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.
