United Airlines scrapped its latest attempt to combine with US Airways and create the world’s largest carrier, formally backing away Friday from a deal that likely would have meant fewer routes and higher ticket prices for consumers.
Now the question for those and other U.S. airlines is how to get by and make money with oil prices near $130 a barrel.
The CEOs of the two airlines told their employees in separate messages that a combination was off “for now,” although US Airways’ Doug Parker indicated it is unlikely for at least the rest of this year. They had spent months exploring a deal that would have enabled the carriers to shed costs — likely paring employees, trimming overlapping operations in Washington, D.C., and parts of the West and eliminating competing flights.
But the attempt was hamstrung by tightening credit markets and the airlines’ dimming financial outlook, which has dried up cash and made them less attractive to the banks that would have to provide capital.
Consumers may benefit from more choices for the time being, but the airline industry’s accelerating deterioration is no cause for celebration.
“The more competition we have and the more pricing decisions by CEOs we have, the better for consumers,” said Tom Parsons, chief executive of travel Web site Bestfares.com. “It’s still coming down to the bottom line, though: Can any one of these airlines survive in this era?”
UAL Corp.’s United, the second-largest U.S. airline, and CEO Glenn Tilton have been perhaps the strongest advocates for consolidation within the industry. But Tilton was unable to work out a deal with Continental Airlines Inc. after Delta Air Lines Inc. and Northwest Airlines Corp. agreed to pair up in April. He told Parker on Thursday that he was walking away from a chance to hook up with No. 7 US Airways Group Inc.
In his message to employees, Tilton cited unnamed “issues” that are thought to include financing, integration and labor obstacles. He said United is “evaluating other options” — thought to include a possible alliance with Houston-based Continental.
He also indicated United will continue to cut capacity and pass on rising costs to customers, as other airlines have this year with higher ticket prices and more fees for baggage and other services.
The decision came against the backdrop of the latest rise in oil prices over $127 a barrel Friday after a recent drop.
“The failure of United to find a merger partner is not surprising given the fact that no airline, Southwest included, can survive at $130-per-barrel oil,” said Harlan Platt, a finance professor at the business school at Northeastern University who follows the airline industry closely. “Either prices must rise by $50 a ticket or massive layoffs and cutbacks are needed.”
Parker told his employees that he strongly believes consolidation is required in the airline industry and that US Airways would benefit from participating.
However, he said: “After much work and many conversations with other airlines, we have come to the conclusion that consolidation involving US Airways will not occur at this time.” He said it is “simply unlikely that anything will happen in 2008 as our industry continues to struggle with how to function in a world with $130-a-barrel oil prices.”
Absent the deal with US Airways, luring Continental into its Star Alliance would be a step forward for United.
Under alliances, airlines can set pricing and schedules jointly to increase revenue without the integration problems of consolidation. But they remain subject to antitrust review by federal regulators.
They also could avoid the labor trouble that consolidation tends to bring. In United’s case, its influential pilots’ union had spoken out about the impact of a pairing with US Airways as extremely negative and said it should be used only a last resort.
“It appears that the board of directors saw that the potential risks and expenses were greater than any perceived benefit” of consolidation, said Jay Heppner, a United pilot and union spokesman. “We are confident that United has the ability and resources to stand alone.”