Fred Harteis Business News - Fasten your seatbelts

Fred Harteis Business News - The airline industry got shaken up this week by a multi-billion-dollar offer for a troubled carrier, with experts saying the bid would lead to more deals and leave just a handful of major airlines flying.

That was the description of US Airways' $8 billion bid for Delta Air Lines Wednesday. But it could just as easily have described the outlook on May 24, 2000, when United Airlines parent UAL Corp. agreed to buy US Air for $4.3 billion.

At that point back in the spring of 2000, the six major carriers were widely expected to shrink to four or even three from more mergers.

But after more than a year of review, the Justice Department blocked the UAL-US Air deal. Then came Sept. 11, plunging fares and air traffic, followed by skyrocketing fuel prices and the growth of low-fare competitors.

Four of the six major airlines have gone into bankruptcy court a total of five times since then. All have cut workers, renegotiated labor deals and slashed other costs. But more than six years later all six are still flying.

"There's been a lot of conversation, but not a lot of consolidation," said Continental Airlines CEO Larry Kellner at an investor conference in September. "If industry consolidation occurs on a broader scale, it's very important. But I wouldn't put the probability that high."

But Kellner now has a minority view, especially in the wake of Wednesday's announcement.

With airlines filling a record percentage of their seats and finally returning to profitability after more than $40 billion in industrywide losses from 2001 through 2005, the time finally seems right for the long-anticipated consolidation.

Industry analysts and some executives say that despite Delta's stated desire to emerge from bankruptcy as an independent carrier, a deal will be made to buy the nation's No. 3 airline. If No. 7 US Air doesn't get it, people think it'll be because another larger airline beats it to the punch.

And once one deal is done, other deals are widely expected to follow.

"The industry only really needs about three full-service network carriers," said Ray Neidl, airline analyst with Calyon Securities, referring to the big airlines with national hub-and-spoke route systems. "That could very happen in the next two years. We've got too many airlines and too many hubs."

Philip Baggaley, Standard & Poor's top credit analsyt for airlines, said that assuming US Air does grab Delta, then American Airlines parent AMR Corp. might well grab Northwest Airlines, which is also in bankruptcy and has almost no route overlap with American.

And that could clear the way for United and Continental Airlines to get together. Northwest, which helped Continental fend off unwanted takeovers in the 1990s, today has the ability to block any deal for Continental by another carrier. But that would evaporate if Northwest itself is bought, or buys another airline.

Baggaley said it will be difficult for Delta management to convince creditors, or the bankruptcy court, that it would be better for the airline to stay independent rather than accepting the best offer from another carrier. He said the best argument that Delta may have is if the Justice Department's anti-trust review seems to be dragging.

Source: Cnn.com

About Fred Harteis: Fred Harteis leads Harteis International.  Fred Harteis has a background in agriculture and has created many successful business ventures.