We went to bed last night with the news United and US Airways were in negotiations to merge for a third time. We awake this morning to the news British Airways and Iberia have finally signed their long awaited merger agreement. British Airways will change its name to International Airlines after completing the deal with Iberia, expected in December of 2010. If United and US Airways were to merge, what would they change their name to? US Domestic Mess? Ground Hog Air?
United and US Airways broke off marriage discussion #2 in June of 2008 as oil was on its historic march to $147+ per barrel. Ultimately, United settled on a virtual STAR alliance partnership with Houston-based Continental. The UA/CO relationship makes sense as both companies have an international focus with hubs in the largest U.S. cities where large pools of business travelers avail themselves to airline service across all continents. A United – US Airways combination ensures regulatory scrutiny of slot holdings at key east coast airports in New York and Washington, DC. I don’t get the benefit of United – US Airways today anymore than when I wrote that I did not like the deal on June 2, 2008.
To my eyes, the real United news yesterday was the company reporting its preliminary March traffic results. “Total consolidated revenue passenger miles (RPMs) increased in March by 3.2% on a decrease of 2.7% in available seat miles (ASMs) compared with the same period in 2009. This resulted in a reported March consolidated passenger load factor of 83.5%, an increase of 4.8 points compared to 2009. For March 2010, consolidated passenger revenue per available seat mile (PRASM) is estimated to have increased 21.5% to 23.5% year over year. Consolidated PRASM is estimated to have increased 3.2% to 5.2% for March 2010 compared to March 2008, approximately 3.0 percentage points of which were due to growth in ancillary revenues.” Those are not words from a company seeking to do a deal for the sake of a deal – right?
The Delta – Northwest Merger Template
United CEO Glenn Tilton and Continental CEO Jeff Smisek have pointed to the success of the Delta – Northwest merger, citing that combined company’s market capitalization of $11+ billion. Today, pre-market, United’s market capitalization is $3.2 billion, or nearly 5 times greater than it was a year ago. US Airways market capitalization is $1.1 billion or nearly 2.5 times greater than it was a year ago.
Today, Delta’s market capitalization is roughly equal to 40 cents per dollar of its trailing twelve month revenue; United’s market capitalization is equal to 19 cents per dollar of trailing twelve month revenue and US Airways is 11 cents. If United and US Airways were to be accorded the same relationship of market capitalization to revenue that Delta is today, the market would need to multiply the pro forma market capitalization today by nearly 2.5 times. An unlikely scenario.
Three of the Reasons Why I Do Not Like the Rumor
- The Delta and Northwest networks were largely complementary when the two carriers combined. The size of Northwest and Delta’s network is larger than a combined United and US Airways. However, the fit of the network is more important than size. The ability to leverage one network against the other in order to create new city pairs to sell is critical to any network’s success. Delta and Northwest made for a true “end to end” combination whereas United and US Airways possess some meaningful overlap that would likely require DOJ mandated carve outs. Any carve-outs would immediately erase some of the perceived benefit of a combined United and US Airways in the eyes of the market. Simply why do I want DOJ interference in the first place?
- Today, United has several immunized joint venture applications pending before the regulatory bodies with partners across each the Atlantic and the Pacific. These relationships are valuable and likely have been recognized by the financial markets as such. Why would United possibly jeopardize the international potential to merge with a U.S. domestic-oriented carrier?
- Finally, and possibly most importantly, the Delta – Northwest combination was blessed to have a pilot leader in place that understood consolidation and globalization are not only inevitable but are important to the success of his company and therefore the pilots he represents. We have talked about Capt. Lee Moak here many times. The Delta – Northwest combination had a merged seniority list and negotiated collective bargaining agreement in place before the deal was consummated. This seemingly simple fact allowed the newly merged company to enjoy the ability to reconfigure the combined network from the outset. The benefits were/are many and could be the subject of another blog post or a master’s thesis or a doctorate.
Whereas Moak and his Northwest counterparts put into place the unthinkable in only five months, the pilots at US Airways and America West continue to emulate the Hatfields and the McCoys five years after their two companies merged. What has transpired at that company since 2005 is mind-numbing and underscores the broken model of labor language that pervades the U.S. industry today. Sadly, the professional aviators at that combined company have suffered due to the leadership vacuum that persists on both sides of the argument.
Combine the dysfunctional relationship between the US Airways and America West pilots with the entitlement mindset of the United pilots (and all United employees for that matter) and you have a mess. A mess that in no way promises the revenue synergies Delta and Northwest mined almost immediately that facilitated an outsized market capitalization relative to other legacy carriers.
Don’t get me wrong, I am for any type of commercial relationship benefitting the industry generally and individual companies specifically. I was a fan of United – US Airways #1 in 2000. I was not a fan of United – US Airways #2 in 2008. And I am not a fan of United – US Airways #3 today. Each company’s fundamentals are improving so I don’t understand the rush – assuming there is one. .
The third time is not a charm. I say do no harm to the improving fundamentals at each company. I do believe the risk of irrelevance in the marketplace is higher for US Airways than it is for United. There was a time – albeit a short period – when the fundamentals of the U.S. domestic market were outperforming international operations. That is not the case today and is but one US Airways’ attribute that will not prove to be a winning scenario over the long term given the cost structures of the legacy carriers.
The one mantra that always lived with me at the negotiating table – you can always do a bad deal.
More to come.
[Note: the author holds shares in United Airlines]