Sorry History of Aviation Mergers (LCC, CAL)

Includes: AAL, UAL
by: The Stalwart

The Stalwart submits: As United Airlines prepares to come out of bankruptcy, its chief is predicting a wave of consolidation in the U.S. aviation sector. As explained by the Financial Times:

Changes in the regulatory environment are likely to permit mergers between major US airlines, Glenn Tilton, Chairman and Chief Executive of United Airlines, said on Thursday as the carrier looks to a future beyond three years in Chapter 11 bankruptcy protection.

Many industry observers expect a reorganised United to take part in future consolidation, after a bid to buy US Airways in 2000 was blocked by the US Department of Justice. US Airways was subsequently acquired last year by America West, a smaller rival, but speculation continues that United could eventually combine with Houston-based Continental (CAL).

Given the prolonged troubles that the industry is having, it would make sense that several redundant airlines (NorthwestUnitedDeltaAmericaUSairways) might look to hook up and get trim, right?

Enplaned looks at the bad track record of aviation mergers and explains why. Mergers include Northwest Orient/Republic Airlines (1986), Delta/Western (1987), and the more recent U.S. Airways/America West. Not surprisingly, much of the problems stem from labor relations:

Large US airline mergers between equals or near-equals have a bad record. One reason is labor issues. In a post last month responding to reader questions, we discussed the seniority integration issues at the new US Airways (LCC), formed from the merger of the old US Airways and America West.

Most airline employees live and die by their seniority position. For instance, the most senior pilot gets his/her pick of available assignments, the second highest picks second, down the line. So how the two seniority lists are integrated is a very big issue.

This causes unbelievable stress. An ALPA (Air Line Pilot Association) official once told us he’d never seen a merger involving ALPA where ALPA hadn’t ended up being sued by groups from both sides (yes, suing their own national union) over integrating the seniority list. And it’s not just pilots -- all union groups go through some sort of seniority integration process and they almost all fight over it.

All of this is to say that we think Glenn Tilton, as someone who only entered the industry three and a half years ago, seriously underestimates the risks of merging two large airlines. To be fair, he's in good company. People love talking about consolidation. It's so exciting moving divisions and armies around the map. Much more fun than focusing on the minutia of running a good business. But there are good reasons why the business is fragmented.

In other aviation news, Virgin America will, today, file an application to begin flying. They may be off the ground by 2006.

Oh, and if this isn't terribly fitting, Virgin America is already having squabbles with the AFL-CIO. Welcome to the good ol' USA!!