Spurned US Airways Still Bullish on Airline Consolidation

Last Updated Apr 28, 2010 6:39 AM EDT

Attending the annual US Airways media day yesterday, it was clear that one word was on everyone's minds: Consolidation. After rumors sprouted that US Airways and United were talking and then, just as quickly, not talking, media day attendees wanted to an update on US Airways thoughts on consolidation. As expected, Chairman and CEO Doug Parker reaffirmed that the airline is committed to consolidation, even if US Airways isn't involved.

In his opening comments of the day, Doug did not waste time and got right to it. "Last week we announced we were breaking off talks with United. That took a little creativity since we never announced we were in talks with United."

After that, Doug did not hold back on explaining why the airline is in favor of consolidation in his usual clear and straightforward way. For that reason, I thought I'd republish some large snippets from his opening talk here.

Consolidation is good for this industry. It's something that needs to happen, will happen, and will result in a much stronger industry. The industry has been so fragmented for so long. While it has some benefits, it has a large number of costs, not the least of which is a very unstable industry which makes it hard to make a profit and very hard on your employees. Consolidation will help with that. It's not a full panacea, but it's a huge step.

We at US Airways would prefer to participate rather than not. We're not the least bit embarrassed to tell you that of the remaining five hub-and-spoke carriers, our route network has the lowest revenue generating capability. It isn't as strong as airlines who have hubs in places like Atlanta, Dallas, and Newark. It's OK; we offset it with a cost advantage. One way to offset this disadvantage is to combine those assets with other assets and create a stronger route network.

We do not need to participate. We're running a very good standalone airline. Metrics on every level - operating performance, reliability, financial control, financial improvement - we're doing better than our peers. We're feeling extremely good about our standalone business and don't need to do anything. If the industry gets better too, that's great.

. . .

If, in fact, our talks with United have compelled them to do something with Continental, that'll get us down to the fourth largest airline. We feel good about that. If United/Continental gets done, does that close the door on US Airways? No, I don't believe it does. If indeed we're now in a situation where there are four large hub-and-spoke airlines, let's assume United/Continental gets done for the sake of this theoretical conversation, there are now four, three of which have 18 to 25% market share. And one, US Airways, has somewhere around 8% share. We have long held the view that the right number of hub-and-spoke airlines for this industry is three. I don't think that's rocket science.

While there's been a number of changes, there's always been three at the top (American, Delta, and United). If you believe we're headed to a network with 3 large hub-and-spoke carriers, we actually have US Airways well positioned. Sometime in the long term, this could happen two years, five years, we don't particualry care. The next transaction that happens won't be between any of those three, but it will be with any of those three and US Airways.

So there you have it. Of course, the counter to that is that there's another way that you get to three large hub-and-spoke airlines. The others go out of business. But as Doug said, US Airways is running well right now. If the economy continues to pick up, then US Airways should get some breathing room financially, but if it turns back down, I imagine things could get ugly.

The one thing that's without question is that these sort of comments are a welcome breath of fresh air when compared to the corporate-speak you get from some other airlines. Not only is it clear, but it makes a lot of sense. If it weren't for Doug and the rest of the US Airways management team, US Airways wouldn't be around today.

[Photo via US Airways]