Continental to join Star, link with United

photo by sea turtle

Even after merger talks between United and Continental fell through a few months ago, the two airlines are still interested in cooperating - yesterday, they announced plans to start codesharing and for Continental to join Star Alliance, of which United is a member. According to an email sent out to Mileage Plus members, United expects the deal to start sometime in 2009.

It remains to be seen what this means for US Airways, which has been a Star member for a few years now. It's possible that it could remain in Star, but having three US airlines in the same alliance could lead to some overlap.

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Continental rejects United as merger partner

photo by Drewski2112

Well, it was a bit of a surprise. After the linkup between Delta and Northwest a few weeks ago, many (myself included) expected to see continued industry consolidation. And a merger between United and Continental was seen as a likely one; rumors floating around pointed to an announcement as soon as this week. The merger would have created an airline that might rival Delta/Northwest in size, as well as international coverage (United's strong Asia presence would fit nicely with Continental's extensive European route network).

But last week, a little something occurred that made Continental think twice: United posted a $542 million loss for the first quarter of 2008. Even in the airline industry, a half billion dollar loss is pretty big, and it's a sign of an ailing airline. United's huge loss scared away Continental, which announced on Sunday night that it was abandoning merger talks with United.

The airline made the announcement in a letter to employees from CEO Larry Kellner and President Jeff Smisek. "We want you to know that our Board of Directors met today and has unanimously supported management’s recommendation that, in the current industry environment, the best course for Continental is to not merge with another airline at this time," it read... The Board very carefully considered all the risks and benefits of a merger with another airline, and determined that the risks of a merger at this time outweigh the potential rewards, as compared to Continental’s prospects on a standalone basis." The letter - which never identified United Airlines by name - went on to say that the airline will "continue to review potential alliances and our membership in SkyTeam. We are considering alternatives to SkyTeam as we carefully evaluate which major global alliance will be best for Continental over the long term."

Continental's decision is certainly a setback for United, which has been looking to merger for some time now. I don't think that the decision to not merge was arrived at easily, since there could have been some benefits from linking with United. But the folks over at Continental are betting that a merger with United, which is racking up heavy losses, could also drag them down as well. Even though Continental definitely wants a better Asian route network - and they could have obtained it through a merger with United - it might be able to get it another way. If United files for bankruptcy again, Continental might be able to grab the Asian routes by themselves, without having to deal with United's poor financial shape.

Continental has also reportedly been in talks about forming a three-way alliance with American Airlines and British Airways, although, from an anti-trust standpoint, this might be a bit difficult.

And as for United - well, this is certainly bad news. CEO Glenn Tilton tried to remain upbeat in a statement released Sunday night: "Our strategy is consistent. Consolidation is underway - ensuring you have the right partner is everything. We will pursue all options to ensure a strong, sustainable future for our airline and will not shy away from the tough choices necessary to create value for our shareholders and benefit our employees and customers." A United-US Airways merger might happen, but I don't know if it will do much good. Both airlines are still dealing with their respective trips to bankruptcy court, and I don't think that a merger between them will solve anything.

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Eos Airlines shuts down

New York-based premium transatlantic carrier Eos Airlines filed for Chapter 11 bankruptcy protection yesterday and operated its last flights earlier today. The airline flew Boeing 757-200s between New York-JFK and London's Stansted Airport, but had plans to expand to other destinations.

Eos' shutdown was not necessarily expected, but given the current state that the industry's in, it wasn't too surprising, either. MAXjet, another premium transatlantic carrier, stopped flying in December.

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US Airways CEO mentions mergers

photo by caribb

In a letter sent to employees yesterday, US Airways CEO Doug Parker said that "airlines are going to have to make dramatic changes" if they want to survive. Although he said that he couldn't "comment on any specific discussions or transaction," he said that the media have suggested that US Airways is in merger talks with United and that American would make a good match as well. "Rest assured," said Parker, "if US Airways chooses to participate in any industry consolidation, we will do so because we believe it is the best interests of our employees and our airline."

Would US Airways be a good match for United, which has been seeking out merger partners? They already code-share (a benefit that the Delta/Northwest combination has), and US Airways has a strong presence in the Northeast and Southeast (two areas where United's route structure is weaker). But I don't see US Airways' route network as being as much of a plus for an airline like United, which needs more international routes. Of the six largest legacy carriers, US Airways has the smallest international route network. United might prefer a rumored merger with Continental to one with US Airways.

US Airways still has problems of its own, too, from its last merger (between US Airways and America West). And let's not forget that the last time United and US Airways tried to merge, it was rejected by the Justice Department on anti-trust grounds.

By the way, here's the original message sent out by Parker (posted on the US Aviation boards):

From: Corporate Communications
Sent: Wednesday, April 16, 2008 8:36 AM
To: Corporate Communications
Subject: USNews Now: An Important Message from CEO Doug Parker
Importance: High

An Important Message from CEO Doug Parker

April 16, 2008

Dear Fellow Employees,

With the recent news of a potential Delta/Northwest merger, analysts and media are speculating about the next potential combination. While we had hoped to remain on the sidelines of this speculation, today’s Wall Street Journal suggests we may be in merger talks with United and another article in the Dallas Morning News suggests we might make a good merger partner for American.

While I can’t comment on any specific discussions or transaction I certainly didn’t want you to hear this speculation without hearing directly from me about what this might mean for US Airways.

