Copyright 2000 The New York Times Company
The New
York Times
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May 31, 2000, Wednesday, Late Edition - Final
SECTION: Section C; Page 2; Column
5; Business/Financial Desk
LENGTH: 796 words
HEADLINE: A Collapse of Airlines' Deal Would Not Be Too
Painful
BYLINE: By LAURENCE ZUCKERMAN
BODY:
Since last week, leaders at the UAL
Corporation, parent of United Airlines, and US Airways have
said repeatedly that they are committed to seeing their controversial $4.3
billion merger through to completion. But it turns out that it
would not be very taxing for either side to walk away from the deal.
According to a copy of the merger agreement filed with the Securities
and Exchange Commission yesterday, US Airways would have to pay $160 million to
UAL if it breached the contract, while UAL would be forced to pay $50 million to
US Airways if it backed out of the deal. In addition, either company can
terminate the agreement if the merger is not completed by Dec. 31. The deal
faces many regulatory hurdles in Washington, making it likely there will be a
delay.
Such financial bounds appear rather loose when compared with
other recent deals like America Online's proposed $165 billion merger with Time
Warner Inc. In that case, AOL must pay Time Warner $5.4 billion if it pulls out,
while Time Warner is obligated to pay America Online $3.7 billion if it walks
away. There is also a second multibillion-dollar breakup penalty if stockholders
at either company reject the deal.
Merger experts said that breakup fees
normally represented a percentage of each company's equity and that the higher
fees in the case of the AOL-Time Warner merger merely reflected the higher
values of those two companies.
But one week after the UAL-US Airways
deal was first disclosed many in the airline industry wonder if the deal will
ever be completed. Most of the speculation centers on the next wave of merger
announcements that many analysts said were sure to come and would make
regulators and Congress reluctant to approve a merger between the country's
largest airline -- UAL -- and its sixth largest, US Airways. At the top of the
list are a possible deal between the AMR Corporation, parent of American
Airlines, and Northwest Airlines, and a merger of Delta Airlines and Continental
Airlines.
Richard Blumenthal, the Connecticut attorney general,
announced yesterday that he would join federal authorities and officials in New
York, Pennsylvania and Massachusetts in taking a hard look at the UAL-US Airways
deal. "The merger of United and US Air would create an airborne behemoth with
huge implications for our consumers and economy," he said. UAL and US Airways
hope to win over state and federal regulators by selling most of the US Airways
operations at Ronald Reagan National Airport in Washington to DC Air, a new
airline being formed by Robert L. Johnson, founder of Black Entertainment
Television and a US Airways board member.
DC Air will receive seven
gates at Reagan National and 222 coveted takeoff and landing slots at the
airport, where the number of daily flights is limited, for $141.2 million,
according to the memorandum of understanding between Mr. Johnson and UAL and US
Airways that was also filed with the S.E.C. yesterday.
In addition, UAL
has agreed to lease maintenance sites, jets and ticket counters to the fledgling
airline. The memorandum also states that "United will provide interim employees
for up to six months to staff 'open' positions, while DC Air hires and trains,
if needed, at United's cost."
UAL and US Airways executives said that DC
air would quickly become a strong competitor with the combined United-US
Airways, but others are not so sure. An analysis by Samuel C. Buttrick, an
airline analyst at PaineWebber, found that the number of airplane seats flown
from Reagan National would decrease by 15 percent after DC Air began operating
compared with what United and US Airways each fly today.
"It would
appear that there will be fewer seats at the outset rather than more seats," Mr.
Buttrick said. "It is certainly hard to see how that is good for the consumer."
He added that DC Air could expand its service from Reagan National over
time but that would not be easy given the restrictions at the airport. Another
hurdle facing the deal is the approval of employees at both airlines. The
leadership of the union representing United's 10,000 pilots, who own about a
quarter of UAL's stock, will begin three days of meetings in Chicago today to
discuss the deal. James E. Goodwin, UAL's chief executive, is scheduled to
address the group this afternoon.
As Mr. Goodwin has previously stated,
the merger agreement guarantees that there will be no layoffs at the combined
airlines for two years. Nevertheless, it will be a tough audience. Last week,
Rick Dubinsky, the chairman of the United union's master executive council who
is also on UAL's board, criticized Mr. Goodwin for pursuing the merger before
first sealing a new contract with the pilots. Those talks are expected to go on
for months.
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