Airline Weekly - November 16, 2009
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Airline Weekly - November 16, 2009

To Merge or Not to Merge: That is the question for Continental, which may yet decide to fully fuse with United

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Cover Story

To Merge or Not to Merge: That is the question for Continental, which may yet decide to fully fuse with United

Last summer—about a month before the Lehman Brothers saga, in fact—British Airways and Iberia said they were discussing a merger. But about four months before that, an even bigger merger discussion was taking place across the Atlantic: Continental was talking to United.

Ultimately, in late April 2008, Continental walked away, telling stakeholders that its best course was to “not merge with another airline at this time.” The decision was perhaps unsurprising. “This time” referred to a moment when the credit crisis was already underway, oil prices stood at about $120 a barrel, United had just suffered an enormous $537m net loss and Continental was starting to lose money itself. Not a great time, in other words, to assume the risks of a giant merger. Instead, the two airlines decided to form a tight partnership, culminating in Continental’s switch from SkyTeam to the Star Alliance last month.

Now flash ahead to the present. Oil prices are below $80 a barrel, Continental and United both reported summertime operating profits, both have recently bulked up on cash as credit markets eased and both have further downsized capacity and costs. In addition, the worst of the steep recession appears to be finished, with demand showing signs of recovery. Is this the right time for Continental and United to pull the trigger?

One giant factor is Delta’s merger with Northwest, announced last April just before Continental’s walk-away announcement. So far, that combination’s worked well, with little of the labor drama inherent to most airline fusions. Indeed, Delta is outperforming the Big Five financially this year. But is that because they’re capturing more corporate contracts with their bigger network and achieving economies of scale to cut costs? Or is the superior profitability simply the byproduct of each independently having a bankruptcy-cleansed cost structure that’s leaner than that of its peers? Delta’s management is unambiguous, claiming $700m in estimated synergies for 2009 alone. But Northwest and Delta had the two best profit margins of the Big Five in 2007, too, before the merger was even announced.

Another thing that’s changed from spring 2008 is Continental’s management. CEO Larry Kellner is on the way out, passing the baton to his colleague Jeffrey Smisek, who may... (391 of 1564 words)

Also Inside this Issue:

Never before has a misfit been so coveted in the marriage market. Hapless Japan Airlines continues to lose money, even in its peak season, but Delta and American are still turned on. The two American giants, of course, are merely looking to marry for money, understanding full well the power of a Tokyo hub to their respective global alliances.

British Airways and Iberia are marrying for money too. But can the combination of hubs in London and Madrid replicate the power of fusing Paris and Amsterdam? Or for that matter, can it be as successful as joining Frankfurt and Zurich?

JAL and Iberia weren’t the only airlines that reported losses last week. So did Singapore Airlines and, if you exclude a big forex gain, Korean Air. Let’s not even mention Air India.

On the other hand, there were success stories too. Turkish Airlines, Air Arabia and Copa had fabulous quarters. Gol did well too and TAM, while hardly lighting the world on fire, at least made a profit.

More generally, airlines of all shapes, sizes and geographies are reporting signs of traffic and yield revival. One carrier, in fact—Vietnam Airlines—even felt bullish enough to buy A380s, though politics may have had something to do with that.

So who’s left to report earnings? Europe’s Air France/KLM, easyJet and Air Berlin all go this week. A few carriers in East Asia like Asiana, Thai Airways, Malaysia Airlines and AirAsia will report shortly as well. And there may be some imminent plane orders: the Dubai Airshow is now underway.

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