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United to buy US Airways $11.6 billion deal creates a colossus; antitrust OK up in the air Wednesday, May 24, 2000 By Frank Swoboda and Don Phillips, The Washington Post
United Airlines, the world's largest carrier, has agreed to acquire US Airways for $11.6 billion in a deal that would create a giant airline with nearly twice the number of flights as its nearest competitor.
Jobs, flights in Pittsburgh protected in US Airways sale
Online graphic: Marriage made in the heavens
All of US Airway's operations would be taken over by United and all of US Airways' 46,300 employees below top management would be guaranteed jobs, sources close to the deal said.
If the deal is completed, the US Airways name would disappear from the skies.
The plan includes the sale of most of US Airways' routes at Reagan National Airport to Robert T. Johnson, founder of Black Entertainment Television. His new airline, to be called DC Air, would be the nation's first minority-owned airline.
Officials close to the sale said the new airline would directly compete with United in U.S. Airways' three hubs --Pittsburgh, Philadelphia and Charlotte, N.C. -- as well as in Washington, D.C.
United's takeover, which was approved by the boards of directors of both airlines yesterday, also would end the latest chapter in the career of US Airways Chairman Stephen Wolf, 58, who has made his mark in the industry rescuing troubled carriers, including United itself in the late 1980s. Wolf is not expected to remain with the combined airline.
The agreement, according to sources, also includes a two-year freeze on all of United's domestic fares other than adjustments to reflect increases in fuel prices and the consumer price index.
The acquisition must be reviewed by the Justice Department's antitrust division. The deal with Johnson, a member of the US Airways board of directors, is seen as a way to help allay government concerns about the overall merger.
"We think we've covered all the bases," said a source involved in the negotiations, noting that Congress long has pressed for minority ownership and new entrants in the airline industry.
Still, in an era in which consolidation seems to be refashioning every American industry, the merger between two prominent airlines was expected to trip deep regulatory inspection while intensifying debate about the domination of certain "hub" markets by major carriers.
"This is not a slam-dunk by any means," said an aide to the Senate Judiciary Committee's antitrust subcommittee who asked not to be named. "You can expect real scrutiny by the antitrust regulators and the possibility of congressional hearings."
The aide said there may be "some pro-competitive benefits to the acquisition and some pluses for consumers, but there are definitely going to be questions raised about competition and concentration in the industry."
US Airways is the nation's sixth-largest and its routes dominate the eastern half of the country. The acquisition of Arlington, Va.-based US Airways would give United a major passenger feed for its transatlantic routes.
The newly merged airline would have hubs from coast to coast and about 6,500 daily flights, nearly double that of American Airlines, the nation's second-largest carrier. As of yesterday, United was the No. 1 airline in the world ranked by employees and revenues, but only No. 9 in market value.
Before spinning off DC Air, the combined United-US Airways would have revenue of $26.7 billion, almost $5 billion more than No. 2 American Airlines, and 146,300 employees. Based on 1997 numbers, the combined company would have revenue passenger miles -- an industry measure -- of more than 162.8 million, well above American's 106.9 million.
Some industry experts predicted the merger would never pass muster with the government, and even if it did it could take years for the deal to be completed.
Clark Onstad, former Federal Aviation Administration general counsel and airline executive, said United's bid will spark opposition and probably a scramble for advantage by American Airlines.
"The opponents are going to argue hub concentration between Philadelphia, Pittsburgh and Dulles, while the proponents are going to point to new entries such as Jet Blue and Southwest on the East Coast," Onstad said. "But Jet Blue went to an airport nobody wants [New York's John F. Kennedy International] and Southwest is concentrating on secondary airports.
"The biggest opponent will be American Airlines, which will try to come out with an East Coast hub," Onstad said. "They don't have one now."
American Airlines said it would have no immediate comment on the merger plan.
United plans to keep US Airways' Washington-New York-Boston shuttle and enough slots at Reagan National to feed Washington area passengers to US Airways' international hubs in Pittsburgh, Philadelphia and Charlotte.
Sources said United has agreed to pay $60 a share for all US Airways stock, a 131 percent premium over yesterday's closing price of $25.93 3/4.
According to sources, the agreement is an all-cash deal with United paying $4.3 billion and assuming US Airways debt of $1.6 billion. The balance of the $11.6 billion price tag will be the assumption of US Airways' aircraft leases.
US Airways has been on a major spending spree, buying Airbus Industrie jets in an effort to rationalize and modernize its fleet. It was unclear last night whether United would continue US Airways' contract with Airbus.
Also uncertain is what will become of Metrojet, US Airways' low-cost airline-within-an-airline, which is based at Baltimore-Washington International. United will gain the Metrojet routes, but it is uncertain whether United will use Metrojet as the basis for a new shuttle operation similar to its low-cost West Coast operation. United might choose to abandon Metrojet, ending US Airways' ambitious plan to go head-to-head with Southwest Airlines.
If United should decide to take on Southwest, the Texas-based airline would face a much tougher competitor with deeper pockets. The two airlines daily wage a low-cost battle on the West Coast.
Another element of uncertainty for US Airways employees is whether United's guarantee of job security means they will have the same jobs they do now, or whether United could transfer employees anywhere within the system. Pilots have no worry because there is a nationwide pilot shortage. However, US Airways management has asserted that the airline has too many built-in costs in other areas, such as maintenance and pilot dispatching.
US Airways already has closed several maintenance bases, but it is uncertain whether United would want to keep all the remaining bases, including Pittsburgh and Charlotte, which has been a hotbed of union discontent.
Also, it is unclear whether United would need US Airways' pilot training base at Pittsburgh. United's training base at Denver is one of the largest and most modern in the industry.
United is primarily an east-west airline, while US Airways primarily flies north-south routes. United said the acquisition would add 560 routes to its system.
Another part of the agreement calls for United to freeze the fees it pays travel agents for the same two-year period that covers the air fare freeze. The airline industry has been trying to wean passengers away from travel agents and onto the Internet to make their reservations. As part of the tensions, the airlines have been steadily reducing travel agent fees.
Negotiations between the two airlines began in March, about the time US Airways wrapped up the last set of labor negotiations with its union workers, an agreement that guaranteed basic labor peace for at least three years and probably longer, under cumbersome federal rules which often drag out talks for several years beyond a contract expiration date.
Union contracts are extremely important in the airline industry in general and for United in particular, which is owned and governed by its unions.
Employees at United have four seats on the airline's board of directors and what amounts to veto power over major changes, such as the appointment of top management and mergers and acquisitions, such as the purchase of US Airways.
Unions at the two airlines did not immediately react to the announcement of the merger agreement. However, all the various work groups at the two airlines are represented by the same unions, all of whom have set procedures for establishing seniority in the event of mergers or acquisitions. The airline industry is one of the nation's most heavily unionized industries, and seniority reigns.
Post-Gazette staff writer Jack Torry contributed to this report.
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