UAL Set to Acquire America West

Sources close to TSC tell us United Airlines parent UAL (UAL Quote) will shortly announce a merger with America West Airlines (AWA Quote). The deal, which has been under close wraps for a few weeks, would solve problems for both carriers.

United would gain in many ways. First, the airline would gain aircraft, and right now, with an expansion at Washington's Dulles Airport scheduled to start in May, United is somewhat plane-constrained. Sources told us this morning that preliminary plans would have United shifting many of America West's Airbus aircraft to its hub at Dulles and retaining most of the 737 and 757 aircraft in Phoenix, which is America West's current hub.

The airlines' fleets meld very well, with engines and types of aircraft being very compatible, with the exception of the engines on America West's 12 Boeing (BA Quote) 757s. Not a big deal.

These additional aircraft would give United the lift it needs to fuel an East Coast expansion and also allow it to establish a West Coast hub in Phoenix. This, in turn, would provide an excellent defensive position against AMR's (AMR Quote) ongoing expansion on the West Coast, centered on its purchase last month of Reno Airlines (RENO Quote).

United could also use Phoenix to put pressure on Southwest Airlines (LUV Quote) and could integrate America West's existing West Coast route system with the Shuttle by United service currently based in California.

What's in It for America West

On the America West side of the ledger, the benefits are very clear. Bill Franke, the airline's chairman and CEO, would like to do something with the airline. It is no secret that he has been attempting to put a deal together with more than one suitor this past year, only to see nothing come to the table.

America West announced earnings this morning, and the numbers looked good at first blush. Including charges related to union contract settlement payments, the airline earned $20.2 million, or 51 cents a diluted share, for its fourth quarter. Analysts had been looking for the airline to earn around 39 cents, according to First Call.

However, numbers tell only part of the story. We learned this morning that Franke has postponed delivery of the bulk of the 13-Airbus order the airline was scheduled to receive in 1999, as well as the construction of a planned headquarters training facility and several fairly large capital expenditures on the books for the first quarter. These strike us as signs the airline wants to reduce expenses and make the numbers look as good as possible: Signs it is probably on the block.

The airline in November again posted the worst on-time performance record for the majors and also generated the most passenger complaints of all the big airlines.

The effect of poor service on passengers has been clear. In December, revenue passenger miles rose 3.8% from a year ago, but capacity rose 6.5% -- resulting in a drop in load factor.

And finally, the negotiations between management and the union representing America West flight attendants is at a very precarious point. The union wants an impasse to be declared and a 30-day cooling off period to ensue. So far, management has dodged the bullet, but an impasse could be called at any time.

Sources tell us that the master executive council of the United pilots union met yesterday to consider a deal involving America West. This is not unusual, given the employee-stock-ownership-based structure of UAL. The pilots union would have to sign off on any deal that was announced.

Shares of America West have been rising over the last three weeks or so. This afternoon the stock was up 15/16 at 19 1/16 on volume of 774,600 shares.