Tuesday, September 28, 2010

American Airlines being left behind

The impending mergers of United Airlines with Continental Airlines, and Southwest Airlines' deal to buy AirTran reshuffle the deck for the largest US airlines and put new pressure on major carriers without a merger partner to find one.

For American Airlines, which lost the title of world's largest airline after the 2008 merger of Delta Air Lines and Northwest Airlines, the outlook is getting murkier. Experts say American needs a merger partner and may already be losing a competitive edge.

"They find themselves facing the market from the bottom of the top three as opposed to from the top of the top three, and this really hurts you in the corporate travel marketplace," said airline consultant Robert Mann.

Well-heeled business travelers, the bread and butter of US airlines, gravitate to the carriers with the most extensive route networks, Mann said. American simply cannot make that claim anymore, he added.

"That's going to mean a tougher revenue marketplace for American," he said. "By contrast, I think you'll see United and Continental, as well as Northwest and Delta, have relatively favorable stories to tell in acquiring revenue in the markets that they extensively serve."

Dallas-based American has long argued that it does not need a merger to survive and thrive, saying it has confidence in its large international network to lure premium travelers.

"Network breadth is important, and we have that in abundance," AMR chief executive Gerard Arpey said at an investor conference in July. "We can go to virtually any corporate account and offer them convenient access to all the markets that are important to them."

United Airlines plans to close its USD$3.17 billion all-stock purchase of Continental in the next few days, forming the world's largest carrier.

Southwest shocked the industry on Monday with news that it would buy AirTran for USD$1.4 billion in a bid to expand into lucrative East Coast markets.

"It's not at all surprising that when one domino falls, other people have to reposition," said Bob Profusek, global head of M&A at Jones Day and lead lawyer for the UAL merger.


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