Copyright 2000 The Baltimore Sun Company
THE
BALTIMORE SUN
October 8, 2000, Sunday ,FINAL
SECTION: BUSINESS ,1C
LENGTH: 1758 words
HEADLINE:
United, US Airways: Can this merger fly?
Troubles: The
merger of United Airlines and US Airways faces some serious
antitrust questions. The combined airline would control more than 25 percent of
the nation's air traffic.
BYLINE: By Paul Adams
SOURCE: SUN STAFF
BODY:
The math is simple. United Airlines is offering US Airways' shareholders
$60 per share, a nearly 100 percent premium over the airline's
current stock price.
That is why few expect US Airways shareholders to
vote Thursday against the proposed $11.6 billion merger with
United Airlines. But you won't see too many new investors rushing to buy stock
in the Arlington, Va.-based airline.
Some say the stock market cast its
vote months ago, when industry analysts began doubting whether federal
regulators would allow the No. 1 and No. 6 airlines to combine into an industry
behemoth controlling more than a quarter of the nation's air traffic and likely
touching off a frenzy of industry mergers. The deal is also a victim of timing.
After a wild summer of airport delays and labor disputes, the merger has landed
United at the center of a public debate about high fares, long check-in lines
and crowded airplanes that have left many U.S. travelers fuming and many
politicians calling for more competition and accountability in the airline
industry.
Much of the regulatory concern centers on the
Baltimore-Washington market, where a combined United and US Airways would enjoy
near monopoly status at Washington Dulles International and would hold the No. 2
spot at Baltimore-Washington International Airport.
Though the airlines
and some industry analysts say further consolidation could be healthy for the
industry, skepticism has kept US Airways' stock in the basement relative to
United's offer.
"The market is saying that they have doubts this thing
will ever be consummated," said Rob Milmore, an airline analyst with Arnhold
& S. Bleichroeder. "Right now, the government is anti-big."
The
Department of Justice has recently proven its willingness to take on industry
giants like Microsoft. And it has demonstrated a healthy skepticism about the
state of competitiveness in the airline industry by suing Northwest Airlines in
1998 to force it give up its controlling interest in Continental Airlines.
Antitrust officials also went after American Airlines last year, saying
it had illegally driven away a smaller competitor at its Dallas-Fort Worth hub
and then raised fares.
The Justice Department could have its hands full
if it allows United to merge with US Airways. It is widely believed that the
merger would spur American Airlines' parent AMR Corp. to link up with either
Northwest Airlines or Delta Air Lines. Meanwhile, Delta would likely go after
Continental Airlines. In the end, the nation's six major carriers would be
reduced to three, analysts say.
Given the Justice Department's track
record, "It is unfathomable that they will not also oppose this one," said Paul
Stephen Dempsey, a University of Denver law professor and author of several
books on transportation policy. He also serves on the board of directors for
budget carrier Frontier Airlines.
United, the world's largest airline,
didn't win many converts during the summer when a combination of bad weather and
a labor dispute with its pilots forced the airline to cancel thousands of
flights. The difficulties are contributing to an expected third- and
fourth-quarter loss and have caused some to question whether the airline is
capable of handling its own fleet, much less the addition of 400 US Airways
planes.
"What we have seen United go through this summer doesn't help
their argument in terms of this merger being consumer friendly," Milmore said.
United officials say the summer's travel snarls were caused by unusual
weather and labor issues that have since been resolved.
"What, if
anything, do those have to do with the merger?" said Susana Leyva, a spokeswoman
for the airline. "Every airline will have labor issues regardless of size.
Ultimately, the Department of Justice will review this merger based on its
consumer benefits and its preservation of competition."
But with airline
problems making front-page news, industry officials were questioned at a series
of hearings on Capitol Hill, culminating last month in the Senate Commerce,
Science and Transportation Committee adopting a resolution objecting to the
merger.
Congress has no official voice in the merger, and antitrust
experts are split over whether the political pressure will have any effect on
the Justice Department's review. One former government antitrust official said
such matters never enter into the picture, while others doubt that claim.
"I know these decisions are not made in a vacuum sealed off from the
political pressures on them," said Sam Peltzman, a professor of economics at the
University of Chicago.
Federal regulators are also facing pressure from
about 20 state attorneys general, who have expressed concern about the merger.
Maryland antitrust officials said they are studying the matter. However, state
transportation officials said they are in negotiations with the two airlines to
address concerns about competition.
But Minnesota Attorney General Mike
Hatch - perhaps the most vocal opponent of the deal among state officials - said
he will sue to stop the merger if the Justice Department approves it.
