespread, wholesale cutting from the network," said Swelbar, research engineer with the MIT International Center for Air Transportation. "It's pruning [and] paring capacity."