Evaluating the Impact of Airline Mergers on Communities

Transcription

1 June 2008 Evaluating the Impact of Airline Mergers on Communities ACI-NA Marketing and Communications Conference Presented by: Robert A. Hazel

2 Outline Fuel Crisis Impacts on Air Service Why and When Do Airlines Merge? How to Assess Airline Mergers? 1

3 Greatest Near-term Impact on Air Service Is The Fuel Crisis, Not Pending Or Possible Airline Mergers To make up for fuel cost increase, airlines must raise average fare Round Trip Fuel Costs per Passenger for A320 and Average Trip Length (1,130 Miles) $149 Over the past year: Airfare up $21 or 7% $79 Fuel cost up $70 or 89% To make up for fuel increase, fares must increase another $49 or 15% 2nd qtr 2007 Proj 2nd qtr 2008 Round-trip Fuel Fuel Price Airfare* Cost* Percent per Gallon 2nd qtr 2007 $300 $79 26% $2.00 2nd qtr 2008 $321 $149 46% $3.80 * Excludes taxes and fees ** Assumes 119 passengers (80% LF), 2.97 block hours each way and fuel burn of 788 gallons per hour; 2q07 airfare from DOT O&D Survey; 2q08 airfare from Oliver Wyman analysis 2

4 In Weak Economic Environment, Impact of Significant Fare Increase Will Be Drop in Demand Elasticity effects in typical leisure and business markets Leisure Business 15.0% 15.0% -6.0% Keep in mind As airlines cut capacity to adjust to falling demand... Unit costs increase... Leading to further required fare increases -16.5% Price Change Demand Change 3

5 Already Announced Cuts for 4th Quarter 2008 Exceed the Largest Capacity Cuts Over the Past 20 Years Capacity cuts announced so far exceed 7% with more coming Annual Change in Domestic Capacity, and Enplanements 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% Capacity Enplanements % -2.4% -7.6% -1.6% -10% Available Seat Miles Passengers Enplaned Source: Air Transport Association 4

6 Basic Message There Will Be Fewer People Flying! Recent Past Coming Soon 5

7 How Does Fuel Crisis Relate to the Climate for Mergers? Current fuel crisis environment not conducive to additional mergers in short-term Nearly all U.S. airlines (except for Southwest) are burning cash Post merger integration is expensive and synergies take time to realize How best handle difficult labor integration issues when both companies continue to shrink? Once industry reduces capacity and stabilizes, favorable environment for additional mergers Market share important as airlines compete for traveler loyalty Large hubs to optimize the collecting power of each hub Less redundancy and tight capacity means higher fares, especially in absence of LCC competition 6

8 To Assess Likely Impact on Community, Ask the Following Questions: Fundamental first question How well is current service performing? As viewed by the airline, not the community What is driving the merger? Why are these two airlines merging? What is the level of demand for air travel? Which management team is in charge? Answers to these questions will determine outcomes: Air service Fares Employment 7

9 WHAT IS DRIVING THE MERGER? 8

10 Why Do Airlines Merge? One View Pure network expansion is likely to have more positive (or less negative) impact on air service options and capacity Acquiring Airline Year Northwest Republic 1986 TWA Ozark 1986 Texas Air Eastern 1986 Network Expansion Acquire Competitor Financial Distress Delta Western 1986 Texas Air People Express 1986 American AirCal 1987 USAir PSA 1987 USAir Piedmont 1987 Southwest Morris Air 1993 AirTran Valuejet 1997 American Reno Air 1999 United* US Airways 2000 American TWA 2001 America West US Airways 2005 Delta** Northwest 2008 * Disapproved by Justice Department ** Proposed 9

11 Why Do Airlines Merge? The S-Curve Effect 100% Share of Passenger Revenues 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Share of Seats 10

12 Hub Structure Still Too Many Hubs? A Problem to be Addressed by Consolidation? x x? x x 11

13 Different Merger Impacts on Communities of Different Sizes Not Necessarily However, fuel impact on small communities will be greater to the extent they are served with less fuel efficient equipment Domestic Seats by Airport Size Indexed to 2000 = Large Hub Medium Small Non-hub Percent Change % 1.9% -1.5% -9.9% 3.2% -2.5% -11.1% 4.4% -0.7% -21.3% 4.7% -0.2% th (67.3%) 31-67th (21.5%) th (8.0%) th (3.2%) Sources: OAG and US. DOT 12

14 WHAT IS THE OVERALL LEVEL OF DEMAND? 13

15 Overall Level of Demand/Strength of the Economy Differing merger impacts Growth environment Growing demand & Network expansion-based merger Capacity reduction environment Declining demand & Competitor acquisition-based merger Current capacity cuts driven by Anticipated weakening demand Summer still looks strong [or does it?], but Fall and beyond... Deteriorating airline economics Ongoing challenge for airport managers Convincing the community that capacity cuts and fare increases are functions of changing demand and airline economics, as much as mergers 14

16 When Do Airlines Merge? Near the profit peak? Acquiring bankrupt carriers as the business cycle improves? 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% Northwest-Republic, TWA-Ozark, Texas Air-Eastern, Delta- Western, Texas Air-People Express, American-AirCal, USAir-PSA, USAir-Piedmont American-Reno Air, United-US Airways, American-TWA America West-US Airways, US Airways-Delta, AirTran-Midwest? U.S. Airline Operating Margin Source: Air Transport Association 15

17 WHO IS IN CHARGE? 16

18 Who Is In Charge? Impacts Employment - Corporate headquarters - Other corporate offices - Training - Maintenance Different business philosophies - Seasonal service - Less-than-daily service - Different regional fleets - Strategic focus preference for the known versus the unknown? 17

19 Conclusions Greatest near-term impact on air service is the fuel crisis, not pending or possible airline mergers Impact of individual merger will vary greatly by community and requires detailed analysis... but answers to the following questions will provide important guidance: How is your current air service performing? What is the rationale behind the merger? What is the strength of air travel demand? Which management is in control of the combined company? Where mergers occur, communities should strive to develop working relationships with management of the new company 18

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