CEOs of UAL, US Airways to Meet To Discuss Progress of Merger Talks
By SUSAN CAREY
May 28, 2008 5:22 p.m.
CHICAGO (WSJ.com) - The chief executive officers of UAL Corp. and US Airways Group Inc. are scheduled to meet Thursday to discuss the progress of their merger talks and share information on potential deal problems that UAL directors raised at their last board meeting, said people familiar with the matter.
The airlines have been exploring a combination for more than two months, although the discussions slowed in April while UAL held separate merger talks with Continental Airlines Inc. After Continental rebuffed United Airlines parent UAL a month ago by saying it prefers to remain independent, United stepped up talks with US Airways.
Thursday's CEO meeting has been scheduled for several days. If the executives can move the companies toward resolving the bulk of the outstanding items, they could approach their respective boards in mid-June for permission to move ahead with a deal, these people said. The people familiar with the situation cautioned that talks could fall apart at any time if the airlines can't agree on terms or if one or both decide a merger is too risky in the current environment of surging fuel prices, tight credit markets and the slowing U.S. economy.
Issues outstanding include how the airlines would raise capital to fund the combination; how to resolve some labor contract issues that could have adverse economic consequences; and how much flexibility they would have to take airplane seats out of their combined system. United continues to study other options that don't include a merger with US Airways, these people said.
If United and US Airways did come to agreement in mid-June, they would follow by two months the announcement of a merger between Delta Air Lines Inc. and Northwest Airlines Corp. That proposal already is undergoing scrutiny by the Justice Department and conceivably could close late this year, creating the world's largest airline by traffic. A UAL-US Airways transaction would be slightly larger.
There are no particular points of contention in the talks between United and US Airways, say the people familiar with the matter. While the airlines have yet to agree on an exchange ratio for a share swap or on who might run a combined company, the carriers do concur that a merger could unlock $1.5 billion in cost and revenue synergies, which is more than their current combined market capitalization.
UAL has been asking whether various labor and other risks can be mitigated without eating into the economic benefits of a combination. For example, integrating the airlines could result in large one-time costs to merge reservation systems, rationalize fleets, and train pilots on new aircraft types.
People familiar with the situation at Chicago-based United said some executives there think a US Airways merger would create value and holds better prospects for United than going it alone. But other executives are focusing more on the risks in the current climate and think it might be wiser to forge a marketing alliance with Continental, although those two options aren't mutually exclusive.
Complicating matters is the fact that United is still stinging from Continental's rejection. Some UAL directors are chagrined that the airline so far has failed to do what it has championed for several years-- merge with another airline, said one person familiar with the board's thinking. Directors felt blindsided by Continental's decision; when the idea of a deal with US Airways was raised at a May 15 board meeting, directors asked some hard questions. Some questions came from the two board members who are labor union representatives. United's unions have said they will oppose a merger with US Airways.
This internal debate has occurred as time grows shorter for a merger deal to receive antitrust scrutiny before the Bush administration leaves office in January. People familiar with US Airways, based in Tempe, Ariz., said the company is feeling frustrated by the shrinking regulatory window and is pressing United for a decision.
"We can continue to analyze (a deal) but not until Labor Day," said one person. "There's no point in keeping going if the antitrust clock runs out."
US Airways, itself the result of a 2005 merger with America West Airlines, is the nation's seventh-largest airline by traffic. It still is digesting some of the labor integration challenges present since the merger, but has largely recovered from the operational problems that dogged it soon after the merger closed. Its CEO, Doug Parker, is such an ardent proponent of consolidation that he made a hostile bid for Delta in late 2006, when that carrier was in bankruptcy-court protection. Delta ultimately repelled that effort.
Glenn Tilton, UAL's CEO, has been a champion of consolidation for several years, believing that fewer, larger U.S. airlines would have better pricing power in the domestic market and improved competitive posture against large, deep-pocketed foreign carriers. UAL has talked to Delta, Continental and US Airways in recent months.
USA320Pilot comments: As I indicated earlier this could be an interesting week.
Regards,
USA320Pilot
