Consolidations, bankruptcies have airline industry on edge

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When David Siegel was in charge of US Airways earlier this decade, he predicted the industry would be ruled in the future by just three giant U.S. carriers. Then the pilots union and US Airways' chairman ousted him.

Turns out the embattled Mr. Siegel may have been right after all.

Yet another round of consolidation in the U.S. airline industry began last week as Delta Air Lines and Northwest Airlines unveiled a proposed tie-up that would supplant American Airlines as the world's largest air carrier. There was also new speculation about a union between US Airways and United Airlines (nixed once already in 2000 because of regulatory concerns), United and Continental Airlines, or American and US Airways (which was rebuffed last year in a takeover attempt of Delta).

Behind this latest merger talk is a belief that airlines cannot survive an era of $115-a-barrel oil, strong overseas rivals, low-fare upstarts and a possible recession without the savings and revenues that come from larger combinations. Recent casualties to the industry's worsening environment are Aloha Airgroup Inc., Skybus Airlines Inc. and ATA Airlines Inc., all of which have filed for bankruptcy and shut down. Frontier Airlines Holdings Inc. also filed for bankruptcy but continues to fly. Others, such as Southwest Airlines, are paring growth plans for 2008 and beyond.

"The math doesn't work" in the airline industry, Mr. Siegel said Friday. "Something's got to give." More consolidation is simply "the laws of economics" at work. "You don't have to like it. It is what it is, and stuff's going to happen."

This new period, he warned, "will be painful."

More carriers will file for bankruptcy, he said, more flights will be cut, more jobs will be lost and more hubs will retract and close, just as Pittsburgh's did under Mr. Siegel's watch. In fact, Mr. Siegel predicted that Salt Lake City, St. Louis, Charlotte, N.C., Indianapolis, Cincinnati and Memphis all would disappear as hub operations in the coming years. He also expects plenty of labor integration problems, with squabbling over pay and seniority sure to cause operational problems across the country (Pilots from the old Arlington, Va.-based US Airways and Termpe, Ariz.-based America West Airways still are fighting about such issues two and half years after a merger of the two carriers).

"All the integration problems and potential labor disruptions could easily result in short-term financial distress," Mr. Siegel said. "It could get worse before it gets better."

But "medium to long term, there is a powerful argument for these combinations."

Mergers allow carriers to assume more routes, more customers and more pricing leverage. They also provide an opportunity to eliminate high costs. But the cutting of unprofitable flights and hubs is always a delicate political issue -- one reason why it has taken airlines so long to do it. Last week, Delta and Northwest tried to address such concerns by predicting their merger would save $1 billion a year without closing hubs or firing front-line employees.

But Mr. Siegel says that view will change, in time.

"I believe what will happen is the airlines will claim not to be reducing capacity and eliminating jobs and then they will do their deals and at some point in the future say 'economic conditions continue to be challenging' " -- providing the cover for the necessary reductions.

The inevitability of consolidation perhaps can be traced to 1978, when Congress deregulated the airline industry, thinking it would increase competition, lower prices and allow more Americans to fly. Carriers never made lots of money during five decades of government involvement in the business, but they did enjoy protection from new competitors while unionized employees were well paid and benefitted from generous work rules, the costs passed onto well-heeled passengers.

Consumers did well in the deregulated era as air fares went down dramatically in markets with new competition from upstarts such as Southwest Airlines. But many of the premier names in the business did not survive -- Eastern Airlines, Pan American and Braniff Airlines. And the carriers that transitioned from regulation to competition missed many opportunities to reduce their labor costs, instead choosing an array of temporary fixes (a hub-and-spoke system, frequent-flier programs, reservations systems, alliances) in exchange for employee peace and loyalty.

Asked in 1991 to examine the economics of the business while working as a planner at Northwest, Mr. Siegel said he could see that the high costs would have to be dealt with eventually.

"You could see then that consolidation was logical," he said. Because of the cultural difficulties involved, "It just was going to take a long time to get there.

"I thought it would take five years, and I was wrong."

What caused airlines to consider consolidation more seriously were the 9/11 attacks, which came roughly two months after a proposed United-US Airways merger collapsed due to Justice Department opposition. The aftermath of the attacks exposed the underlying weaknesses of large carriers that realized they could no longer rely on exorbitant fares to cover their high costs. They went after employee pay, benefits, retiree health care and pensions while cutting unprofitable hubs and duplicative routes.

Several also filed for bankruptcy protection. One of the first was US Airways, led at the time by Mr. Siegel. Once the airline reemerged from its first bankruptcy, Mr. Siegel began looking for merger partners; he even gave thought to a takeover of United, calling the idea "Project Minnow." And early in 2004, he made his prediction that the industry would eventually winnow to three large U.S. carriers (and three discount carriers), saying he did not want US Airways to be left out. The next year, after having been removed as CEO of US Airways, he detailed how that might happen in a February 2005 speech at Georgetown University.

He predicted the following tie-ups:

• American Airlines and Alaska Airlines.

• Continental and United (rumored to be in the works)

• Northwest and Delta (announced last week)

• America West and US Airways (which was announced in May 2005 and closed in September 2005)

• Southwest, ATA and AirTran.

• JetBlue Airways, Frontier and Independence Air.

The Delta-Northwest hookup announced last week "makes sense" and "the next most likely combination is Continental-United," Mr. Siegel said. American, he added, may be weary of mergers after its union with TWA earlier this decade did not go well, but he can also see American combining with either Alaska or US Airways.

"Consolidation, if managed appropriately," he said, "can be good for everybody." There will be fewer jobs, but "those jobs will be more secure." There will be fewer carriers, he said, but enough competition to keep prices low.

"Right now these airlines are on an unsustainable path," he said, and "everybody shares the responsibility ... The government is to blame. The airline management teams are to blame. The airline labor groups. They are all to blame."

To fix the industry, "they have to step up. It's in their collective interests."

Dan Fitzpatrick can be reached at or 412-263-1752.


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