Airlines Take Flight

Arizona-based US Airways led the formation as it took wing, but it had plenty of highflying company. Investors stampeded the market to board fast-moving shares of Continental Airlines (CAL), JetBlue Airways (JBLU) and AirTran Holdings (AAI), which on Tuesday inked a partnership with Frontier Airlines Holdings (FRNT) that vastly expands its reach.

If the US Airways-Delta merger gets off the ground — and that's a big if — it would create the world's largest trans-Atlantic carrier. US Airways, whose chief executive, Douglas Parker, is a vocal proponent of consolidating the beleaguered airlines industry, is now the seventh-largest U.S. carrier. Delta, which entered Chapter 11 bankruptcy in September 2005, is the third-largest. US Airways' takeover bid is made up of $4 billion in cash and the rest in stock.

A successful union is about as uncertain as an on-time arrival. There are many regulatory and antitrust questions, and the industry itself is vulnerable to outside influences, from fuel prices to the potentially devastating effects of another terrorist attack. Most importantly, though, Delta's management isn't quite ready to play along with Parker.

"We received a letter from US Airways this morning and will of course review it," Delta CEO Gerald Grinstein said in a statement. "Delta's plan has always been to emerge from bankruptcy in the first half of 2007 as a strong, stand-alone carrier."

Roger King, an analyst at CreditSights, an independent capital structure research firm in New York, says Parker, who orchestrated last year's merger between then-bankrupt U.S. Airways and America West Airlines, is a forceful presence.

"I think the management at US Airways is much more entrepreneurial and can successfully complete mergers," he says. "If anybody could do it, it would be these guys."

The Analysis
The outbreak of pro-merger fever in the airline sector is no surprise. Market watchers have long touted the need to cull the number of legacy carriers, burdened by high labor costs and fuel prices, as an inevitable and necessary shift for the industry.

But the flurry around the US Airways overture won't necessarily translate into sustained gains for any airline stock, cautions Brian Nelson, an analyst at Morningstar who covers the legacy carriers. While a merger could allow the new airline to cut out flight routes, renegotiate labor contracts and bring capital expenditures down, those aren't necessarily good reasons to own the stock.