Most of you know my views on consolidation and those have not changed. Our industry is far too fragmented and consolidation, if done properly, could result in a much healthier industry which would be good for our employees, our customers and the communities we serve. Rest assured if US Airways chooses to participate in any industry consolidation, we will do so because we believe it is the best interests of our employees and our airline.

Despite all of the challenges of merging two airlines, we are a much stronger company today as a result of the merger of US Airways and America West. We posted the highest pre-tax margin of the big six airlines in 2006 and even with our operational challenges we posted the second highest pre-tax margin in 2007.

And we have an improving airline. We’ve made great strides with our operational improvement plan, including top three performances in on-time arrivals for three consecutive months. As we continue through 2008, we feel extremely good about our ability to continue to improve our operational performance relative to the industry.

But we can't ignore what's happening in the world around us. Oil has risen to over $113 per barrel and Wall Street is anticipating a recession that, if it happens, will lower all airline revenues. And the DL/NW combination potentially creates a formidable competitor. In that world, all airlines are going to have to make dramatic changes to their existing business models in order to be viable.

I know airline merger speculation can be distracting so for now, I encourage all of us to remain focused on running a great airline. Our work on the reliability, convenience and appearance initiatives continues and we are running an extremely reliable airline as a result. Whatever we do, we will always take great care to ensure the path we choose returns value to our shareholders and customers, and also provides long-term stability for our employees.

Thanks for all you do for our customers and keep up the great work.

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Delta and Northwest announce merger

It's official: the long-anticipated merger of Delta Air Lines and Northwest Airlines has finally been announced. The combined carrier - already billed as "America's premier global airline", will be known as Delta and will be based in Atlanta. Delta CEO Richard Anderson would head up the new airline.

A press release by the airline touted the benefits of the merger; it "creates a company with a more resilient business model that is better able to withstand volatile fuel prices than either can on a standalone basis." The release went on to say that "the merged airline will maintain all hubs at Atlanta, Cincinnati, Detroit, Memphis, Minneapolis/St. Paul, New York-JFK, Salt Lake City, Amsterdam and Tokyo-Narita... Delta customers will benefit from Northwest’s extensive service to Asian markets and Northwest’s customers will have access to Delta’s strengths across the Caribbean, Latin America, Europe, the Middle East and Africa."

Of course, the merger still needs to clear regulatory hurdles, and there's always the issue of the pilots at both airlines, which haven't yet agreed on seniority. But if the merger goes off successfully, it will create the world's largest airline. Also, keep a look out for a United-Continental merger, which has been rumored to occur if a Delta-Northwest merger was announced - it could be announced very soon. (Although United has favored a merger for some time, Continental has said it would consider it only if a Delta-Northwest deal went through.) More details of the Delta-Northwest deal will be revealed tomorrow at a press conference featuring both CEOs in New York, but until then, check out the website that Delta set up about the merger.

I've also posted below the internal memo sent out to employees today at Delta, which sheds a bit more light on the merger process (click on the images to view them at full size):

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Virgin America gets more support

photo by Drewski2112

Even after a wave of airline bankruptcies has recently shaken the US airline industry, Virgin Group chairman Richard Branson said on Thursday that he is "extremely pleased" with the airline's performance and that it is "well ahead of budget". He was also predicted that "in three or four years time, it'll be flying to all the major American cities."

In addition, the Wall Street Journal reported today that British and American investors in the airline are planning to infuse approximately $100 million of new capital as the airline plans to expand. The money will certainly help Virgin America stay afloat amid high oil prices and a weak economy.

CEO David Cush has said that Virgin America is on track to become profitable by 2010, although the airline is currently losing money. He also said that the airline might be able to take advantage of some of the recent turmoil in the industry, which has caused other airlines to scale back service and reduce capacity in some markets, to gain a foothold in markets where it doesn't currently operate.

In January, Virgin America was able to sell 65% of its seats - significantly lower than the 80% industry standard. Cush has recently said that this figure has improved to just over 70% - still below average. Branson, however, stated that the low figure is not surprising, given that the airline started operations eight months ago.

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Frontier files for bankruptcy

photo by Drewski2112

Denver-based Frontier Airlines filed for Chapter 11 bankruptcy protection earlier today, citing a move made by its credit card processor, First Data Corporation, which has started withholding a larger percentage of proceeds from ticket sales.

"To be clear, we filed for very different reasons than those of other recent carriers, and our customers and employees can be confident that we intend to keep on flying and providing outstanding service and products," said Sean Menke, Frontier president and CEO. "Given the recent progress we have made towards strengthening our balance sheet and obtining additional financing, it is truly unfortunate that we have had to take this action."

Frontier's bankruptcy filing stems from what are known in the industry as "holdbacks". A bank that processes an airline's credit card purchases holds onto a certain percentage of the proceeds until the passenger actually flies. As of now, that percentage for Frontier is locked at 45%. But First Data was going to increase that to 50% immediately and to 100% by May 1. By filing for bankruptcy, Frontier can avoid the increase.

Frontier isn't in dire straits like Aloha and Skybus were, but right now, a lot depends on public opinion. Travelers have been hearing about a lot of airline bankruptcies recently, and even if Frontier isn't on the brink of collapse, a bankruptcy filing might scare away customers.

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