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Los Angeles
Times
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May 25, 2000, Thursday, Home Edition
SECTION: Business; Part C; Page 1; Financial Desk
LENGTH: 1452 words
HEADLINE:
NEWS ANALYSIS;
2ND TIME AROUND FOR UNITED-US AIR;
AIRLINES:
PLANNED MERGER WILL FACE SAME LABOR CONCERNS THAT THWARTED A DEAL IN 1995.
THAT'S ON TOP OF ANTITRUST HURDLES.
BYLINE: JAMES F.
PELTZ, TIMES STAFF WRITER
BODY:
Anyone
analyzing whether United Airlines' parent, UAL Corp., can actually complete a
planned $ 4.3-billion buyout of smaller rival US Airways Group Inc., a proposal
the carriers confirmed Wednesday, might do well to revisit what happened between
the two airlines 4 1/2 years ago.
UAL was looking to buy US Airways at
that time, too, but UAL's then-chairman, Gerald Greenwald, got an earful from
United's powerful labor force that they wouldn't back the deal. So it was
scrapped.
Now, UAL's new chief executive, James Goodwin, is trying again
to acquire US Airways and make United--already the world's biggest airline--into
an industry behemoth with more than 6,500 daily flights worldwide, more than
145,000 employees and $ 27 billion in annual revenue.
But once again,
labor could be the biggest stumbling block to completing the deal, even more so
than the antitrust concerns that undoubtedly will be raised by U.S. and foreign
airline regulators, or the possibility of competing offers. In fact, the
enormous complexity of melding two airlines' employees--who typically are
unionized and very concerned about keeping their seniority, wage levels and
other benefits intact within the merged carrier--is the main reason airline
combinations seldom occur.
American Airlines was hobbled in early 1999
when, after buying tiny Reno Air, angry American pilots staged a weeklong
sickout in protest.
The issue is even more prominent at UAL, because the
pilots and other employee groups own a combined 55% of the company's stock and
have seats on UAL's board of directors.
"The pilots are the ones who
will determine whether or not this thing works," said Terry Trippler, who runs
1Travel.com, a Minneapolis-based travel site that focuses on air fares.
"Now remember, we're talking about the cockpit; we're talking about big
egos here," he said. A key sticking point, he added, will be how the issue of
pilots' seniority is handled in a combined company.
So while some
analysts suggest that a UAL-US Airways marriage could open the door to a wave of
additional airline mergers, or that all this consolidation could lead to higher
ticket prices for travelers, all of that speculation might be premature until it
becomes clear that the employees of United and US Airways are on board with this
merger.
Yet already labor's unease is apparent. No sooner had UAL and US
Airways announced their deal than the Air Line Pilots Assn., the union
representing United's 10,000 pilots, expressed its "strong concerns" about the
deal. And it chastised UAL for inking the pact before "reaching full agreement
with the United pilot group on all issues."
US Airways, an amalgam of
airlines merged together in the 1980s, also has had its share of labor strife,
although within the last year it has signed new contracts with its mechanics and
flight attendants.
The antitrust issues, meantime, are not small, by any
means. Travel experts and others criticized the deal on two main grounds: That
ticket prices undoubtedly would go up because there are already only about 10
major U.S. airlines, and that any strike or work stoppage at such an enormous
airline--the combined carriers would have hub airports at eight major cities,
including Los Angeles--would severely affect not only the U.S. travel system but
the whole economy.
"Airline managements today are not concerned with the
consumer as much as they're concerned with their damned stock price," said
Michael Boyd, who heads Boyd Group, an aviation-consulting firm in Evergreen,
Colo. "There would be fewer options, less competition," and ultimately the
merger would be "to the detriment of the consumer," he said.
"We're
going to eliminate an airline and, if we have reduced competition and prices do
not go up, it will be the first time in history that that will happen in the
free-enterprise system," Trippler said. Plus, a strike "could really cripple the
country," he said.
Analysts also noted that speculation is mounting that
Northwest Airlines and Continental Airlines might merge if this deal goes
through. Northwest and Continental already have a far-flung alliance whereby
Northwest owns a 51% voting stake in Continental.
