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Analysis: Northeast dominance is key asset to merger
Wednesday, May 24, 2000 By Andres Martinez, Post-Gazette Staff Writer
Merger news often shocks, entailing previously unimaginable combinations.
AOL acquires Time Warner! MCI WorldCom buys Sprint. Or, to take a walk down memory lane, Westinghouse takes over CBS.
But the only shocking aspect about the news that UAL Corp., parent of United Airlines, has agreed to acquire US Airways is that it didn't happen a lot sooner. In the nation's airline industry, US Airways has long been the most coveted bride, and it was only a matter of time for her to walk down the aisle.
The dowry that US Airways, the nation's sixth largest carrier, has to offer suitors is its dominance in the Northeast. In addition to its hubs in Philadelphia and Pittsburgh, US Airways is the leading carrier at the key business destinations of Boston, Washington's Reagan National and New York's La Guardia. It also owns one of the two extremely profitable shuttles between these three airports.
UAL's offer of $60 a share -- a staggering 131 percent premium to US Airways' closing stock price yesterday -- is a tribute to the value of that stronghold.
Neither United nor American has much to offer travelers trying to get from Philadelphia to Boston, from Pittsburgh to New York, or from New York to Baltimore. And given the congestion at Northeast airports, with their limited number of available slots, dominance in the region is not easily contested.
Given these realities, it is not surprising that both airlines have been rumored buyers of US Airways in the past. United came closest in 1995, when a deal fell through at the eleventh hour due to opposition from its employees, who own a controlling stake in the company. American was subsequently interested, too.
The need for both big carriers to build a significant presence in the Northeast is more acute than ever, at a time when airlines around the world are striving to provide passengers a seamless system on which to travel. Hence United's Star Alliance, binding it in code-share agreements with airlines as diverse as Thai, Brazil's Varig and Scandinavia's SAS airlines. In capturing US Airways' customers, United will be servicing them not only to Boston, but to Oslo and Rio as well.
It was this trend of global conglomeration that must have convinced US Airways' leadership that it was too late to try and play catch-up with the leading carriers by going it alone.
Initial accounts are that United, which will have 6,500 daily flights after the merger, will keep practically all of US Airways' 40,000 employees, and preserve the hub status of Pittsburgh, Charlotte, N.C., and Philadelphia.
But a suitor's promises don't always outlive the honeymoon. Will it keep its hubs in Philadelphia, Pittsburgh, Dulles and Chicago intact?
The answer is a most definite maybe, and only time will tell how maintenance and other such operations are to be rationalized. The fact that the two carriers' route systems overlap so little -- again, the main impetus behind the merger -- is an encouraging sign.
Indeed, given the congestion at United's O'Hare hub, it may make sense for the airline to boost Pittsburgh's status as a hub for passengers connecting from the Northeast to its western hubs in Denver and on the West Coast.
Passengers originating from Pittsburgh should have better alternatives when heading west, as well as abroad. Conversely, under the unlikely but worst-case scenario that the merged entity might downgrade Pittsburgh's status as a hub, residents might benefit from lower fares as other airlines seek to increase their local market share.
Before any of these scenarios unfold, Uncle Sam will have to give his blessing. United, which has a hub at Washington Dulles, is reportedly ready to sell off US Airways' routes from Reagan National, excluding the shuttle and routes to its hubs, in deference to concerns that the combined airline would be too dominant in the nation's capital.
The reinvigorated antitrust officials at the Justice Department, who are carefully reviewing a far less ambitious alliance between Continental and Northwest, the nation's fourth and fifth largest airlines, will closely examine this one.
And expect American, Delta and other powerful airlines to lobby vigorously against this marriage. US Airways is too alluring a bride to let go without a fight.
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