Bankrupt for two years, United Airlines has a new role in mind if it can reorganize: Industry consolidator. Taking cues from the telecommunications...
Bankrupt for two years, United Airlines has a new role in mind if it can reorganize: Industry consolidator.
Taking cues from the telecommunications industry, the money-bleeding airline business needs to consolidate to regain its health, Glenn Tilton, United chairman and chief executive, told investors in New York yesterday.
Look for his carrier to act, he said.
Most Read Stories
- What drivers can and cannot do under Washington state's new distracted-driving law
- Foreign buyers drop off as Seattle housing market hits hottest tempo since 2006 bubble
- Why watermelon is good for you
- Put down that cellphone; distracted-driving law is here
- ‘A painful and frustrating experience’: Horizon Air scheduling havoc will continue into the fall
“For the industry to get to a position where it can genuinely make some progress through the current level of dysfunctionality, there need to be fewer network legacy carriers,” he said at the JP Morgan Airline Conference. “Just as telecom is plagued with overcapacity and commoditization, so is the airline industry, which must follow and consolidate.”
United lost $1.6 billion in 2004.
But it’s primed to be an acquirer because it has the best assets and will have used the bankruptcy process to strengthen its finances for mergers, Tilton said.
“The perception of what’s possible in the industry from two years ago has changed,” he said. “Two years ago … you would have not thought possible what we have already done.”
For a carrier struggling to attract financing to exit bankruptcy, talk of buying out competitors may have seemed audacious. But for an industry in such peril, all kinds of different approaches are being broached.
Still, analysts such as Jamie Baker with the conference’s host, JP Morgan, questioned whether the industry’s problems would be solved through mergers.
He argued that previous deals haven’t lowered costs or eliminated excess capacity. And United’s previous attempt at buying US Airways in 2000 was a “massive distraction.”
Federal regulators nixed that effort because of antitrust concerns.
Many barriers remain to airline mergers, according to other industry executives, including Gerard Arpey, chairman and chief executive officer of American Airlines.
“Given what industry has been through since 9/11, there is very little balance-sheet strength left and it takes a lot of money to successfully integrate two complex large organizations,” he said.
“I think you could argue that the government barrier [to airline mergers] might be lower, but I think the financial barrier might be higher.”
American was the last major carrier to merge with another airline, buying the assets of bankrupt Trans World Airlines in 2001 in a move that has paid few dividends in a deep industrywide slump.
“I can definitely comment to you that it’s real hard,” he added.
Still, regulatory hurdles may be lower because of the rise of low-cost, low-fare carriers, which have stripped traditional network carriers of their pricing power, Tilton said.
The bigger problem has been blending labor unions together, which causes fierce seniority wars and savages morale.
With United poised to terminate all of its pension plans, unions are becoming “more and more aware of the realities” of the industry’s dire economics, Tilton said.
Analysts agree unions have lost their ability to dictate wages and working conditions.
“We think unions must acknowledge that there aren’t any more golden eggs to squeeze out of the airlines,” said Ray Neidl of Calyon Securities in a recent research report.
The last obstacle, integrating different computer systems, facilities and aircraft fleets, “is just work,” said Tilton, whose background is in the oil industry. “I think there are synergies to be had.”