Do you think there are too many airlines to choose from? Well, that might not be the case for very long. Looking at the number of proposed mergers and consolidations taking place in the airlines industry, the choices could continue to dwindle, and perhaps sooner than expected.
Last week, US Airways (NYSE: LCC) Chief Executive Doug Parker said that his airline was the only dominant carrier left to enter a mergers-and-acquisitions deal, and added that he wasn't averse to aligning with the right partner. Parker, however, said his airline wants to remain a strong stand-alone carrier. Could more consolidation lie just around the corner?
Possible, failed, and missed M&As
Possibilities of a merger do exist. And, according to Bloomberg, the candidates with which a marriage could take place are United Continental Holdings (NYSE: UAL), Delta Air Lines (NYSE: DAL), and AMR Corp. (NYSE: AMR), parent of American Airlines.
On the other hand, smaller carriers such as JetBlue (Nasdaq: JBLU) and Alaska Airlines (NYSE: ALK) may get more realistic looks from US Airways considering their scale and unique route offerings. But, ultimately, such deals have a remote possibility -- for now, at least. Consolidations such as these would possibly lead to profit gains stemming from more efficient operations, as existing facilities would get better utilized and the deadweight ones would be removed.
This is not the first time that US Airways has been considering joining forces with a fellow airline. Back in 2006, its attempt to merge with Delta veered off course. Later in 2008 and 2010, talks of a deal with what was then United Airlines fell through. US Airways didn't taste success even as the industry witnessed a spree of consolidations. Last year, United Airways acquired Continental to become the largest carrier in the United States. In 2008, Delta acquired Northwest Airline.
Meanwhile, Southwest (NYSE: LUV) is considering a bid for AirTran (NYSE: AAI). Clearly, airlines are seeing sense in joining forces in an attempt to reduce competition. Consolidation helps reduce competition and leads to greater economies of scale and lower costs. Plus with fewer competitors vying for customers, airlines theoretically have greater price control. This, in turn, leads to higher profits, which leads to happier investors.
What a consolidation would mean
Consolidation isn't an easy game though. It is a very calculated and considered affair. In the case of airlines, it could be even more intricate. While considering a takeover, a carrier must take into account the routes the other carrier operates because acquiring a company operating in different areas greatly enhances the market base.
Cost efficiency is another reason why airlines are so bullish on mergers. Aligning routes also helps get rid of crisscrossing flights leading to fewer flights.
In view of high oil prices arising out of tensions in the Middle East, and U.S. carriers being forced to implement capacity cuts following a difficult start to the year, consolidation is not the worst option.
The Foolish bottom line
A merger might benefit US Airways, as it may help it increase its revenues and profits by expanding its network of flights and enabling more efficient operations. The possibility of US Airways joining forces with another big player remains strong. While this might pinch consumers' pockets as a result of higher fares, it would also provide investors with higher returns as the company prospers. Whether a deal takes place remains to be seen.
