Thursday, February 25, 2010

In Search of Mergers

United Airlines and US Airways are in the mood to merge, but will they find any takers?  See Jui Chakravorty, Two Big U.S. Airlines Open to Merger, Reuters, Feb. 24, 2010 (available here).  Unlike regulators in Washington, both carriers understand that consolidation in a tough operating environment is the only way to survive.  The problem, however, is that domestic capital is thin and crossborder megers are an impossibility under the strict U.S. cap limiting foreign ownership to 25%. 

US Airways claims that it is not interested in a foreign takeover.  Even so, its chances of finding a domestic partner are long.  In 1995 and 2000, the Department of Justice threatened lawsuits to block US Airways's acquisition by United.  Both threats were predicated on the implications of United taking over US Airways hub operations at high-use East Coast airports.  Perhaps, given the financial woes the airline industry has faced since 9/11, including record high fuel prices and the economic downturn, the Justice Department would be willing to take a more favorable view of a domestic link-up between the two.  That's assuming, of course, that United would even be interested in pursuing a new deal with US Airways.  United's 2008 plans to merge with Continental fell through and it seems the airline is more interested at the moment in pursuing deals to bolster its international market presence through the Star Alliance and its Madrid/Washington Dulles operating agreement with Ireland's Aer Lingus. 

Assuming that United is out of the picture, that essentially leaves US Airways with two options: Continental and American Airlines.  Delta Air Lines, after its takeover of Northwest in 2008, is no doubt out of the running.  American, the nation's second largest airline, may have a tough time convincing the DOJ that a merger with US Airways doesn't raise antitrust concerns.  Continental could be a viable option, but like United, it may be content with its international relationships for the time being.

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