Airlines have made money by controlling their costs and seeking additional revenue. Fees for bags, food, seat assignments and even for the cost of calling to book a ticket have helped keep many airlines in the black recently. Those fees have been instituted throughout the airline system and seem to have little to do with the consolidation craze.
To be fair, there are some initial benefits to combining operations. Merging headquarters and slashing management costs does help the surviving airline, although it can be limited. For example, United has had to hike the pay of Continental employees by 20% to 30% to entice them to move up to Chicago from Houston, a person close to the company told Fortune. The bizarre reason to remain headquartered in such an expensive city, even with tax breaks, shows that airline mergers aren't always rational.
An American combination with US Airways seems to be an especially irrational choice. Its attempts to grow its international business have been marginal at best as it operates from hubs like Pittsburgh, Charlotte, Philadelphia and Phoenix. American's network is far superior and its creditors know that. US Airways would therefore need to offer a lot of cash to sweeten any deal, something it doesn't have.
A pairing with Delta on the surface seems like a more rational choice, but there are a few major obstacles that sour the deal. First, the merger could create an antitrust issue as the two overlap in 65 nonstop domestic city-pairs. United Airlines and Continental only shared 14 domestic city-pairs when they proposed their merger, while Delta and Northwest shared even less at 12 city-pairs. That's important as antitrust regulators tend to look at city-pair concentration as opposed to overall market concentration.
On the international front, a Delta-American deal would upset the carefully balanced frequent flyer alliance system, since they are both the U.S. anchors for their respective alliances, Sky Team and One World. If one leaves to join the other it could be a big hit to passenger volume.
And the connections that the two have with their respective European frequent flyer anchor airlines go beyond the typical partner arrangement as both have attained antitrust immunity over the Atlantic. American is effectively able to legally collude with British Airways on the lucrative New York to London route, while Delta is able to legally collude with Air France/KLM on the equally lucrative New York to Paris route. It's unclear if those contracts would continue after a merger.
In the end it will be American's creditors that will decide the company's fate. Of the nine members on the unsecured creditors committee, three belong to labor unions. The unions will likely move against management of they cut too much. But given that the cost structures at Delta and US Airways are lower, it seems unlikely that a merger would solve their money worries.
American's decision to go bankrupt with $4 billion in cash in the bank has given it enough time to weigh all its options. For now, management has 120 days to present a plan of reorganization to the court. A judge could extend that period out by an additional 18 months, so a deal, if any, is still a ways away. American will most likely emerge as an independent airline with a much stronger balance sheet. Once all cleaned up, it may be American calling the bankers to do a deal on their terms.
