CEOs: Airline Mergers, Contraction Probable

David Neeleman, left, and Gary Kelly head airlines -- JetBlue and Southwest -- that make a profit.

Gerard Arpey of American Airlines says that consolidation is inevitable but that it won't be easy.

The chief executives of five rival airlines agreed Thursday that the industry is likely to shrink amid unsustainable fuel costs and intense competition -- but they added that such consolidation isn't likely to come quickly or easily.

The executives spoke at a panel discussion during an aviation conference sponsored by Phoenix Sky Harbor Airport. It was a rare appearance of some of the industry's highest-ranking officials, and it occurred while executives from US Airways and America West continued to hold discussions about a possible merger or combination of operations.

"Consolidation, inevitably, is going to play a role" in the recovery of the airline industry, said Gerard Arpey, chief executive of Fort Worth-based American Airlines. But, he added, "neither consolidation or liquidation comes very easily in the airline business."

The panel also included Gary Kelly, chief executive of Dallas-based Southwest Airlines. The other panelists were David Neeleman of JetBlue Airways, Jeff Potter of Frontier Airlines and Mark Dunkerley of Hawaiian Airlines.

Arpey and others said the chief barriers confronting consolidation include the government, which has the ability to block mergers; organized labor, which often opposes mergers and buyouts to protect the seniority of its members; and the fact that most airlines don't have large cash reserves to buy rival companies.

"First we have to get our own house in order," Arpey said. "Consolidation isn't some easy answer."

Mergers tend to add costs and complexity in the short term, Kelly said -- two things the airlines are desperately trying to wring out of their systems. In addition, liquidations tend to come very slowly because the capital markets continue to fund airlines even in bankruptcy.

Even if it happens, industry consolidation only helps the other airlines if it pulls seats and airplanes out of the system, said Potter of Frontier. "It only helps if there is a contraction of capacity," he said.

It could hurt the industry if it allows an ailing airline, which otherwise would have gone out of business, to keep flying. Still, the high price of jet fuel and continued heavy competition make some sort of change inevitable, even if the pace is slow. American announced an increase in fares Thursday night in the industry's latest effort to cover fuel costs.

Even Southwest Airlines, the largest carrier that has remained profitable, wouldn't be making money without its fuel hedging program, which allows the carrier to buy fuel at lower prices, Kelly said.

"No one could make money right now," he said, with crude oil prices above $50 per barrel. Southwest could break even if oil dropped to the mid- to high $40 range, he said.

During the next five years, "I think you'll see some consolidations and some failures," Arpey said.

That expectation was touched on earlier by Rick Schifter, a managing partner at Texas Pacific Group, a Fort Worth-based investment firm that has previously invested in Continental Airlines, America West and European carrier RyanAir.

"I don't think you see a significant recovery without some contraction in capacity," he said. "How it happens is a tough question to answer."

In a briefing with reporters after the panel discussion, Arpey also defended American's decision to back a new, low-cost airline booking system, G2 SwitchWorks.

American and several other carriers have paid the firm advance fees exceeding $20 million to handle some ticket distribution and may end up with equity stakes in the company.

The arrangement was blasted Thursday by the Business Travel Coalition, an advocacy group for business travelers. Kevin Mitchell, the group's chairman, said it could lead to abuses by the airlines and called for a federal investigation.

Arpey said American is simply trying to lower costs with a more efficient system of distributing fares.

"We're trying to take a piece of our distribution costs and give it to our customers," he said.