United-US Airways marriage faces better chance - East Valley Tribune: News

United-US Airways marriage faces better chance

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Posted: Thursday, May 1, 2008 2:53 pm | Updated: 9:51 pm, Fri Oct 7, 2011.

CHICAGO - United Airlines and US Airways saw their first attempt at marriage foiled earlier this decade by the deal's high cost coupled with stiff opposition from lawmakers, unions and consumers.

This time, a proposal for them to combine could face an easier route to approval in Washington, where the last bid died in July 2001. But first it has to get past unhappy pilots and other obstacles that could ground any bid to create the world's largest airline.

The two carriers are in advanced talks to join forces, scrambling to respond to the threat posed by the proposed Delta-Northwest mega-carrier. No agreement is assured, and either airline could walk away to seek another partner or an alliance instead.

Industry experts say United-US Airways would be an imperfect union - a deal fraught with risk but one that makes some sense competitively.

UAL Corp.'s United sees the chance to gain a bigger foothold in the Northeast, where it lags competitors, and attract more customers for flights to Europe. US Airways could tap into its larger rival's powerful international network. And there is enough overlap to provide the opportunity for significant cost savings.

However, it's not seen as nearly as good a fit route-wise as the failed try at a combination between United and Continental Airlines Inc., and US Airways Group Inc. still hasn't resolved pilot seniority and other loose ends from its acquisition by America West in 2005. Also, sky-high fuel prices and an expected decline in air travel demand could limit any savings.

"There's a lot of operational risk there," said Roger King, an airline analyst for CreditSights. "None of this stuff is going to help them tomorrow - it's all long-term, revenue-enhancing possibilities. But it would give (an expanded) United the largest domestic footprint of any airline."

United unveiled the first plan to couple with US Airways on May 24, 2000, bidding to dramatically increase its presence on the East Coast, strengthen its entire network and nearly triple its daily flights.

The proposed $4.3 billion acquisition quickly ran into turbulence amid opposition from the airlines' rivals, labor unions, Congress, consumer groups and state attorneys general, many of whom complained it would create a dominant airline that limited competition, particularly in the Washington D.C. area.

Economic realities of the airline industry, which was struggling even before the terrorist attacks of Sept. 11, 2001, also made the deal's price tag increasingly exorbitant. By the time the Justice Department formally rejected the deal after 14 months, United already was moving to try to call it off.

This time, the industry consensus is that a United-US Airways combo has a much better chance to be approved by federal regulators, along with Delta Air Lines Inc.-Northwest Airlines Corp., especially in light of questions about the future financial health of both carriers.

Just in case, though, the rush is on to put together a deal that could be signed off on before a new administration takes over in January.

Morningstar analyst Brian Nelson sees the two carriers as likely needing to make some divestitures in areas where they overlap in order to be approved - the Washington area and perhaps also the West, where both have strong operational bases.

Their overlay of hubs also would be looked at closely. United has hubs in Chicago, Denver, Los Angeles, San Francisco and Washington's Dulles International Airport, while Tempe, Ariz.-based US Airways has primary hubs in Charlotte, Philadelphia and Phoenix and secondary hubs in Las Vegas, New York, Washington's Reagan National Airport and Boston.

"It's difficult to say how much scrutiny there will be on this because the landscape is in constant flux as carriers are trimming capacity across the board," Nelson said. "It just seems that United is searching for anybody at this point, and I think that speaks potentially to their financial position."

United maintains it is financially sound, despite reporting a $537 million first-quarter loss last week that spooked investors and resulted in a huge sell-off of its stock.

Shares in the Chicago-based company remain down 25 percent since then despite climbing $1.20, or 8.1 percent, to $16.10 in Thursday trading. US Airways shares, meanwhile, rose 76 cents, or 8.9 percent, to $9.35 as falling oil prices lifted the whole sector.

US Airways would be a relatively affordable acquisition for United with a current market cap of $861 million, even with the latest surge.

Standard & Poor's analyst Phililp Baggaley also says the two airlines' pay scales are fairly similar, which might make labor costs lower than they would have been under a United-Continental combination.

But winning over needed support from pilots and other employees could be a stumbling block, especially at larger United. United's pilots union this week said a tie-up with US Airways would be "extremely negative from United's perspective."

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