Could US Airways, United
merger fly this time?
Many factors have changed since United's and US Airways' bid to unite was turned down in 2001 (Duh it was AWA)
JEFFERSON GEORGE
jgeorge@charlotteobserver.com
Related Content
Recent histories: Tale of 2 airlines
When US Airways and United Airlines wanted to join forces seven years ago in what was then the biggest merger proposal in U.S. airline history, federal officials rejected it. Harshly.
"Millions of consumers would have little choice but to pay higher fares and accept lower quality air service," U.S. Attorney General John Ashcroft declared in the summer of 2001.
Since then, both airlines have gone through bankruptcy protection -- US Airways twice, and United in the longest case in airline history. Oil prices have shot up 500 percent, from less than $25 a barrel to almost $120 this week. Last month, two other major airlines, Delta and Northwest, announced their merger plans.
In short, the industry has changed, executives and analysts say, suggesting that a US Airways-United link-up actually could be approved this time, if the carriers go through with it.
Both airlines have declined comment, but many analysts have pegged them as potential partners after Continental Airlines -- regarded as United's preferred partner -- decided Sunday to stay separate.
United and US Airways are in advanced talks to combine operations, although either could walk away or seek an alliance instead, the Associated Press reported Thursday.
If they merge, United -- which is strong in the Midwest and West -- would gain a bigger presence on the East Coast and more flights to Europe to balance its Asian service. US Airways, Charlotte's dominant carrier, could tap into its larger rival's extensive international network.
A deal would face hurdles. Cutting flights and reducing service in some markets might save the combined company money, but federal officials who review merger plans may frown on less competition and higher fares.
Then there's the two airlines' ability to actually combine operations -- in particular labor groups that made sacrifices in the bankruptcies and have unresolved issues in US Airways' last merger with America West.
Yet those hurdles may be trumped by an airline industry with more players than in 2001, and in which carriers are running out of ways to cut costs short of consolidation.
"The market really has become more competitive," said Dan Kasper, an airline consultant with LECG in Cambridge, Mass. "Low cost carriers have continued to expand.
"Now there are substantial questions whether the industry can support the number of carriers it currently has."
Bad idea, then and now?
Another consultant, George Hamlin of ACA Associates, said United and US Airways could cite the "failing business doctrine," essentially telling federal officials "you need to let carriers merge so they can survive."Despite industry changes, however, United-US Airways still isn't a good match the second time around, Hamlin said. "I thought it was a bad idea then," he said, "and it's worse now."
US Airways doesn't give United significant international service, Hamlin said, and the only real benefit is US Airways' hub in Charlotte. "Does United want US Airways simply to get a presence in the Southeast?" he said.
Instead, Hamlin said, the industry would be better off letting weaker carriers fail and dividing up the desirable assets. Unclaimed assets -- routes or airport gates -- would reduce capacity, he said.
But airline liquidations, Kasper said, are "really pretty painful for all concerned," compared with a merger in which airlines can negotiate and plan reductions gradually. And as long as the price of oil remains above $50, Kasper said, the industry will have to make cuts.
"Clearly," he said, "there's going to be some attrition in the business."
Lower price this time
One issue that helped kill the last United-US Airways tie-up -- price -- likely won't be a factor this time, experts say.
United's previous $12.3 billion bid -- including $4.3 billion in cash -- came when US Airways agreed in May 2000 to a $60 per share price. By the summer of 2001, however, the stock price had fallen below $25, and United wasn't happy with the deal.
Shares in US Airways closed Thursday at $9.35, up nearly 30 percent from last Friday. At that price, the airline's market value is less than $1 billion, and one analyst said the purchase price could be as low as $700 million.
"That's nothing," said Roger King of CreditSights. "That's like buying 10 planes."
Less clear is the cost of combining work forces, including roughly 6,000 US Airways employees in Charlotte.
Merging labor groups historically has been difficult. Almost three years after US Airways and America West announced their link-up, the two pilot groups remain far apart, continuing to battle over a seniority list. The unions also don't have a joint contract with the company.
United and US Airways want to get their merger approved this year, Hamlin said, before the departure of the Bush administration -- generally seen as more favorable to consolidation.
Because of the labor issues, however, "you don't want to end up with something you rush into and find it becomes a money pit and an operational nightmare," he said.
Kasper agreed. "It has potential to be messy. None of the groups is very happy."
Still, labor issues likely would affect only the carriers' decision to merge, not federal approval, Kasper said. "They're only going to look at competition" in markets served by US Airways and United, he said.
And while the airlines' 2001 merger was rejected soundly, the harsh words then don't mean that a combined United-US Airways never had a chance and won't be approved this time, Kasper said.
"Once the decision is made, the guy's got to justify it," he said. "I wouldn't expect the attorney general to get up and say it was a close call." -- The Associated Press contributed
-- Jefferson George: 704-358-5071
Mulling a merger
After their last deal was denied in 2001, US Airways and United Airlines -- if they decide to merge -- might have an easier path this year.
Why it could happen
1. Record-high oil prices are battering airlines' bottom lines.
2. More competition from other carriers means fewer antitrust concerns.
3. The purchase price for US Airways would be cheaper now.
Why it could fall apart
1. Concerns still exist about high fares and the new airline cornering some markets.
2. Unhappy employees could make merging labor groups difficult.
3. The new airline still could go bankrupt, causing even more turmoil.
See you soon. 
