Regional Execs See Opportunities in Mergers

While there has been much hand ringing about the potential impacts of industry consolidation, industry executives speaking before the Raymond James conference last week showed more confidence when they noted that current contracts are long term which are not cancellable, nor do they allow for any reduction...

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While there has been much hand ringing about the potential impacts of industry consolidation, industry executives speaking before the Raymond James conference last week showed more confidence when they noted that current contracts are long term which are not cancellable, nor do they allow for any reduction in aircraft. In addition, most executives see significant opportunity as legacy carriers rationalize their networks.
“I’m quite bullish on consolidation because I know companies such as Republic can be so helpful to our partners in a consolidation,” Republic Airways Holdings Bryan Bedford told investors at the assembly.
“There are a lot of different options and talk is cheap in area,” said SkyWest CEO Jerry Atkin. The practical answer is if consolidation is about reducing capacity and keeping all the revenue, that would mean all aircraft sizes are up for grabs for reduction. There would be some off the bottom but historically there’d been as much come in from downsizing bigger airplanes. What doesn’t make sense for a 130-seat airplane makes a lot of sense for a 70-seat aircraft. So, I would expect in a general sense there would be as much come in on the top as would go off the bottom, if not more.”
He addressed a possible United/Delta deal which would put the Salt Lake hub at risk, saying there were other opportunities with that scenario as well, especially since SkyWest works for both. “I think the risk is overblown. While it doesn’t make sense to have Denver and Salt Lake so close together, if you downsize Salt Lake and move flights to Denver, we have the capability of shifting aircraft. When you downsize hubs, it usually increases regional carrier flying.”
In response to a question about the possible wholesale release of smaller RJs, as suggested recently by former Continental CEO Gordon Bethune, who is now with Pardus Capital Management, Bedford indicated there was a credible argument that as few as 50 and as many as 100 such aircraft could come out of the system. “The question is,” he said, “is who is the most exposed. The capacity that will come out will be the most expensive and least quality and that is not Republic. If you put those factors together, our business is not at risk, even if we didn’t have long-term contracts.” He noted that Republic not only has a 25+ percent capacity increase planned for 2008 and 20+ percent for 2009 already under contract, it also has a 74-aircraft orderbook of Embraer ERJ 170/175s and 190/195s for which it is currently negotiating delivery times to ensure they maximum flexibility based on an uncertain market.
“It’s hard to say what the dynamics will be,” he said. “Will it be more of the same with up-gauging or will there be a realignment of network alliances and how does that change the domestic landscape? We need to be sensitive and demonstrate how we can be a solutions provider for the legacy carriers.” He also noted that both Boeing and Airbus were sold out through 2014. “Even in a world where there is consolidation, it is hard to envision there would be a lot of domestic re-fleeting that will go on besides what regional partners can bring to the table”
Bedford recounted the last four years and the impact on Republic. “Republic has had the privilege of participating in every bankruptcy, except Northwest,” he said. “So we’ve been in the middle of firefight for four years so we understand the dynamics. The biggest risk to regionals is the fact people felt there was counter-party risk that partners would not perform over the term of the agreements.
“We are essentially an aircraft lessor,” he continued, “buying and financing the assets and making them available. We are also like a maintenance and repair facility, doing maintenance outsourcing and like temp manpower agency, making people like crews available to fly, mechanics to fix aircraft and dispatchers to help operate them. In other words, we provide a very strong outsourcing service. But if our legacy partners are out of business and can’t pay us then that creates the largest element of counter-party risk. In a world where there would be a very thoughtful consolidation with the goal of making partners stronger, that makes contracts stronger as well. So what is good for our partners is good for us.
“We lived through the US Airways/America West merger and played a critical role,” he added. “We purchased slots in New York and Washington, and purchased aircraft assets such as the Embraer ERJ 175. Those were good investments for our partnerships and good for shareholders. I see more such opportunities going forward becoming available to companies like Republic should consolidation occur. So we are certainly not afraid of it and, if it’s helpful for partners, we embrace it.”
Jazz CEO Jim Randell noted that consolidation has already occurred in Canada reducing airlines numbers to one legacy, one low-cost operator and one regional. He noted there was more opportunity for his carrier pointing to the many markets that cannot sustain a 737 or A320, no matter how low the fares are. “There are further opportunities, especially for our Bombardier CRJ 705 which now flies long-haul routes between Calgary and Houston and Edmonton-LAX with a executive class cabin and the lowest trip costs on long, thin routes. Rendell pointed out that Air Canada was already operating 60 Embraer ERJs but still offered opportunities for larger turboprops and RJs.

If DL/NW, Perhaps CO/UA
Speculation rose recently that should Delta and Northwest reach a merger agreement, the logical next opportunity would be a Continental/United combination. While messy airline mergers were not seen by management as a fix for fiscal troubles in the past, airline managers have changed their minds in the face of fourth quarter losses and prospective mergers on the horizon. As Northwest Doug Steenland said last week – the only thing worse than a merger is not to merge.
The New York Times reported that a UBS analyst sees a merger between Delta and Northwest prompting a Continental deal, possibly with United. Most commentors indicated that mergers will not change the two most fundamental facets of economics affecting the industry – fuel prices and demand. United and Continental discussed a deal a year ago after US Airways made a hostile bid for Delta, then under bankruptcy protection.
Meanwhile, Trissential, a Minneapolis-based management consulting company specializing in business improvement, finds that combining business systems such as enterprise resource planning and customer relationship management following a merger or acquisition, like the ones now being discussed, takes on average twice as long and costs 50 to 100 percent more than originally projected.