DEALTALK-Rival mergers put new pressure on American Airlines

* Southwest/AirTran merger sheds light on American Air

* American has held alliance talks with U.S. Air-sources

* Jet Blue, Alaska seen as good fits for American

* Pilots, costs to hinder American effort to tie knot

By Kyle Peterson and Soyoung Kim

CHICAGO/NEW YORK, Sept 28 (BestGrowthStock) – Maybe that
long-predicted wave of U.S. airline mergers is finally here.

The impending merger of UAL Corp’s (UAUA.O: ) United Airlines
with Continental Airlines (CAL.N: ) and Southwest Airlines’
(LUV.N: ) deal to buy AirTran Holdings (AAI.N: ) reshuffle the deck
for the largest U.S. airlines and put new pressure on major
carriers without a merger partner to find one.

For AMR Corp’s (AMR.N: ) American Airlines, which lost the
title of world’s largest airline after the 2008 merger of Delta
Air Lines (DAL.N: ) 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 Robert Mann, an airline consultant with RW Mann & Co.

Well-heeled business travelers, the bread and butter of the
top U.S. 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
huge 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 $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 more than $1 billion in a bid to expand
into lucrative East Coast markets. [ID:nSGE68Q0GW]

“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.

“It’s kind of a game of musical chairs,” Profusek said.
“It’s also just a function of industry conditions. Too many
people chasing the same dollar means that it’s not very
efficient. I think there will be continued consolidation in the
airline space.”

But for American, the benefits of consolidation are drying
up, said Mann. He said there are no potential merger partners
that offer the complementary, end-to-end domestic networks that
make the Delta/Northwest and United/Continental mergers good
fits.

“All the good pieces are taken off the board,” Mann said.

<----------------------------------------------

14 biggest airline, travel M&A deals since 2007:
http://link.reuters.com/nyr75p

Airline rankings by traffic, revenues:
http://link.reuters.com/qah65p

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LEFTOVER PUZZLE PIECES

Behind-the-scenes efforts by American to find a partner may
underline a growing recognition that scale does matter in the
capital-intensive industry.

In 2008, American held merger talks with US Airways
(LCC.N: )and alliance talks with Continental just after the
Delta/Northwest merger, sources told Reuters previously.

But a merger is too hard to consummate for now because of
American’s relatively high labor costs and open contracts with
its unions, experts say. The carrier has long complained it has
the highest labor costs in the industry.

US Airways has its own challenges. It has yet to fully
integrate its labor groups following its 2005 merger with
America West Airlines.

Many experts believe, however, that carriers can use
alliances to cut costs and boost revenue without all the
baggage of a merger. They also note that alliances preceded the
Delta/Northwest and UAL/Continental mergers.

American held talks with US Airways again after the
United/Continental merger to lure its smaller rival into the
Oneworld global alliance, people familiar with the matter said.
Currently US Airways partners with United and Continental in
the Star Alliance.

JetBlue Airways (JBLU.O: ) and Alaska Airlines (ALK.N: ) also
could be good fits for American Airlines and might be on its
M&A radar, analysts and bankers have said.

American entered a code-share agreement with JetBlue this
year allowing passengers to connect with one ticket to
American’s international flights from New York and Boston.

AMR: WE DON’T NEED A MERGER

American frequently spotlights its efforts to beef up
international alliances to attract premium travelers.

The carrier also plans to concentrate service in New York,
Los Angeles, Chicago, Dallas/Fort Worth and Miami, all markets
with heavy business traffic.

These initiatives will pave the way for more than $500
million of annual revenue and cost benefits, the company said.

Beverly Goulet, AMR’s vice president of corporate
development, disputes the notion that business travelers pick
airlines with the largest networks. The key, she said, is to be
in the right cities.

“When you have a network that can compete, I don’t think
that the size of the company per se is going to drive the issue
of success,” Goulet said.

“We’re big where it matters,” she said.

Goulet said AMR is less vocal on the subject of mergers
than some of its rivals, but the carrier believes consolidation
is good for the “fragmented” industry.

She said AMR explores all its options. But she believes
strategic alliances can produce tremendous benefits.

American, British Airways (BAY.L: ) and Iberia (IBLA.MC: ) won
approval from the U.S. government in July to create a joint
business governing flights between North America and Europe.

Meanwhile, American and Japan Airlines (JALFQ.PK: ), Asia’s
largest carrier by revenue, hope to win regulatory approval for
closer cooperation on trans-Pacific routes.
(Reporting by Kyle Peterson and Soyoung Kim; Editing by Steve
Orlofsky)

DEALTALK-Rival mergers put new pressure on American Airlines