The long wedding march for US airlines is nearing its end, with all the marriages bringing much-needed discipline into the industry.
A federal settlement November 12 finally allowed US Airways and American Airlines to merge into the world’s largest airline. This comes as no surprise to airline fuel buyers and others I talked to at a recent industry jet fuel forum.
Of course, it was a biased crowd. Airlines are doing all they can to control costs coming out of the recession, and they see a fourth megamerger in almost as many years as a needed path toward further capacity discipline.
“It will be positive for the whole industry,” one jet fuel buyer for a competing airline said. “The capacity control with these mergers is allowing the airlines to do a little bit better.”
The US Department of Justice said November 12 it settled its lawsuit challenging the merger, with the airlines agreeing to divest landing and takeoff slots, including 52 at Washington Reagan National Airport and 17 at New York’s LaGuardia Airport. The new American also agreed to maintain current hubs for at least three years, among other parts of the deal.
The federal worry, of course, is higher passenger ticket prices because of less competition. The airlines are more likely to worry about higher fuel costs, which along with labor costs have helped cause seven major bankruptcies since 2000.
The federal clearance had no immediate impact on jet fuel prices that have risen to more than one-third of an airline’s costs. “That’s too far off,” one Gulf Coast jet fuel trader said. “Good for the airlines, but in terms of jet fuel — no effect,” said a second.
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But sources said the deal would keep pressure on airlines to continue the capacity discipline they have adhered to since the recession, while also making it likely that the new American would not hedge its jet fuel book, contrary to the practice of nearly all US airlines.
If it had not been allowed to proceed, American likely would have aggressively added routes and flights in a bid to grow as big as United and Delta, but any sudden rise in fuel costs may have put American back into the bankruptcy court it is still trying to exit, sources said. It’s a perilous, cost-heavy industry that in total had lost money since the dawn of aviation until just a few years ago. Even now, US airlines can only tout profit margins of 2% or less.
Fuel buyers had expressed little doubt that the merger would be allowed to proceed, with some divestitures. But they said the industry was already doing all it could to contain fuel costs, from exchanging smaller planes for larger ones to rerouting into more efficient flight patterns.
Simple weight-control measures like swapping heavy flight books for tablets are saving millions of dollars. “Those are real deals. It’s pretty significant dollar savings. And it reduces fuel demand,” the fuel buyer said.
Mergers also have been part of that cost control. Delta and Northwest, Southwest and AirTran, and United and Continental each merged in the last five years. The $17 billion deal to create the new American still needs final approval by a federal judge, but the four major airlines will control 80% to 90% of the US market. That leaves little room for more marriages, even in in the unlikely event the federal government would approve them.
“After all is said and done, how many less flights will there be?” asked another market source. “The load factors are pretty decent on all those flights, so I’m not sure. I don’t recall any of the any other mergers, saying, ‘Wow, jet prices are really cheap now because of the Continental-United merger.’ ”
