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The Evolving U.S. Domestic Market Current cycle of industry structural changes: How will the landscape evolve? The Cas

The Evolving U.S. Domestic Market Current cycle of industry structural changes: How will the landscape evolve? The Case for Consolidation. 2007 32 nd FAA Forecast Conference Washington, DC March 16, 2007. Formerly Fragmented Industries Consolidating Globally. Consolidating globally

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The Evolving U.S. Domestic Market Current cycle of industry structural changes: How will the landscape evolve? The Cas

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  1. The Evolving U.S. Domestic Market Current cycle of industry structural changes: How will the landscape evolve?The Case for Consolidation 2007 32nd FAA Forecast Conference Washington, DC March 16, 2007

  2. Formerly Fragmented Industries Consolidating Globally • Consolidating globally • Pharmaceuticals/health care • IT services/software • Energy/refining/retailing • Defense/manufacturing • Maritime/rail/trucking/intercity bus • Distribution/warehousing/logistics • Banking/financial services/insurance • Lodging/hospitality • Telecoms/broadcasting/media • Among those remaining fragmented • Airlines

  3. Why not Airlines? • Maturing industry with “excess capacity” • Poor balance sheets, despite restructuring • Evolving exposure to competitive/operating/regulatory change

  4. Once Again… Why not Airlines? • Fragmented, obsolescent, over-leveraged industry • Extensive “best customer” overlap • Converging practices/processes/models • Complementary business models, scope • Highly competitive, nonstop and O&D • LCCs provide institutional price discipline

  5. Dangerous Profit/(Loss) Swings • Increasing peak-trough amplitude/duration • Alarming to traditional capital markets • Continuing energy cost exposure/leverage • Clearly (ought to be) a policy level concern

  6. Anti-trust Concerns? (With apologies to VIACOM)

  7. Threshold Conditions Favoring • Capital markets understand roll-up economics • Maturing networks, enduring LCCs, alliances • “The Sky’s the Limit”: self-induced congestion • Aging business cycle: when the music stops…

  8. Compelling Metrics Persist • Top 6 US networks’ domestic shares ~ 50% • Legacy infrastructure, crushing debt load/ratings • Mapping to 3 global alliances … (was 5) • JET-A forward curve in contango • Short fuse

  9. Historical Mitigating Factors • Desire for “organic” network ubiquity • Incipient consolidation • Prior value destruction: “Mergers … bad” • ATI concerns: “old” industry environment • Have we run out of excuses yet?

  10. Reality: Continuous Consolidation • Regulated era: Trunks emerge • 1980’s initial post-deregulation scramble • 1990’s post-Gulf War I restructuring • Early 2000’s post-9/11 restructuring • Next opportunity: next outgoing tide

  11. New Formula: M + T + B = R • Management … team with a clue • Target … in restructuring • Billions … in OPM • Results … “No tears” (OK, not too many)

  12. Excuses keep on coming… • “What’s the rush?” • Earnings cycle improving • Energy prices moderating • Bankruptcy opportunities foreclosed • Million$ of rea$on$ to stay independent

  13. All Signs Point to Consolidation • Music stops  consolidation • Citizenship flex  consolidation • Energy cost rise  consolidation • Roll-up economics  consolidation • LCC share expansion  consolidation • Congestion costs/pricing  consolidation • Consumer price resistance  consolidation • Only questions: “What pairings, and when?”

  14. Potential Consolidation Risks • Small community service deterioration • Further service quality deterioration • Workforce integration non-trivial • Except in egregious cases, NOT anti-trust

  15. Consolidation necessary, inevitable • Economics and operations driven • Domestic and international scope • Remaining issues are mode and timing • First Mover Advantage already evident

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