'Open skies' pact seen as possible catalyst for airline mergers
By Padraic Cassidy, MarketWatch
Last Update: 2:33 PM ET Mar 22, 2007
NEW YORK (MarketWatch) -- The deal to liberalize air traffic between the United States and Europe might be the catalyst for renewed talk of airline mergers, something that's gone dormant since Delta Air Lines Inc. successfully fended off a hostile takeover bid from U.S. Airways Group earlier this year.
The so-called "open skies" accord between U.S. and European Union authorities could mean larger carriers move to buy up smaller ones as more European-wide routes are allowed direct flight access to cities in the U.S., and vice versa.
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As yet, European airlines would not be permitted to fly between U.S. cities, but they could fly between, say, Denver and Milan -- opening up a transatlantic market that currently accounts for about $22 billion in annual revenue for U.S. and E.U airlines combined, according to industry estimates. See full story.
Consolidation would strengthen U.S. network carriers' hands in the highly competitive transatlantic market, but significant obstacles to foreign ownership remain even after the agreement.
Currently, the U.S. restricts foreign ownership of U.S. airlines to 25% of voting rights, a level that would change under the proposed pact.
With what he called the Bush administration's "enlightened" attitude toward open skies and foreign ownership of airlines, the timing could be right to dust off consolidation plans, said FTN Midwest analyst Michael Derchin.
"The boom-and-bust business model of the U.S. network airlines is clearly not working," he said. "Consolidation offers a solution for the industry if executed properly."
The agreement is a bigger deal than most investors appreciate, according to Credit Suisse's Daniel McKenzie.
He said Continental Airlines Inc. (CAL: news) , Northwest Airlines Corp. (NWACQ: news) and Delta Air Lines Inc. (DALRQ: news) "are likely bigger winners than most believe."
Prying open a full-up Heathrow, the London airport that is the world's busiest airport by number of passengers, exposes those carriers to millions more in spending by corporate travel managers to get staff to London, McKenzie said in a research note, adding: "If this were a game of Monopoly, [Heathrow] would be like Boardwalk -- it's a piece that makes winning a lot easier."
Passenger-gate slots at Heathrow could be made available through partnering airlines at the expense of Virgin Atlantic, British Airways PLC (BAB: news) , United Airlines (UAUA: news) and American Airlines (AMR: news) -- currently the only four carriers allowed flying routes between the U.S. and Heathrow.
Immediately after the E.U announcement Thursday, Continental filed with the U.S. Department of Transportation for rights to serve new routes to Europe, including a Houston-Heathrow route and a Cleveland-Paris route.
On Wednesday, Chief Executive Larry Kellner said that Continental wasn't seeking a merger partner and that the E.U. agreement would boost the carrier's competitive position.
Delta, which successfully battled a hostile $9.75 billion bid from U.S. Airways (LCC: news) , plans to emerge from bankruptcy this spring as a stand-alone carrier.
Padraic Cassidy is a reporter for MarketWatch in New York.
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