Airline industry destined for more mergers

Delta CEO Richard Anderson issued a statement flatly denying that his airline was in merger talks with United but acknowledged that the airline is studying its strategic options.

He said Delta “believes that the right consolidation transaction could generate significant value for our shareholders and employees and that strategic options should be evaluated. With oil at over $90 a barrel, this analysis takes on a heightened importance as we factor those prices into our long-term planning process.”

Anderson told members of the Georgia congressional delegation Thursday that he wants Delta to remain headquartered in Atlanta should any merger take place down the road.

Delta is not the only airline under pressure from investors. American Airlines has been under increasing pressure to bolster share prices since September when FL Group, an Icelandic private equity group that owns 9.1 percent of parent company AMR, urged it to consider spinning off its frequent flyer program. The action, the group said, would be a “strategic alternative that would significantly increase shareholder value.”

The reignited talk of mergers, spinoffs and consolidation comes at a time when the U.S. airline industry is bouncing back from years of bankruptcy and plummeting profits. The post-9/11 downturn saw the bankruptcies of United parent UAL, Delta, Northwest and the former US Airways Group, which has merged with America West.

But in 2006, the industry posted its first profitable year since 2000, and analysts predict profits this year of $4 billion to $5 billion. That's compared with the cumulative $40 billion airlines lost in the previous six years.

The biggest problem facing airlines today is soaring oil costs, which boost the price of jet fuel — one of the top airline expenses. Oil prices rose above $95 a barrel Friday amid expectations that global crude supplies will remain tight.

Cordle, of Airline Forecasts, said every $10 increase in a barrel of crude oil translates to $3.4 billion in additional costs for the airline industry. The industry — which burned nearly 20 billion gallons of fuel last year — has offset some impact of higher fuel costs through better efficiency and fare increases. But analysts predict those actions might not be enough in the long run.

“We do not believe that consolidation is imminent, but when it comes, it will be fast and furious,” Neidl said last week in a Calyon Securities report. “Absent some major airlines terminating operations, which would take capacity out of the system, we believe the industry is ripe for consolidation. We do not need six nationwide, full-service airlines with all their overlapping expensive hub operations.”

Neidl said he remains leery about mergers, however, especially because they can be difficult, expensive and disruptive to complete.

Nevertheless, he said: “Once the starter gun goes off, there will probably be a mad rush to pair up.’’

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