Regional Airlines May Be Next Hot Item in Takeovers

Regional airlines may become hot takeover candidates if United Airlines, the nation’s second-largest air carrier, gets a pilots contract that would give lower wages to pilots from regional subsidiaries it purchases, airline industry experts say.

Should this happen, possible targets among the handful of publicly traded regionals might be Air Midwest Inc., based in Wichita, Kan.; Metro Airlines Inc., based in Irving, Tex.; Mesaba Aviation Inc. of South Minneapolis; Air Wicconsin, a unit of Air Wisconsin Services in Appleton, Wis., and Washington-based Presidential Airways.

Unlike many of its rivals, Chicago-based United, a unit of UAL Corp., does not own any regional airlines.

But industry experts say United might begin buying them if it can exclude would-be regional pilots from receiving the same higher wages earned by its current pilots.

Analysts note that when Dallas-based American Airlines, United’s archrival, exempted regional pilots from its union contract last year, it went on a buying spree, acquiring five regionals, including Simmons Airlines of Chicago for $78 million, Command Airways, an Upstate New York regional, for $24.5 million, and Wings West, based in San Luis Obispo, for $42 million.

Concession Is Key

Other major airlines also have numerous feeder carriers. Continental Airlines, part of Texas Air Corp., owns a string of feeder carriers, including Provincetown-Boston Airline in New England, Britt Airways, with hubs in Houston, Cleveland and Chicago, and Rocky Mountain Airways, based in Denver.

However, a new industrywide buying spree for regional airlines is unlikely to take off unless United can obtain a concession agreement with its union, the industry experts say.

Diane Zielinski, director of United’s regional airline program, said the pilots’ current contract stipulates that if United takes control of another airline, the two pilot groups must merge, which could give the incoming pilots higher wages.

“Because of this, it doesn’t make sense to merge,” she said. The extent of the wage provision clause is being discussed in current negotiations with the pilots, Zielinski said.

Payne Webber analyst Edward Starkman said the pay issue centers on whether pilots who fly smaller, less complex planes carrying fewer passengers per plane in regional service should be paid the same as those who fly giant jetliners carrying hundreds of people.

Presently there are about 150 regional airlines in the United States that fly from smaller cities to metropolitan airports, where they feed passengers into the major carriers.

Many have allied themselves with larger airlines, sharing computer reservation system codes, frequent flyer programs and even flying colors.

Delta Made Deals

What makes the regional airlines attractive, industry experts say, is not their equipment or earnings potential, but the high volume of passengers they feed into the route systems flown by the major carriers.

Delta Airlines has taken a first, tentative step by acquiring a 20% equity interest in three publicly traded regional airlines: Comair, which serves the Midwest from Cincinnati, SkyWest Inc. of Utah, and Atlanta-based Atlantic Southeast Airlines Inc.

Richard Lowry, Delta’s manager of interline marketing, said the airline made the investment to maintain some control of its regional partners. “We want to make sure these carriers stay in our area, and to prevent others from soliciting our business,” he said.

Lowry said Delta will raise its stake only if forced to, but added: “We don’t see a trend. But if United started to do this wholesale, we’d have to re-evaluate our position.”

For United, Air Wisconsin is the largest regional carrier, feeding United at Chicago’s O’Hare Airport. It has spurned two takeover offers in the last year from non-airline bidders, and Tuesday received a third takeover proposal valued for at least $17 a share.