United Reportedly to Buy US Airways
In a deal that is likely to set off a new round of consolidation in the airline industry, the parent company of United Airlines plans to purchase US Airways Group Inc., creating an airline behemoth of more than 6,500 daily flights and nearly 1,000 jetliners, industry sources said Tuesday.
UAL Corp., already the world’s biggest airline, could announce the deal today. Neither company would comment Tuesday evening. It would be one of the largest deals in aviation history and give United nearly twice as many daily flights as its nearest competitor, American Airlines.
Arlington, Va.-based US Airways is strongest along the East Coast, and United’s route structure crisscrosses the country. The effect of the merger on Southern California is likely to be minor. US Airways serves Los Angeles, Orange County and San Diego with nonstop flights to its three hubs: Philadelphia, Charlotte, N.C., and Pittsburgh.
United is the largest airline in the western U.S. With its United Shuttle subsidiary, it has hub operations and the most flights out of California’s two busiest airports, LAX and San Francisco International.
United has long coveted US Airways because of the way the two airlines’ route systems complement each other, said John Van de Kamp, a United board member. Van de Kamp, however, would neither confirm nor deny that a deal is imminent.
The deal, in which United reportedly will offer $4.3 billion in cash and take on $7.3 billion in debt and other obligations, values US Airways at $60 a share, a huge premium over the carrier’s closing stock price of $26.31, up $1.06, Tuesday on the New York Stock Exchange.
As news of the deal trickled out of the financial markets Tuesday evening, analysts and industry officials were debating whether it would gain the clearance of antitrust regulators at the Justice Department.
“Since the United and the US Air route systems don’t overlap to any degree, this would not decrease competition,” said Julius Maldutis, an analyst with CIBC World Markets in New York.
Chicago-based United lacks the north-south routes on the Eastern Seaboard that have become the bread and butter of US Airways’ business, Maldutis said. Connecting those routes to United’s transcontinental business will give the combined carrier a piece of nearly every airline market nationally. US Airways also has been building a transatlantic business from its Philadelphia hub, as well as Pittsburgh and Charlotte in recent years.
Because of the antitrust issues, the deal reportedly calls for United to spin off a portion of US Airways’ routes and operations to a new airline that would be headed by Robert L. Johnson, chairman and chief executive of BET Holdings Inc., the owner of the Black Entertainment Network cable television company.
“That’s the type of thing you would do when you have a merger and some overlap and you have antitrust concerns that you want to deal with upfront,” said Van de Kamp, the United director. Many of the routes that would be sold are at Reagan National Airport in Washington, where US Airways has more than a third of the market. BET is also based in Washington.
Also, UAL would not raise fares on domestic routes for two years after the transaction is completed, except to reflect increases in fuel costs and the consumer price index, according to sources.
A threat greater to the deal than antitrust concerns is labor, which helped scuttle a 1995 merger bid between the two airlines because they could not agree about labor and seniority issues, Maldutis said. Internal company surveys by United at the time found that about 75% of its workers were against the merger.
United’s pilots wield unusual power at the company because they own 25% of its shares. All told, employees own 55% of United and control three of the 12 seats on its board of directors.
Ironically, in agreeing to be acquired by United, US Airways Chairman Stephen Wolf looks to again find himself ousted from the top job at an airline because of United. Wolf left United after the 1994 transaction that gave the shares to workers in return for nearly $5 billion in concessions and the right to create a new low-fare airline.
Maldutis said he expects the nation’s other large airlines, including American, Delta, Continental and Northwest, to immediately begin to look for merger partners among smaller regional airlines such as America West.
In anticipation of an industry consolidation, shareholders of Southwest Airlines last week voted to adopt a “poison pill” plan that would make the company less attractive to a hostile takeover. Shareholders still must approve the final plan. Herb Kelleher, Southwest’s chairman, called the vote a precautionary measure.
The merger comes at a time of strong growth for UAL, which saw revenue rise 9.3%, to $4.55 billion in the quarter ended March 31. The company’s operating profit rose 73% to $252 million from a year ago. However, it reported a loss of $99 million because of an accounting charge dealing with the sale of frequent-flier miles and losses on aircraft subleases. UAL shares closed at $60.38, up 63 cents, in New York Stock Exchange trading Tuesday.
US Airways reported a loss of $215 million in the first quarter ended March 31, contrasted with a profit of $46 million in same period a year earlier. This year’s first-quarter loss included a $103-million accounting charge. It also reported a $139-million operating loss. Revenue rose slightly, to $2 billion, from a year earlier.
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Reuters was used in compiling this report.
