United-US Airways Deal Would Face Hurdles

CHARLOTTE, N.C. -- The airline industry's second merger this year, if there is to be one, will likely be far more difficult than the first.

In the three weeks since Delta(DAL Quote - Cramer on DAL - Stock Picks) and Northwest(NWA Quote - Cramer on NWA - Stock Picks) announced their plans to combine, their four legacy competitors have discussed a variety of options to join forces.

UAL's(UAUA Quote - Cramer on UAUA - Stock Picks) United and Continental(CAL Quote - Cramer on CAL - Stock Picks) talked, but Continental walked away.

AMR's (AMR Quote - Cramer on AMR - Stock Picks) American had discussions with Oneworld alliance partner British Airways about "opportunities for cooperation," as did Continental.

And finally, United and US Airways(LCC Quote - Cramer on LCC - Stock Picks) continued their talks, with the possibility that a deal could be completed as early as this week or next, sources say.

So far, nothing has been announced, but in a sense, the last of the theoretical combinations above is the obvious one. Both United and US Airways are members of the Star Alliance, they already code-share in 270 markets and they have been the most consistent advocates for consolidation. Then there's the fact that the two tried in 2000 to reach a merger pact, but the arrangement collapsed, in part because United lost interest.

However, a United-US Airways deal would face potential problems that don't confront Delta and Northwest.

Route overlap is an obvious problem. In the Washington area, United has an international hub at Dulles, while US Airways dominates Reagan National, with about 40% of the traffic.

To remedy this in 2000, the carriers proposed a spinoff to newly created DC Air, a National-based airline owned by Black Entertainment Network founder Bob Johnson.

This time, valuable slots at National could be up for grabs. "The low-cost carriers would belly up to the trough and American might be there as well," says aviation consultant Darryl Jenkins.

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