North Central Airlines and Southern Airways, two major successful regional airlines, said yesterday they have agreed in principle to merge.
Their announcement was the third instance of airline merger talk this week. On Wednesday, Continental Airlines and Western Airlines said they have begun exploratory discussions aimed at combining. On Monday, Texas International Airlines said it had acquired a 9.2 percent interest in National Airlines and was "considering the possibility" of taking over the larger carrier.
Industry observers believe the accelerated interest in airline consolidation may reflect a desire to gain more assets with which to operate in the freer, more competitive environment the Civil Aeronautics Board is seeking.
"They may really believe bigger is better even though the evidence does not support it in the airline industry" one CAB source said.
The proposed merger of North Central and Southern is subject to the negotiation of a definitive agreeement, the approval of directors and stockholders, and their lenders' consent. Like the other airline merger possibilities, a North Central-Southern combination would also require the CAB's approval and the president's, since the merger would involve some international routes.
It is unclear how the CAB would greet formal requests from the carriers for merger approvals. Nothing that the CAB has not been confronted with merger decisions in the last few years, CAB Chairman Alfred E. Kahn said yesterday, "It's tough to say what the CAB's policy is."
However, he said the merger trend is "worrisome" and one that "concerns us."
In considering airline mergers, the board looks at the possibility that actual competition may be reduced and the chance that the potential for future competition may be lessened. While easy entry into new markets can increase competition among airlines, economist Kahn worried that mergers might reduce the number of potential competitors for specific routes.
Although the CAB wants to move to such an environment, it is not a sure thing. Legislation that would reduce regulation of the industry - which could lead the way to a freer environment - is still pending in Congress, and the CAB's own efforts to open the industry through a freer entry policy are now being challenged in the courts.
North Central and Southern do not compete directly now although they both serve some of the same busy airports and have been growing in recent years. North Central, in particular, has recently become a very aggressive competitor and, without a merger with Southern, might very likely expand in Southern's direction.
North Central, based in Minneapolis, serves 93 cities in 17 states, largely in the northern part of the country, and two Canadian provinces. Last year, it earned $13.7 million on revenues of $229 million.
Southern, based in Atlanta, serves 70 cities in 19 states, with an emphasis on tthe South, and Grand Cayman Island in the Caribbean. Southern earned $8.3 million last year on revenues of $160 million.
Terms of the proposed merger call for the exchange of 2.2 shares of North Central common stock for each share of Southern common.