United, US Airways fly closer to merger
May 13, 2008
United Airlines is closing in on a merger with US Airways, sources say, after
being spurned by Continental Airlines and Delta Air Lines.
The combined carrier would be headquartered in Chicago, United's base and home
to its largest airport hub, said a person familiar with the negotiations.a person familiar with the negotiations.
But United executives aren't expected to run the carrier, which would be the
nation's second largest, slightly smaller than the proposed Delta-Northwest
Airlines tie-up announced last month. Top duties are likely to be assumed by US
Airways Chief Executive Doug Parker and its president, Scott Kirby, said people
close to the Phoenix-based carrier.
Others caution that the management team's makeup and a host of other issues have
yet to be sorted out and that an announcement isn't imminent.
The carriers have been down this path before. United and US Airways explored a
merger in 1995 and went so far as announcing a deal in 2000, only to shelve it
14 months later amid a slowing economy and opposition from labor and regulatory
officials.
As in 2000, United and US Airways are expected to shed assets in the Washington,
D.C., market, where overlapping operations are likeliest to raise antitrust
concerns. United is the dominant carrier at Washington Dulles International
Airport; US Airways is the largest at capacity-constrained Reagan National
Airport.
AirTran, JetBlue and Virgin America officials all say they would be in the
market for landing rights and gates that the carriers would divest at Reagan
National and other East Coast strongholds if a merger were consummated.
"There are some places we're keeping a very close eye on," said David Cush,
president and CEO of San Francisco-based Virgin America, an upstart airline
aimed at business travelers that plans to rapidly expand its cross-country
routes. "If a deal is proposed, we'll get our wish list together."
United and other carriers are contemplating industry-changing consolidation amid
a credit crisis, lower consumer spending and record-high fuel prices. In
addition to the Delta-Northwest merger, American Airlines is negotiating an
alliance with Continental that would enable the carriers to sell tickets on each
other's flights.
All airlines are struggling to cope with the sharp industry downturn. But the
pressure is especially keen for United CEO Glenn Tilton, whose airline's
performance badly trailed its peers during the first quarter and who hasn't been
able to deliver a deal to shareholders, despite being the industry's most vocal
proponent of consolidation.
What's more, United is projected to suffer the deepest 2008 losses in the
industry, an estimated $10.71 per share, at the current oil prices, according to
a research report published Friday by analyst Kevin Crissey of UBS Investment
Research.
The airline with the second-largest projected loss? US Airways, which Crissey
estimates will lose $10.16 per share. Parker also has advocated consolidation
and last year failed in an attempted hostile buyout of Delta.
Combining with US Airways would provide United with a $5.3 billion cash cushion,
potential cost-saving synergies of at least $1.5 billion and the means for even
more drastic cuts if needed, like parking the two carriers' 111-plane fleet of
aging Boeing 737-300 jets, sources said.
Sources expect any merger to include capital from strategic investors, which
could include global alliance partners or a Middle East-based sovereign fund.
While United planned to borrow to fund its $12 billion buyout of US Airways in
2000, this time executives want a deal that would strengthen its balance sheet.
But some question whether those gains would offset a fuel bill that would rise
as much as $6 billion in 2008 for the combined carriers, or demands by unions at
United and US Airways to raise their wages, the lowest among major airlines, up
to the industry average.
Jake Brace, United Airlines' senior vice president and chief financial officer,
said mergers will work only if they are accompanied by a major revamping of
airline operations.
"Consolidation by itself is not the solution. The industry will need to do many
things to create business plans that work in this environment," said Brace, who
declined to comment on any talk of a merger. US Airways also would not comment.
Even so, many longtime aviation observers are skeptical that the megacarriers
formed by combining Delta with Northwest and United with US Airways would be
stronger and more efficient than the carriers operating as stand-alone
companies.
"There are [few] easy answers for an airline in United's situation, but a merger
just isn't one of them," said Hubert Horan, a Phoenix-based aviation consultant.
Horan thinks that a United-US Airways linkup may find it more difficult to
navigate the industry's troublesome landscape. He thinks the costs of combining
computers, reservation systems and fleets could wipe out much of the potential
cost savings. There's also the possibility of potential disruptions that could
be triggered by trying to integrate United's pilots with their balkanized
counterparts at US Airways.
"The last thing you need, especially heading into a recession and with fuel
volatility, is to spend $1 billion of cash reserves that are already dwindling
... on what would be the most hellaciously complex merger in aviation history,"
Horan said. "It's like dropping a gasoline-soaked bomb on six union groups.
Source: The Chicago Tribune
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