NEW YORK (Reuters Breakingviews) - U.S. airlines need more than a little help. The “Big Four” – Delta Air Lines, American Airlines, United Airlines and Southwest Airlines – have been pleading for additional bailouts as Covid-19 continues to crimp travel. More cheap money is an option. But consolidation would also help, and probably leave taxpayers – if not consumers – better off. In 2021, the big carriers will shrink from four to three.
Airline mergers aren’t easy. Unionized workforces that rank pilots based on seniority, for example, make it hard to mash companies together. And competition regulators don’t like it when too much power ends up in the hands of too few players, though U.S. antitrust authorities have permitted some industries, such as mobile telephone operators, to concentrate to just three players.
But consolidating makes financial sense. Most other countries have a single flag carrier implicitly or explicitly backed by the state. America doesn’t, but pandemic bailouts have made the Big Four quasi-government-owned, giving the public a stake in their future. And merging hasn’t worked out too badly for consumers so far. Ticket prices adjusted for inflation have halved since 1995, when America’s skies were awash with carriers, according to the Bureau of Transportation Statistics.
American, which has lapped up $13.5 billion in taxpayer cash, is in the worst position. The Texas-based carrier has $25 billion of net debt, roughly 6 times its forecast EBITDA for 2022, according to Refinitiv estimates that assume three-quarters of sales return in two years. United is next but with debt levels only half as daunting.
Yet 2022 is a long way off. If revenue rebounds only 70% while costs remain stable, American’s EBITDA plunges to just $335 million – not a crazy assumption given the expected long-term impact on corporate travel and airlines’ outsize operating leverage. That jeopardizes interest payments.
A deal may be better for taxpayers than restructuring. One between American and a rival might mean ditching routes. Shareholders of the healthier partner may balk at taking on added problems. But cheap government funding could help.
And regulators also have a history of turning blind eyes to competition concerns during a crisis, such as in 2008 when JPMorgan bought Bear Stearns and Bank of America scooped up Merrill Lynch. If the alternative is bankruptcy, a merger stamped by the government can’t be ruled out.
- This is a Breakingviews prediction for 2021. To see more of our predictions, click here