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Transportation: A merger is still the best hope for US Airways
Sunday, March 25, 2001 By Frank Reeves, Post-Gazette Staff Writer
United Airlines' takeover of US Airways was supposed to have been completed by now. And the bright future, which airline officials enthusiastically described when the merger was announced in May, was supposed to have begun.
The new airline would encompass the nation's most comprehensive network, connecting United's route system west of Chicago with US Airways' East Coast network. Passengers in Pittsburgh would be able to fly directly to new destinations in Asia and Europe.
The jobs of US Airways' 12,000 employees in the Pittsburgh area also would be secure -- at least for two years. United has pledged to expand and revamp the US Airways maintenance center at Pittsburgh International Airport. The fate of the project had been in some doubt, even before the merger was announced.
But the merger of United, the nation's largest airline, with the nation's No. 6 carrier, has run into some unexpected hitches.
Twice the airlines have delayed consummating the merger in order to give U.S. Justice Department lawyers additional time to complete their antitrust review of the $11.6 billion acquisition. Originally, Justice had been expected to complete its review by January; then by April 2.
Despite the delays, United said earlier this month that it expected the merger, including federal review and approval, would be completed by June 30.
In early March, both airlines also alerted investors that first-quarter losses were likely to be significantly greater than earlier estimates. Both blamed the softening U.S. economy, which they said has caused a decline in flights by business travelers. High fuel costs also have cut into revenue.
In the face of mounting losses, United said it planned to cut spending this year by $200 million. This is a tiny fraction of the $18.7 billion in expenses UAL Corp., United's parent, incurred in 2000.
In addition, US Airways said increased competition from low-cost carriers had cut into its East Coast business, where the airline has long been the dominant carrier.
The deal that Justice Department lawyers are now reviewing is significantly different from the proposal United Airlines Chairman James Goodwin and US Airways Chairman Stephen Wolf announced last spring at a news conference at a Manhattan hotel.
For one, the deal is no longer a cozy affair between US Airways and United. American, the nation's No. 2 carrier, is now a major player.
In a complex arrangement announced in January, United agreed, in effect, to turn over some of US Airways' assets to American once the merger is completed. For example, United and American would jointly operate the US Airways Shuttle operations in the Northeast. American would acquire a 49 percent stake in DC Air, a minority-owned, start-up airline that would serve 44 markets out of Washington's Reagan National Airport that are now served by US Airways. United also would transfer a number of gates, slots and up to 86 surplus aircraft to American.
In return, American agreed to compete with United on key hub-to-hub routes on which United and US Airways currently offer the only nonstop flights. American also would pay United up to $1.3 billion.
The deal between American and United was widely interpreted as an attempt to assuage Justice Department concerns that a United-US Airways merger could stifle competition on the East Coast.
Some analysts also saw the deal as an attempt to blunt American's possible opposition to the United-US Airways merger.
The merger could undergo other revisions before it is approved by federal regulators. US Airways' assets could be divided among additional carriers before a final plan is approved.
But some believe that United, now in a position to dictate US Airways' future, will never walk away from the deal and allow other carriers to acquire or divide US Airways assets.
The continued uncertainty around United's takeover has inevitably led some analysts to speculate about the fate of US Airways should the merger fall through.
US Airways has said that unless it is allowed to merge with United, it cannot remain viable, citing increased competition from low-cost carriers and its lack of a national route network that bigger major carriers have.
Low-cost carriers such as Southwest and AirTran Airways have continued to encroach on US Airways' East Coast turf. In December, AirTran resumed flights out of Pittsburgh International, a US Airways hub, and Southwest continues to add flights that serve the periphery of the New York and Boston metropolitan areas.
But analysts remain divided. Some contend that if US Airways were in such dire shape, United would not have been willing to pay $60 a share for US Airways stock, which was trading at about $26 a share when the deal was announced in May.
Sam Peltzman, a University of Chicago economics professor who specializes in airlines, said US Airways could turn itself around if it were to undergo major restructuring. Management would have to simplify the route system, cut fleet costs and seek labor concessions in a bid to lower expenses, which are the highest in the industry.
But Darryl Jenkins, director of the George Washington University Aviation Institute, holds little hope for US Airways if the merger collapses.
"I don't think US Airways will go out of business next week. It would take a long time, maybe 10 to 15 years. But they would become the next TWA. It would be a slow death. Two or three bankruptcies. And whoever gets the assets in the end would get a shell."
Earlier this month, American Airlines acquired bankrupt Trans World Airlines for $742 million.
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