Majestic Research

The Dallas Morning News

American Airlines Could Pair Off With US Airways or Cut in on Northwest, Delta

By Terry Maxon
Published: April 16, 2008

With Monday’s Delta-Northwest merger announcement, the mating dance has begun for the big U.S. airlines. But will the world’s largest carrier, American Airlines Inc., wind up with a dance partner?

As Delta Air Lines Inc. and Northwest Airlines Corp. explained their deal to investors and the news media Tuesday, speculation began growing about a possible deal joining Continental Airlines Inc. and UAL Corp.

If those four airlines pair up, that leaves slim pickings for Fort Worth-based American—either US Airways Group Inc., an airline with a small international presence and little to offer across the Pacific, or some smaller airline focused mainly on North America.

Calyon Securities airline analyst Ray Neidl had a suggestion Tuesday: American could start a bidding war to woo away Northwest and its valuable Asian routes.

“They’d [American] be a good fit for either Delta or Northwest, and I don’t entirely rule out them coming in as a spoiler. I’m not predicting it, but it’s a possibility,” Mr. Neidl said.

“It’s probably their best play, to make the deal more expensive for Delta or maybe put themselves into position to get some spin-off assets,” he said. “It would be difficult, though.”

Another industry analyst, Robert McAdoo of Avondale Partners, also seemed to like the idea of an American run on Northwest.

“It seems to me that adding Northwest and its Asia routes probably does more strategically than any other acquisition that’s available,” he said.

American has a robust trans-Atlantic system, anchored by a healthy supply of takeoff and landing rights at London’s Heathrow Airport picked up 16 years ago with a purchase from Trans World Airlines Inc. American is also the leading U.S. carrier to Latin America, with an extensive system of routes and rights acquired from Eastern Air Lines Inc. in 1990.

But the locally based airline lags far behind both Northwest and United Airlines Inc. when it comes to Japan and the Far East, with Northwest a long-established presence in Asia and United building on the Pan American World Airways Inc. network it bought in 1985.

While American flew 5.6 billion available seat miles across the Pacific in 2007, Northwest racked up 23 billion available seat miles, and United operated 32.5 billion.

American has remained close-mouthed on its plans, but analysts will have a chance today to quiz top executives as the carrier discusses first-quarter earnings. In the past, American executives have told Wall Street that fewer airlines could make the industry healthier.

“There’s never been a magic bullet to solving the industry’s woes, especially with fuel prices at record levels,” American spokesman Roger Frizzell said Tuesday. “But, in general, consolidation could be a step in the right direction.”

But he added that “there are many challenges to consolidation, mainly labor, regulatory issues and integration, and it remains to be seen whether it will produce benefits in the airline industry.”

American “will stay focused on running the best business possible, but we’ll also stay mindful of the industry landscape as potential opportunities present themselves,” he said.

While many industry observers have dismissed US Airways as a target for American, Mr. McAdoo said it could be a good match.

US Airways doesn’t have much of an international route system, he said, but it does have a huge presence in eastern U.S. markets that could lure more passengers to American. US Airways could feed American’s trans-Atlantic and Latin America flights up and down the eastern seaboard, he said.

“I think either Continental or US Airways would be a good addition to the American system,” Mr. McAdoo said. “Some people say [that] because you’d so control Texas that you couldn’t get [a merger with] Continental approved. Given Southwest’s presence in Texas, I don’t think that’d be a big impediment. And there seems to be value in US Airways beyond what people think about.”

When proposing a merger with Delta in 2006, US Airways called for cutting capacity. The possibility had competitors happily contemplating what routes, airport gates and other assets they might snap up.

Southwest Airlines Co. officials have said they’re ready and willing to grab assets other airlines might want to divest.

This time, however, Northwest and Delta aren’t talking about lopping off a lot of branches since the route systems of the two carriers overlap little. Other airlines may find few gems spun off in a Delta-Northwest merger, said Matt Jacob of Majestic Research.

“Don’t forget, the first routes that are shed are the ones that are least profitable quite often,” he said. “They’re the most competitive and the most duplicative, and with oil prices reaching all-time highs, diving into those won’t make the most sense.”