This Megamerger Is Doomed

Here we go again.

According to unnamed sources cited by The Wall Street Journal, UAL Corp.'s (Nasdaq: UAUA  ) United is in talk with US Airways (NYSE: LLC  ) about a merger. If completed, the deal would create the nation's second-largest carrier by revenue:

Carrier

Trailing 12-Month Revenue

Delta Air Lines (NYSE: DAL  )

$28.1 billion

UAL + US Airways

$26.8 billion

AMR Corp.

$19.9 billion

Continental Airlines (NYSE: CAL  )

$12.6 billion

Source: Capital IQ, a division of Standard & Poor's.

Rewind before you fast-forward
We've been down this road before. United CEO Glenn Tilton and US Airways chief Doug Parker last talked merger in early 2008. Tilton's predecessor, Jim Goodwin, brokered a deal in 2000 that failed when employees and antitrust regulators objected. Five years later, US Airways would combine with America West to form the company Parker leads today.

In the years since, Parker and Tilton have demonstrated an appetite for deals. For example, Parker spent months pursuing Delta as its former CEO, Gerald Grinstein, appealed to creditors for help. Grinstein's plan worked, and by February of 2007, Parker and US Airways had been officially rebuffed. Delta and Northwest Airlines would merge a year later.

Tilton, meanwhile, has favored both US Airways, and if the rumor mill is to be believed, Continental. I'm among those who bought the Continental story, writing in the wake of the completion of the Delta-Northwest deal:

The rationale for a UAL-Continental merger remains as sound today as it was [in 2006]. Both airlines fly similar aircraft. And since each carrier features distinct hubs from which they fly, there would be less integration work and fewer layoffs.

A fleet feat
I stand by that statement. A merger with Continental still makes sense, a merger with US Airways, less so. Here's why:

Aircraft

Continental

United

US Airways

Airbus A-319

--

55

93

Airbus A-320

--

97

72

Airbus A-321

--

--

51

Airbus A-330

--

--

16

Boeing 737

235

71

64

Boeing 747

--

30

--

Boeing 757

62

96

25

Boeing 767

26

35

10

Boeing 777

20

52

--

Embraer E-190

--

--

17

TOTAL AIRBUS

--

152

232

TOTAL BOEING

343

284

99

TOTAL EMBRAER

--

--

17

Source: Federal Aviation Administration records.

Fleets integration is important for many reasons, but none more so than maintenance. Boeing (NYSE: BA  ) and Airbus build their planes differently. Consequently, mixed fleets require a diverse set of technical skills to maintain, and that sort of talent doesn't come cheap. (Nor should it.) This is why, years ago, Southwest (NYSE: LUV  ) committed to flying just Boeing 737s.

Mixed fleets also add complexity when it comes to capacity planning. A Boeing 777 is always going to be most profitable flying long-haul routes, whereas as Embraer's (NYSE: ERJ  ) regional jets are always going to be best suited for short-haul flights. Getting the mix right, even in the face of weather delays and unforeseen mechanical difficulties, is essential to profitability.

Contrast that with Southwest. When every route is served by 737s, the entire fleet system becomes plug-and-play.

Yes, I realize that comparing Southwest with a global legacy carrier isn't exactly fair. Legacy carriers need mixed fleets in order to provide global service. All I'm saying is that, while some fleet diversity is inevitable, less diversity is better than more. Homogenous fleets like Southwest's cost less to maintain.

Going into labor
We also shouldn't forget history. Labor unions have long opposed any deal between United and US Airways. During 2000, shortly after the first merger attempt was unveiled that May, UAL pilots stopped working overtime. To my knowledge, no one has ever proved that pilots staged a work slowdown that summer, but there's no escaping the timing. It didn't look like a coincidence then, and it still doesn't now.

At US Airways, pilots in 2008 stood against a merger with United on the grounds that United was a poorly run carrier burdened with "mounting losses and a dismal balance sheet."

Meanwhile, inside the airline, pilots of the former America West and former US Airways are still fighting over merging their seniority lists. And I mean literally fighting. There's been at least one reported incident of fisticuffs between the two groups.

