LCC, UAUA Resume Merger Talks - Analyst Blog

Yet another round of talks between US Airways (LCC) and UAL Corp.'s (UAUA) United Airlines has been announced, as reported by New York Times.

The talks about merger between the two carriers first started in May 2000, but the deal was nixed by regulators and labor unions. Talks commenced again in April 2008. Now the talks have resurfaced again after the successful merger of Delta Airlines (DAL) and Northwest Airlines. CEOs of both the carriers are in favor of the deal and are of the view that the resulting entity will provide competition to Delta.

Low demand caused by economic slowdown resulted in lost market share for United Airlines. Its market share decreased to 8.8% in 2009 from 10.4% in 2004. It ranks third in the U.S. measured by traffic and market value. Currently, US Airways is the sixth by traffic and eighth by market value. The merger would provide significant cost advantages for the operation of both the airline, both of which emerged from bankruptcy, as one company creating the nation’s second biggest airline, (Delta airlines holding the first rank). United with its vast international network and limited domestic network would gain from US Airways’ alliance which is primarily a domestic carrier. On the other hand US Airways would benefit from the former’s global network.

The deal, however, has to gain approval from several regulatory bodies and pass an anti-trust review by the Department of Justice. The two carriers had earlier attempted to merge but the efforts had been blocked by regulators and labor unions.

The biggest hurdle to the deal is labor unions. Since airline industry is highly unionized, it becomes very difficult to integrate the workforce. US Airways, which was brought by America West in 2005, still faces labor unrest. Former America West employees remain on their original America West union contracts and have not completely integrated with their pre-merger US Airways counterparts.

It is being said that the deal, which will not be disclosed for next several weeks, will see an exchange of stocks and shares of the combining companies.

Consolidation between the ailing U.S. carriers is very much on the cards, in order to remain competitive. Airline profitability has been suffering for the majority of the past five years, leading to numerous firms leaving the industry. A high profile merger occurred in 2008 between Delta and Northwest Airlines, creating the largest airline in the world. These indicate hard time for the airlines. Low-cost airlines (LCC) have emerged as the winners in the troubled times, with most recording continued positive earnings.

The 1980s witnessed a major round of mergers. Delta bought Western, American acquired AirCal, Northwest possessed Republic, TWA acquired Ozark and US Air merged with Piedmont and PSA. We expect a spurt in merger and acquisition activity in response to the challenges facing the industry going forward.

However, consolidation in the industry is going to hit the customers hard who will be left with a limited number of carriers to choose from, besides facing high fares.
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