US Airways Saga Proves Mergers Only a Band-Aid

Failure meant a plunge in the share price. The bid for Delta was unveiled Nov. 15, 2006, and withdrawn Jan. 31 this year. From its opening on the day the merger collapsed, the shares have lost about 63% of their value, while the Amex Airline Index has fallen about 34%.

Today, US Airways no longer has a lead role in the industry's consolidation drama. "It's not as if we can force it to happen at this point," Parker conceded at a recent investor conference. "Being the sixth of the big six, we're not going to be somebody's first choice."

FTN Midwest Securities analyst Mike Derchin says part of the reason the stock went up was merger fever. "But after the attempt with Delta failed, people assumed there would be no more mergers for a while, which affected all the airlines," he says. "Then, as the year went on, we had higher oil prices and people got nervous about the economy."

Other factors also came into play.

As the legacy carriers' focus shifted to more profitable international flying, US Airways lagged. US Airways has less than a third of its capacity in international markets. In 2006, international flights accounted for just 20% of the total, largely explaining why "US Airways is probably least attractive in consolidation scenarios," Nelson says.

Labor integration has gone poorly, largely owing to a questionable ruling on seniority by an arbitrator for the Air Line Pilots Association. Pilots from the former US Airways find the ruling so deeply inequitable that they are seeking to replace ALPA, a divisive process that has delayed negotiations for a new pilot contract.

"Because the work forces of America West and US Airways have not been integrated, you don't really know what the final labor cost number is going to be," Derchin says. "I don't think it will be outrageous, but everybody assumes it will be higher, and it is an overhang on the stock."