How would UAL pilots mix into this mess? Badly, I think, and not just because of the fisticuffs. US Airways CEO Parker recently said in a meeting with pilots that a provision in their contracts that would trigger a huge pay hike in the event of a merger would torpedo any deal unless it were worked around.

Not all signs point to Continental
If there's a problem with UAL combining with Continental it's that the FAA data from above is somewhat misleading. United retired its 737 aircraft last year. Tilton has since hinted at replacing Boeing's short-haul mainstay with narrowbody regional jets from Bombardier, Aviation Week reports. So the synergies with Continental may not be quite as strong as they first appear.

A deal that combines the fleets of United and US Airways could work. But if history holds -- and in the airline business it usually does -- labor unions would block this merger, just as they have twice before. Invest accordingly.

Would you buy stock in the combined company if United and US Airways were to merge? Discuss in the comments section below.

Embraer is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy is ready for its mid-morning snack.


Read/Post Comments (6) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 09, 2010, at 8:00 PM, Zman767 wrote:

    At US Airways, pilots in 2008 stood against a merger with United on the grounds that United was a poorly run carrier burdened with "mounting losses and a dismal balance sheet."

    Actually you've got it backwards! It was the UAL ALPA MEC Chairman and the UAL BOD that were vehemently against this merger and eventually convinced Tilton to abandon it.

  • Report this Comment On April 09, 2010, at 9:21 PM, TMFMileHigh wrote:

    Hello Zman767,

    >>It was the UAL ALPA MEC Chairman and the UAL BOD that were vehemently against this merger and eventually convinced Tilton to abandon it.

    It may have been that UAL's ALPA rep was against merging, but US Airways pilots were also publicly against a deal.

    Thanks much for writing and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On April 10, 2010, at 2:28 AM, FBEditorial wrote:
  • Report this Comment On April 10, 2010, at 10:20 AM, neilvnyc wrote:

    FTC is just one obstacle to such megamergers. The public is fed up with bail-outs hence there might be a political issue to.

    This is simply not a good climate for large M&A. On the other hand, middle-market deals should abound in 2010.

    Neil Venters

    http://twitter.com/neilvnyc

    http://www.mergersandacquisitionsjobs.org/

  • Report this Comment On April 10, 2010, at 8:16 PM, tim757pilot wrote:

    Your analysis of the CAL and UAL fleet is dead wrong. At least 30% of the parts and maintenance commonality between aircraft comes from powerplants. UAL's 757, 767 and 777 aircraft all have Pratt & Whitney power, while CAL's 757's have Rolls Royce and CAL's 767's and 777's have GE. Also, CAL's 757, 767, and 777 average fleet age is much, much younger than UAL's. Finally, UAL has 747-400 and Airbus aircraft CAL does not operate and CAL has more than 200 737 NG Boeing aircraft UAL does not operate. UAL had much older 737-300/500 aircraft, which are all parked and no longer part of its fleet. Finally, CAL has FIRM orders for 787's with deliveries beginning just over a year from now, while UAL has some proposal for possible 787 deliveries years in the future. Please do not try to create a deal out of nothing.

  • Report this Comment On April 11, 2010, at 9:46 AM, feefor2 wrote:

    The assessment about fleet commonality being a rationale for a merger is dead wrong. For legacy airlines the benefits of a more complex fleet far outway the incremental costs of scheduling and maintaining those aircraft. the key is matching capacity to demand. Just ask Delta--they now fly virtually every type of aircraft available. Do you see them rushing to rationalize their fleet? Legacy airlines can access revenue streams that "low cost" airlines can never touch.

    Further, even though United and Continental fly some of the same "types" of aircraft e.g. 737's for example, they are hardly the same. Different models, engines, configurations, etc.

    The probability of any deal here is low, but the rationale for a United/Continental plan makes more sense. Just not for any of the reasons noted in the article.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1148628, ~/Articles/ArticleHandler.aspx, 8/28/2014 9:26:26 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement