A Giant Dogfight on the Horizon : Airlines: United plans to buy Pan Am’s London routes, but American wants a shot too. A worldwide market is at stake.
In what promises to be a hotly contested battle for dominance as a global carrier, American Airlines said Thursday that it plans to top United Airlines’ $400-million offer for the London routes owned by Pan Am Corp.
In a letter to Pan Am Chairman Thomas G. Plaskett, Robert L. Crandall, chairman of American parent AMR Corp., offered no specific price but said American wants a chance to “pursue a transaction superior to the proposed United transaction.”
Crandall reminded Plaskett that the two men had spoken as recently as Monday morning about the routes. His letter also contained a veiled threat. He said Pan Am’s fiduciary duty to “maximize value for Pan Am’s shareholders and creditors dictate(s) that you afford us an opportunity to make a competing offer for these assets.”
But late Thursday, Plaskett in a return letter threw cold water on Crandall’s overture, noting that Pan Am and United had “a legally binding agreement.” United declined comment.
Kevin Murphy, airline analyst with the New York investment firm of Morgan Stanley, said that a higher offer would be a “smart move on the part of American.” He said that even if American didn’t get the routes, at least its major competitor, United, would be forced pay more.
Timothy Pettee, airline analyst with Alliance Capital Group, said United’s $400-million offer is less than the routes are worth. On Wednesday Stephen M. Wolf, chairman of UAL Corp., United’s parent, said the routes had annual revenue of about $500 million.
Pan Am and United announced their agreement in principle Tuesday. The transaction, which faces a number of hurdles from U.S. and British authorities, would give United a pivotal lead in the transatlantic airline market.
Under the agreement, United would take over Pan Am’s routes from New York, Washington, Los Angeles, San Francisco and Seattle to London. It would also fly to Paris from Washington.
Whoever gets the routes, the sale represents a significant retrenchment for ailing Pan Am. During the past decade, Pan Am has sold some of its most valuable assets. It still has extensive routes to such places as Eastern Europe, the Middle East and Africa.
The deal between the two carriers also includes the transfer of two 747-200s to United and some major marketing agreements, including a joining of the two airlines’ frequent flyer programs. As part of the marketing agreement, United will alter some flight schedules to feed passengers into Pan Am’s Miami hub, from which it serves Latin America.
In his reply to Crandall, Plaskett wrote that “there may be some misunderstanding regarding the scope of our agreement with United. The agreement is far more than a sale of international route authorities. Among other things, it envisions a long-term marketing program and other cooperative arrangements. I had understood from our many conversations, including the most recent one, that American would be interested only in buying routes and did not wish to enter into a broad-scale agreement with Pan Am.”
American’s European destinations include France, Spain and the United Kingdom. But Crandall has long coveted additional routes to London.
“London is the most important gateway for the North Atlantic and for Europe. American has been expanding its European presence as part of its overall growth plan,” said Alton Becker, an American spokesman.
At the moment, United’s only North Atlantic routes are to Frankfurt and Paris.
American has agreed to buy the Chicago-London route from Trans World Airlines for $195 million and is “frustrated,” Becker said, because the government has not acted on the application. American also recently purchased the Latin American routes of bankrupt Eastern Airlines.
Observers are reminded of the 1985 sale of Pan Am’s Pacific routes to United for $715 million. They have been a gold mine for United. Their sale came as a surprise to American, and Crandall does not want to be surprised again.
HOW U.S. AIRLINES DIVIDE THEIR SHARE OF THE GLOBAL MARKET The following percentages are based on revenue passenger miles.
Airline 1989 % share Pan Am 21.9% Northwest 18.4 United 15.2 TWA 13.9 American Airlines 10.6 Continental 10.2 Delta 6.9 Eastern 2.0 USAir/Piedmont 0.6 Hawaiian 0.5
Source: Airline Economics Inc. Total not equal to 100 because of rounding.
