Airline Merger on the Radar Screen for a Long Time

The emails from readers and moles close to the action started about 4 p.m. EST Tuesday. Had I heard about the meetings scheduled with the powers-that-be and upper management? Had I heard about what was being discussed? Then, just as quickly, the notes turned to, "Holly, it's a deal -- United parent UAL (UAL) and US Airways (U) are going to merge."

Not a surprise. At all.

As we said here a long time ago, US Airways had a major problem on its hands. It is basically a high-cost commuter airline on the East Coast, with no transcontinental routes to support such an operation.

Given this scenario the prospects for long-term earnings appreciation were slim to none, in my opinion. US Airways' recent announcement that it planned to step up flights to the Caribbean was almost laughable. It was certainly not a move that was going to improve the airlines' ever-dropping revenue per available seat mile .

As readers of this column may recall, it seemed to me that US Airways Chairman Stephen Wolf had no way out but ... out. It was clear that the airline could not solve its revenue and cost issues without the addition of another partner.

To make matters worse, Wolf's potential dancing partners were limited to American Airlines parent AMR (AMR) and United.

Why?

Simple. Route structures. When you look at the overlays of the route structures of the top five major carriers, the route structure of United and US Airways just fits. Very well.

Last year, the answer for the Wolfman's dilemma at US Airways seemed to be a merger with American Airlines. All the pieces were in place, including a deal with AMR-owned Sabre that was to provide a "seamless" information technology platform for both airlines.

But the Sabre deal turned into a disaster for US Airways, with the airline struggling to make the newly installed systems work. Horrendous cost overruns ended up on the bottom line of AMR's financial statements, and frustrated objectives on both sides.

Not surprisingly, the merger deal fell apart.

Remember, American and US Airways announced a marketing agreement with each other in April 1998, as a reaction to the news that United and Delta Air Lines (DAL) were going to seek a code-share agreement.

My, how times change.

The agreement between Delta and United fell apart because Delta management refused to grant the pilots' union a voting seat on the board of directors.

And so now we have a proposed merger between US Airways and United.

If I were a US Airways' shareholder, I would be jumping for joy. (Julian Robertson -- did you know about this two months ago?) If I were a UAL shareholder, I'd have mixed feelings, depending on the details of the agreement to be announced tomorrow.

And if I were a US Airways pilot, I think my sentiments would be similar to those of one of my emailers, a US Airways' pilot, who asked this tonight:

"HOLLY PINCH ME!!! Am I dreaming or am I finally going to have a career that I know I can retire from??? Can I truly spend a little money, maybe buy a house, without the worry that my company will be out of business next week?"

I'd say ... probably.

I'll be back tomorrow with a more detailed look at the deal.

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