Yet the Justice
Department sued those two airlines 18 months ago on grounds that the pact was
anti-competitive, although the agency did not block the deal from going forward
by seeking a restraining order or injunction.
Regardless, analysts said
the fact that the Justice Department is still reviewing that alliance likely
means that actual mergers between UAL-US Airways, Continental and Northwest or
any other big airline combinations might not pass muster.
Jennifer Rose,
spokeswoman for the Justice Department's antitrust division in Washington, said:
"We're aware of the transaction and we will review it closely."
Wall
Street also had concerns about the merger. Amid suggestions that UAL is paying
too much for US Airways with its cash offer of $ 60 a share, UAL's stock plunged
$ 7.19 a share on Wednesday to $ 53.19.
US Airways' shares soared $
22.69 to $ 49 a share. But its close well below UAL's $ 60 offer likely
reflected investors' expectation that the deal's closing is at best months away.
It may also indicate that not everyone on Wall Street sees a bidding war
breaking out for US Airways.
United, based in Elk Grove Village, Ill.,
has major hubs not only in Los Angeles but in San Francisco, Chicago, Denver and
Washington. US Airways, based in Arlington, Va., has hubs in Pittsburgh,
Philadelphia and Charlotte, N.C.
With more than 2,300 flights a day,
United flies more than 570 jets to more than 130 destinations in the United
States and 25 other countries. US Airways and its regional carrier US Airways
Express offer more than 4,100 flights daily in 38 states and 12 countries.
One of the key assets that UAL sees in the deal is US Airways heavy
concentration of routes in the Northeast and mid-Atlantic states, including US
Airways' Shuttle that links New York, Washington and Boston.
Those
routes, combined with United's enormous service--particularly on
transcontinental routes--would make the enlarged United an aviation powerhouse
that would be far larger than the current No. 2 U.S. airline, AMR Corp.'s
American Airlines.
AMR and Delta Air Lines, in fact, are widely expected
to weigh counteroffers for US Airways or consider mergers of their own to stay
competitive with United. Indeed, AMR also thought about buying US Airways in
1995 when UAL was weighing the move.
"Doing nothing is not a tenable
option for American and Delta," PaineWebber Inc. analyst Samuel Buttrick
maintained in a new report.
UAL's $ 60-a-share offer, more than double
US Airways' Tuesday close of $ 26.31 a share, clearly was aimed at discouraging
counter bids.
"They had to go in with a knockout punch right away," said
Paul McManus, a senior vice president at money manager Independence Investment
Associates Inc. (UAL also plans to assume $ 7.3 billion of US Airways' debt and
aircraft-lease obligations.)
Despite all of these concerns, UAL's
Goodwin and his counterpart at US Airways, Chairman Stephen Wolf, said the
combination's assets would more than offset any problems.
The executives
noted at a news conference that the "new" United would offer one-airline service
between more than 560 new pairs of cities, reduce check-in hassles and baggage
transfers, and give both airlines' frequent-flier-mileage participants more
places to fly.
In clear recognition of competitive concerns, United
promised to freeze U.S. point-to-point fares for two years, with exceptions for
fuel costs and inflation. The carrier also vowed not to cut travel agents' base
commissions on U.S. flights again for two years.
*
Times
wire services were used in compiling this report.
The
Less-Competitive Skies
The merger of United Airlines,
the nation's largest airline, with US Airways, the
sixth-largest, would create a company with more than $ 25 billion in annual
revenue. The combined carrier would account for about 1 in 3 seats on domestic
flights and could stifle competition, according to some industry experts.
Market Share (in billions of revenue passenger miles*)
United:
125.4
American: 111.9
Delta: 104.7
Northwest: 741.
Continental: 58.0
U.S. Airways: 41.5
Southwest: 36.5
Trans World: 26.0
America West: 17.7
Alaska: 11.8
* Miles flown by paying passengers.
United Airlines
Monthly closes and latest:
Wednesday:
$ 53.19,
down $ 7.19
US Airways
Monthly closes and latest:
Wednesday:
$ 49.00,
up $ 22.69
Sources: Air
Transport Assn., Aviation Daily, GKMG, Associated Press
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LOAD-DATE: May 25, 2000