Minnesota is home to Northwest Airlines, which controls about 80 percent
of the market at Minneapolis/St. Paul International Airport. The airline's
dominance would only increase if it merges with American Airlines.
"When
you have that kind of concentration, you aren't going to have price
competition," Hatch said. Minneapolis has some of the highest airline fares in
the nation because of Northwest's market dominance, he says.
Antitrust
experts believe that the Justice Department will look at how the United deal
will affect fares and whether routes among the merging airlines overlap. The
decision will come down to whether the deal will hurt consumers by reducing
competition.
The merger is unique, analysts said, in that the two
airlines maintain hubs in the same city. United and US Airways are respectively
the No. 1 and No. 2 carriers at Dulles. US Airways also has a strong presence at
Ronald Reagan Washington National Airport and is the No. 2 carrier at BWI, which
competes with Dulles for passengers.
In addition, the combined airline
would control more than half the flights at six major airports, including
Pittsburgh, Philadelphia, Charlotte, N.C., and Chicago. United executives have
said the expanded reach will give passengers the ability to fly to more cities
without switching airlines, resulting in increased convenience and cost savings.
Jan K. Brueckner, an economist at the University of Illinois at
Urbana-Champaign, recently published a study that bolsters that claim.
Passengers who have to switch airlines to reach their destination pay as much as
24 percent more than passengers who are able to complete their trip on one
airline.
The analysis, commissioned by United, found that United
passengers could save $12 million to $14
million annually if the merger is approved. "The upside is that you'll have a
gigantic airline that allows you to go from just about anyplace to anyplace
else," Brueckner said.
The deal also has been billed as a lifesaver for
US Airways, which has suffered financially for years while the rest of the
industry has seen profits soar with the growing economy.
Without a
partner, some believe, US Airways will not survive another economic downturn.
That in itself might be reason for federal regulators to allow the merger to
take place.
"It spreads US Airways' costs over a much broader network,
which is a very positive aspect of this merger," said Lawrence Nagin, US
Airways' executive vice president of corporate affairs and general counsel.
Some analysts agree that argument may sway regulators.
"More and
more, I'm beginning to think it might be approved the more I see US Airways'
numbers. They Justice Department officials are going to say these guys are burnt
toast," said Ray Neidl, an analyst with ING Barings. However, he still gives the
deal long odds on getting approved.
To allay competitive concerns,
United has said it will not raise fares for two years after the deal is
completed. It will also sell most of its operations at Reagan National to Robert
L. Johnson, founder of Black Entertainment Television and a US Airways director.
The new airline would be called DC Air.
Industry experts said offering
to create the nation's first minority-owned airline is politically shrewd. But
few are convinced that the upstart airline would offer much in the way of
competition. In the months since the deal was announced, the arrangement has
been derided as "a joke" by some analysts, who say DC Air would serve as nothing
more than a feeder airline to United.
"DC Air will be aligned with
United, and no alliance partner of a mega-carrier dares ever provide aggressive
competition to its alliance partner," said Dempsey, the Denver law professor.
Nagin, the US Airways executive, denied the allegation, noting that some
former congressional critics of the deal have since changed their minds about DC
Air's viability. "DC Air is going to be real and independent and a viable
competitor in the marketplace," he said.
In addition to DC Air, other
low-cost competitors - such as Southwest Airlines, JetBlue Airways and others -
will pressure mega-carriers to keep fares competitive, proponents of the merger
said.
Darryl Jenkins, executive director of George Washington
University's Aviation Institute, recently published a study saying that critics
who believe that airline consolidation will hurt competition are underestimating
Southwest's power in the marketplace.
"They go into a new market and
then they just dominate the crap out of it," Jenkins said.
Southwest's
track record at BWI is a prime example, he added. The no-frills, low-cost
airline overtook US Airways to become the dominant carrier at BWI and is largely
responsible for the airport's reputation as a low-fare hub.
With the
largest market capitalization of any airline, Southwest is poised for future
growth.
" People don't realize how big they are and that really in not
that many years, they will be the largest domestic carrier in the U.S.," he
said. "There will not be a Big Three, there will be a Big Four."
Milmore, the airline analyst, questions whether budget airlines like
Southwest will provide enough of a balance against the other major airlines if
the industry consolidates.
" Three mega-carriers controlling 85 percent
of the market is just too concentrated," he said. "That's the big risk."
GRAPHIC: PHOTO(S) / GRAPH(S) 1. Bigger than
big: The merger would combine the world's largest airline, United, with the No.
6 U.S. carrier, US Airways. A US Airways jet and United planes taxi at Chicago's
O'Hare International Airport.
2. Merger turbulence
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