The U.S. airline industry should consolidate sooner rather than later, and preferably before the end of the Bush administration in early 2009, the chief financial officer of UAL Corp said on Monday.
With the U.S. economy slowing and oil prices soaring, U.S. carriers are under pressure to save their fledgling recovery. UAL, the parent of United Airlines, has been one of the leading proponents of mergers, but has not launched any offers.
We want consolidation to happen sooner rather than later, and we think that doing something now and getting it done in this administration is a good thing, UAL CFO Jake Brace said at the Reuters Aerospace and Defense Summit in Washington.
The transition to any new administration -- Republican or Democrat -- could slow the progress of carriers pursuing consolidation, Brace said. That is one reason the UAL would like to see mergers soon.
If we were able to control that outcome, that's what we'd do, Brace said.
Others think the current Republican administration of President George W. Bush may be more willing than a potential Democratic administration to approve a big airline deal, which could increase pressure for airlines to act soon.
It would seem that this administration has been relatively accommodative toward large mergers, Tom Horton, chief financial officer at American Airlines parent AMR Corp, told the Reuters Summit.
I would think that some would view that as a sign that this is a better time to do (a merger) than in the future, he said.
I think there is an argument to made that the industry is too fragmented and consolidation could lead to better outcomes for investors, customers and employees, Horton said.
The Bush administration has approved two mergers involving major airlines: TWA-American in 2001 and US Airways-America West in 2005. But both involved at least one bankrupt carrier, which can lower the bar for Justice Department antitrust approval.
A United-US Airways merger proposal foundered in 2001 over competition concerns.
UAL, like other major carriers, is under pressure from investors to consider options that would ensure long-term survival in a competitive industry while boosting the company's market value.
In November, hedge fund Pardus Capital Management LP urged UAL and Delta Air Lines to merge. Delta denied reports that it was in merger talks with UAL but said it hired advisors to help it review merger options.
UAL managers have long advocated industry consolidation, but have not publicly said they are in talks with a potential partner.
The airline industry is in recovery after a five-year financial downturn.
Major carriers have restructured and are better prepared for competition from the likes of Southwest Airlines and JetBlue Airways. UAL exited bankruptcy in February 2006 after slashing costs by $7 billion.
But record energy costs and a weakening U.S. economy have cast doubt on the industry recovery.
The industry hasn't fixed itself. I think we're going to see a difficult fourth quarter for the U.S. airline industry given oil prices where they are, said AMR's Horton.
Due to uncertainty over the industry's future, stocks have fallen sharply this year. The Amex airline index .XAL is down more than 30 percent and UAL shares are down 10 percent since January 1.
Aside from consolidation, airlines are looking into spinoffs as a way to boost company value.
Brace said the company expects to receive bids soon for the potential divestment of its maintenance operations.
However, the Teamsters union said on Monday it would fight any attempt by the carrier to spin off its maintenance unit, as it looks to rally workers for its machinists organizing drive at United.
UAL also plans to generate a separate profit and loss statement for its Mileage Plus frequent flyer program beginning January 1. Brace declined to say when the company might spin off or sell its frequent flyer program, but he said the company would prefer to make a decision on that after a merger.