Airlines must merge to survive, executives told

The airline industry needs to shrink in order to thrive in the tough new economy, and consolidation is key to airlines' long-term survival, US Airways Group Inc. chief executive officer Doug Parker said in Philadelphia yesterday.

Speaking to a conference of the nation's airport managers, Parker praised the recent merger of Delta Air Lines Inc. and Northwest Airlines Corp., which created the world's largest carrier. But he said more combinations were needed to shore up the industry.

"We have too many seats fighting for the same customers and too many airline hubs that drive a lack of profitability," the head of Philadelphia's largest airline said at the gathering of the American Association of Airport Executives.

Parker told the 1,500 attendees that it was time for airlines to work together and find a common ground "to get this industry fixed. We're on the right track, but we have a long way to go."

"This is a broken business, and it doesn't work," he said in a ballroom at the Convention Center.

U.S. carriers have been too preoccupied with expansion, battling one another for market share, and "signing labor agreements we couldn't afford" to confront the real problem. "Our industry is still far too fragmented."

Even the combined Delta-Northwest airline has less than 25 percent of the U.S. market, Parker said. The remaining six large carriers, including US Airways, have 10 percent market share or less each, he said. "The solution is consolidation."

Parker, who was chief executive of America West when the Tempe, Ariz., low-fare carrier merged with US Airways in 2005, has long been a proponent of industry consolidation through mergers.

In November 2006, US Airways made an unsolicited bid to take over Delta, which then was emerging from bankruptcy. Delta said it was not interested. The bid was withdrawn 10 weeks later.

Last year, United Airlines and US Airways were in talks to merge, until United walked away from a deal.

Parker said yesterday that the industry's current problems - rising fuel prices and weak travel demand - meant that "the growth rates of the past will not be the growth rates of the future."

The only new airplane orders by U.S. carriers are to replace old aircraft, he said.

Parker predicted that "more airports in the future" will find they were "overbuilt" because "the industry is not going to have growth."

"You'll see a contraction in the near term," he said. "There is more supply than demand."

Parker said airlines and airports needed to "work better together. We could use your support on NextGen," the air traffic management system now under development.

The economy remains a top challenge, along with the volatile oil market. "Oil prices have gone up 110 percent since December," he noted.

Parker said US Airways had not done any fuel hedging - signing contracts that lock in fuel prices in advance - since August. "It [hedging] can be the wrong way to go."

And, while fares need to go up, "we can't raise ticket prices in this economy," he said.

Speaking afterward, Parker said that leisure bookings had increased in recent weeks, although more lucrative business travel remained down, with no sign of a recovery.

While the uptick in leisure bookings has been for just a few weeks, the volume increase has been "significant" and more than the usual surge in vacationers and summer travel, Parker said.

"There is something going on there that is different," he said.

While the airline industry has done a good job in cutting capacity - seats and flights - to meet the reduced travel demand, more cuts may be required if the economy does not improve soon, Parker said.

US Airways has said previously it may make further capacity cuts in transatlantic flying.

Asked about reductions in international flights at Philadelphia International Airport - dubbed US Airways' "international gateway" - Parker said it was "too soon to know." He said the cuts might just be in seasonal service normally reduced in the fall and winter.