By Dave Carpenter
Saturday, May 31, 2008
United Airlines scrapped its latest attempt to combine with US Airways and create the world's largest carrier, formally backing away yesterday from a deal that probably would have meant fewer routes and higher ticket prices.
Now the question for those and other U.S. airlines is how to make money with oil near $130 a barrel.
The chief executives of the two airlines told their employees in separate messages that a combination was off "for now," though US Airways' Doug Parker indicated that it is unlikely for at least the rest of this year. They had spent months exploring a deal that would have enabled the carriers to shed costs: probably paring employees, trimming overlapping operations in the Washington area and parts of the West, and eliminating competing flights.
But the attempt was hampered by tightening credit markets and the airlines' declining financial outlook, which has dried up cash and made them less attractive to the banks that would have to provide capital.
Consumers may benefit from more choices for now, but the airline industry's accelerating deterioration is no cause for celebration.
"The more competition we have and the more pricing decisions by CEOs we have, the better for consumers," said Tom Parsons, chief executive of travel Web site BestFares.com. "It's still coming down to the bottom line, though: Can any one of these airlines survive in this era?"
United, the second-largest U.S. airline, and chief executive Glenn Tilton have been perhaps the strongest advocates for consolidation. But Tilton was unable to work out a deal with Continental Airlines after Delta Air Lines and Northwest Airlines agreed in April to pair up. He told Parker on Thursday that he was walking away from a chance to combine with US Airways.
In his message to employees, Tilton cited unnamed "issues" that are thought to include financing, integration and labor obstacles. He said United is "evaluating other options" that may include an alliance with Continental.
He also indicated that United will continue to cut capacity and pass on rising costs to customers, as other airlines have this year with higher ticket prices and more fees for baggage and other services.
"The failure of United to find a merger partner is not surprising given the fact that no airline, Southwest included, can survive at $130-per-barrel oil," said Harlan Platt, a finance professor at Northeastern University who follows the airline industry. "Either prices must rise by $50 a ticket, or massive layoffs and cutbacks are needed."
US Airways' Parker told his employees that he strongly believes that consolidation is required in the industry and that US Airways would benefit from participating.
However, he said, "After much work and many conversations with other airlines, we have come to the conclusion that consolidation involving US Airways will not occur at this time." Absent a deal with US Airways, luring Continental into its Star Alliance would be a step forward for United.
Under alliances, airlines can set pricing and schedules jointly to increase revenue without the integration problems of consolidation. But they remain subject to antitrust review by federal regulators.