U.S. Airways the Airline Industry

U.S. Airways

The airline industry has suffered from rising oil prices, plummeting profits, bankruptcies, and labor problems over the past several years. To make matters worse, the market is brutally competitive. There are currently six major carriers with hub-and-spoke networks, American Airlines, United, Delta, Northwest, Continental and U.S. Airways, and newer low-fare airlines such as JetBlue and Sothwest vying for market share. There is simply too much capacity that prevents or impedes profitability and industry consolidation is inevitable. Many analysts believe that there should only be three full-service network carries. On November 15, 2006, U.S. Airways led the way when it announced its intentions to acquire Delta for $8 billion.

This paper explores if U.S. Airways has made the right move and finds that there is cost saving potential, but that Delta is a poor fit for a variety of reasons..

On the positive side of U.S. Airways' acquisition of Delta is that it would produce a company that is the number one airline carrier in the United States. With more than $28 billion in combined annual revenue, the company would surpass the current number one carrier, American Airlines. Delta is currently the third-largest carrier in the United States in terms of revenue while U.S. Airways is a distant seventh. If the deal is completed, the combined airline will operate under the Delta name and service more than 350 destinations across five continents.

US Airways states that the combined companies will generate $1.65 billion in annual savings from optimization of the airlines' networks and combining facilities in overlap airports. The company would be able to divest of duplicate assets such as one of the shuttles the airlines operate between New York and Washington The deal is expected to reduce overall capacity by about ten percent. Reducing capacity means that fares are likely to increase which should increase profits. There are many opportunities to cut capacity such as Norfolk, Virginia where there are seven Delta flights to Atlanta, Georgia and seven U.S. Air flights to Charlotte, North Carolina.

Despite the positives, there are many challenges to the U.S. Airways purchase of Delta. The first is whether it can pass anti-trust scrutiny of combined market share and overlapping routes. The new airline would have a domestic market share of twenty-one percent and both carriers operate shuttles between New York and Washington. In 2001, the merger between U.S. Airways and United Airlines did not pass anti-trust review because of concerns about concentration of market power. This time around, Democratic control of Congress is likely to mean serious consideration of the consumer who is undoubtedly going to have less options and higher fares as a result of the merger. U.S. Airways is hoping to complete the acquisition of Delta before it emerges from bankruptcy in the first half of next year to gain further cost cuts that could be gained through the bankruptcy court. However, it's not clear if the anti-trust review process will move that quickly, especially since the Democrats are expected to go slowly.

Combining companies is always difficult, but U.S. Airways faces additional challenges than the typical merger. First, U.S. Airways and America West are still struggling to integrate their operations after their merger just last year. Only fifty-seven percent of America West planes have been repainted with U.S. Airway's logos and the companies have had huge labor integration problems, particularly regarding seniority. By adding Delta to the fray before getting its other merger under control, U.S. Airways may be taking on too much too soon. Secondly, Delta is hostile to the proposed takeover. The company had hoped to continue to operate as a standalone player after it emerges from bankruptcy in the first half of 2007. As a result of the hostile bid, competing bids are expected.

Thirdly, even though Delta is financially weak, it is larger than U.S. Airways. In 2005, Delta flew approximately eighty-six million passengers globally while U.S. Airways flew about thirty-seven million passengers. A smaller company taking over a larger one, especially one that had hoped to remain independent, is almost certain to increase resistance to integration.

Hub locations, one of the key factors airlines should review before making merger decisions, appear to have poor synergies. U.S. Airways has hubs in Phoenix, Philadelphia and Charlotte, North Carolina. Delta's hubs are located in Atlanta, Cincinnati and Salt Lake City. This means that the U.S. Air hub in Charlotte is in close proximity to the Delta hub in Atlanta and the U.S. Air hub in Phoenix is nearby the Delta hub in Salt Lake City. Typically, airlines seeking out acquisition targets seek to fill voids in hub locations rather than select airlines with lots of hubs close to their own. For example, critics of the U.S. Air offer state that United would have been a far better suitor for Delta because of the synergies between United's tran-Pacific routes and international networking and Delta's Atlantic and Latin American routes. And, critics believe that U.S. Airlines should have targeted bankrupt Northwest as an acquisition target rather than Delta. Most experts expect United to make a counter bid for Delta