Experts say airline merger could stall O’Hare expansion, but Durbin and Kirk urge moving ahead
BY FRANCINE KNOWLES AND FRAN SPIELMAN Staff Reporters February 14, 2013 10:40PM
A United Airlines jet at O'Hare.
Updated: March 17, 2013 6:23PM
Chicago-based United Continental Holdings, which faces being knocked off its perch as the world’s biggest airline if the American Airlines US Airways merger announced Thursday is approved, has little reason to worry about how the deal will alter the competitive landscape here, but the marriage could put the brakes on O’Hare expansion, airline industry experts say.
But in a letter to the leaders of American and US Airways on Thursday, U.S. Senators Dick Durbin (D-Ill.) and Mark Kirk (R-Ill.) today that said they want to work with the merged company to continue the O’Hare project: “The proposed merger could have a significant impact on thousands of jobs, air service to downstate Illinois and the O’Hare Modernization Program (OMP). As you move forward in this process, we would like to work with you to keep OMP on track and to maintain the air service and good-paying jobs with benefits that American Airlines and US Airways provide to thousands of Illinoisans.”
The letter went on to say: “It is essential that the proposed merger between American Airlines and US Airways does not delay negotiations with the City of Chicago on the final phase of the OMP that are slated to begin no later than March 1st of this year. The proposed merger between American Airlines and US Airways will significantly alter the airline industry in the United States and face regulatory scrutiny before being approved.”
James Higgins, partner at airline investment research firm Ionosphere Capital LLC, said a merged American and US Airways reduces the need for another runway at O’Hare because “there are going to be fewer flights in aggregate. American is going to have larger average aircraft, fewer flights. That would have happened anyway as part of their restructuring, but certainly this merger is going to do nothing to change it.”
About the merger’s effect on United, Higgins said: “It makes American a little more competitive. They pick up something like three market share points in Chicago at O’Hare with grafting US Airways on their network. It makes them a little bit bigger. They still lag United Continental by quite a bit in terms of seats. This does not change United’s world [materially] in Chicago.”
American and US Airways have 40 percent of the seats to North America out of O’Hare, while United Continental has 48 percent, he said.
In markets from O’Hare to the East Coast, which now are flown entirely by regional jets, the new American Airlines may be able to justify having a mainline narrow body aircraft at certain points of the day because they’ll have the critical mass to support it, he said, adding that fewer flights would mean less runway demand.
American Airlines and US Airways said Thursday that they will join forces to become the largest carrier in the world. The boards for their parent companies, AMR and US Airways Group, voted Wednesday in favor of the $11 billion deal.
The airlines said that they expect the merger to result in about $1 billion in benefits, with $900 million coming from the bigger airline’s ability to woo corporate travelers away from competitors, and about $150 million in cost savings.
Higgins noted that the merger will give American greater strength in the Southeast and Northeast, and he said you’re likely to see more head-to-head competition in markets like Chicago to Rochester and “Buffalo, markets where US Airways has historically had a strong presence and has a strong frequent-flier base, Charlotte, the Carolinas.”
Robert Mann, president of aviation industry consulting company RW Mann & Co. Inc., says United has cause to worry about China, where United and Delta are now the dominant players.
“I suspect that is one of the very first network changes the new American will probably want to make, to evaluate how it can better compete in the U.S. to Asia markets where it doesn’t have much service on its own network,” he said.
He also sees the merger lessening prospects for an additional runway at O’Hare.
“What has been happening in the industry overall is there has been a reduction in flights and a reduction in overall capacity, so that has generally put off the need for new concrete at airports,” he said. “I suspect as the industry continues to consolidate, that that will continue to be the case. The rationale for investments in new runways is I think difficult to make at this point in time.”
But Mike Boyd, chairman of Boyd Group International, says the merger should increase the need for O’Hare expansion.
“The merger will open up the potential for the American system to serve a number of places in the Deep South from Chicago that they’re not serving today,” he said. “There will be some eventual expansion of Chicago service.”
As for the deal’s effect on United, he sees “very little impact. “
“The biggest thing is United will be competing now with one paint job rather than two, but the net merger does not bring a whole lot more market power to American vs. United,” he said. “As far as Chicago goes, US Airways is not much of a player there, so putting it together with American Airlines isn’t going to give it any more power or any more competitive threat to United than they have today.”
Aviation Commissioner Rosemarie Andolino contends the merger would have no impact on the airlines’ willingness to bankroll a fourth runway at O’Hare.
“We’ve been through this before with United,” she said. “We went through a bankruptcy and a merger. Here we are again. . . . Whether there was a merger or not, the discussion points are still the same. I don’t think the merger affects it — other than the fact that right now they’re very preoccupied.
“The Chicago market was a big gap for US Airways and yet a very strong market for American that will continue to be one of their five cornerstone markets,” she said. “Having now two of the largest air carriers hubbing in Chicago and having that infrastructure to continue to more efficiently grow their route structure and add service and connectivity — I think it strengthens our position. . . . Chicago is an airport of national significance. We need to continue to invest in our airport.”
Andolino refused to say whether talks have begun in earnest on ways to finance the fourth runway. She would say only that City Hall has a “regular conversation” with the airlines “on all issues related to our airport.”
“The airlines have always stated they think the program should be demand-driven,” she said. “We’ve always said we’re looking to the overall future of our city.”
Mary Rose Loney, who served two stints as Chicago’s aviation commissioner under former Mayor Richard M. Daley, said she doesn’t think bankrolling a fourth runway at O’Hare will be the “highest priority” for the mega airlines, assuming the merger gets federal approval.
“The two carriers are gonna be looking at how they’re going to integrate their existing hub airports,” she said. “For American, that’s Dallas, Chicago and Los Angeles. For US Air, that’s Philadelphia, Washington Reagan and Charlotte. They’ve made no doubts about the fact that they want to go after LaGuardia. They’re gonna want to look at that.”
The merger still must be approved by the bankruptcy court overseeing American’s bankruptcy restructuring and federal anti-trust regulators.
Contributing: Sun-Times wires