Corrected on 2/14/08: An earlier version of this story incorrectly reported US Airways projections for rising oil prices and the net effect of rising oil prices on their balance sheet.
In 2005, Doug Parker, CEO of America West Airlines, initiated a novel merger with USAirways, which was in bankruptcy and close to liquidation. By most accounts, the deal salvaged an operation that otherwise would have disappeared, and in 2007 the combined airline, which took the USAirways name, earned a $427 million profit. In late 2006, Parker made a similar bid for Delta Air Lines, also in bankruptcy, which Delta rebuffed. With widespread speculation about an imminent merger between Delta and Northwest, and possibly United and Continental, U.S. News asked Parker about his views on consolidation and the lessons he's learned from the merger he's overseen.
There's been talk about the need for consolidation in the airline industry for years, maybe decades. Has the time finally come?
I think there are three things that make this the time. It probably sounds self-serving, but one is the financial success of the USAirways-America West merger that we did. A lot of people were skeptical of that at the time, but we've shown that putting two airlines together can work. Part 2 was our attempt to acquire Delta out of bankruptcy [in 2006]. What that showed is there's a lot of interest in mergers in the industry. It forced them to say, "We can do better as a stand-alone." Well, now their stand-alone numbers don't look as good as what we offered. When you turn down an offer and tell your owners you can do better on your own, you need to do that. The third thing is oil prices. Our 2008 projections show that oil prices will be 25 percent higher than in 2007. For us, that represents $800 million worth of expenses. Why does the airline industry need this?
The industry is extremely competitive, but there's been so much fragmentation that it can't be profitable. There's been room for too many hub-and-spoke carriers, which has meant too many redundant hubs. People talk about monopolies but I think consolidation will be good for consumers, because we'll have more healthy carriers. You don't think it will inhibit competition?
We have six carriers now, and no single one of them can meet the needs of all consumers. Mergers allow you to be more efficient. Value isn't created by raising fares; it's created by lowering costs. So you've actually done an airline merger. What did you learn from combining USAirways and America West?
One of the first lessons is, we're extremely happy we did the transaction. It has worked. Financially we're much stronger now than either company was before. Putting two airlines together is difficult work. It will take a couple of years, and there will probably be some level of disruption to your customers. You have to let them know there will be some disruption. But it's worth it.
Even in the best-managed mergers, there will likely be some integration issues that affect your employees and customers for the first two years. Actually, the first six to nine months is pain free—most of the work is planning for the actual integration, which makes the imminent pain that much worse, since your customers, employees, and managers start to think that it's all going to be painless. Know that it's coming and prepare your teams for it, but also know that it will end and the best thing you can do is get through it as quickly as possible.
The Airways merger hasn't been seamless. There have been problems with on-time performance, lost luggage, and other things that affect consumers. What have been your biggest challenges?
The biggest thing has been merging two reservation systems. We cut over in March 2007. By far that was the biggest integration problem we've had. We spent a lot of time working on that before we cut it over, but still, by that point, we were 1½ years into the merger, and people who made a reservation on one system would get to the airport and the agent couldn't access the reservation on the other system. So there was pressure to get that done.