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By Jennifer Yousfi
Continental Airlines Inc. (CAL) said it would forgo a merger with UAL Corp.'s (UAUA) United Airlines unit, while all-business-class carrier Eos Airlines Inc. ceased operations after filing for bankruptcy protection – two weekend developments that illustrate the escalating pressures that domestic air carriers continue to face.
Continental's management ended months of speculation by announcing that a merger with troubled United would do more harm than good, even with the intense pressure airlines are under due to record high oil prices and the competitive threat posed by the recent deal between Delta Air Lines Inc. (DAL) and Northwest Airlines Corp. (NWA).
"The risks of a merger at this time outweigh the potential rewards," Chief Executive Officersaid in a letter. "While some would prefer to see Continental pursue a merger, we strongly believe we have made the right decision."
As for the niche carrier Eos, in grounding itself it joins, Aloha Airlines and , which have already ceased operations, as well as U.S. charter operator Champion Airlines, which announced plans to stop flying at the end of May.
Frontier Airlines Holdings Inc. (FRNT) also has filed for bankruptcy protection, but at this time plans to keep flying.
The Eos downfall was "no surprise," Calyon Securities airline analyst Ray Neidl told The Associated Press. "We saw it happen with other smaller, undercapitalized airlines. Basically, there are too many airlines. We're in a period of consolidation. The weaker guys, [facing] $120-a-barrel oil, are finally succumbing."
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With jet fuel the single largest expense for carriers, merging to capitalize on economies of scale makes sense. And as the world's new largest carrier, the Delta/Northwest merger now has the competitive advantage.
But while Continental still might be able to go it alone – even against a stronger potential rival – United is in a much weaker financial position and needs a partner. The carrier wasted no time in turning its attentions to U.S. Airways Group Inc. (LCC).
"Consolidation is under way – ensuring you have the right partner is everything," United Airlines Chief Executivesaid in a statement. "We will pursue all options to ensure a strong, sustainable future for our airline."
While talks with U.S. Airways are not yet at the advanced stage United had reached with Continental, management is doing its best to accelerate discussions, hoping to finalize any deal before the end of the year – and before there's a possible change in the political party in the White House.
When it comes to mega-mergers – and industry consolidations in which there might be a perceived decline in competition – the Bush administration is seen as being more of a proponent for deals that require Justice Department approval in order to proceed.
Analysts say that U.S. Airways and United could mesh well due to similar pay structures and complementary fleets. In addition, United and U.S. Airways are both members of the Star global marketing alliance.
Bigger is Better
Atlanta-based Delta announced it would buy the Eagan, Minn.-based Northwest for $3.63 billion, all in stock, creating a single carrier with a combined enterprise value of $17.7 billion.
Delta Chief Executivewill be chief executive officer of the combined company. Delta Chairman will become chairman of the new Board of Directors.
The carriers decided to go ahead with a merger despite being their respective pilot's unions being unable to come to agreement. Delta's 7,000 pilots endorsed the deal by supporting a new labor agreement that includes an equity stake.
While Northwest's 5,000 pilots will be asked to join a contract before the deal closes, the union is expected to oppose deal after the unions could not agree on how to assign pilot seniority – a key determinant of shifts, pay scale and what airplanes they fly – in the new organization.
It is expected that the Delta/Northwest merger will be approved later this year.
News and Related Story Links:
- Bloomberg News:
Continental Air to Shun Mergers, Remain Independent
- The Associated Press:
- Money Morning: