United, US Airways May Give It Another Go
CHARLOTTE, N.C. -- Thanks to the process of elimination, now may be the time for the airlines that most want to merge to go ahead and find a deal, despite the high risk.
That likely means putting together
United
with
US Airways
(LCC)
, whose leaders have been the two biggest advocates for industry consolidation over the past three years.
Those airlines tried to merge in 2000, but the arrangement fell apart. Now, it's on the front burner again, sources say, following the weekend collapse of talks between
Continental
(CAL) - Get Report
and United.
A deal between Continental and United, a unit of
UAL
(UAUA)
, was widely expected following a merger announcement by
Delta
(DAL) - Get Report
and
Northwest
(NWA)
on April 14. However, Continental has now told its employees it will instead remain independent.
In 2001, the proposed US Airways and United merger fell apart primarily because United lost interest, apparently believing the price to be too steep. Subsequently, the Justice Department rejected the deal anyway.
Seven years later, the same proposal would still provide United with a Southeast hub and access to key Northeast airports, the domestic compliments its vast international network has always lacked.
The two carriers already code-share in 270 markets, and both are members of the Star Alliance, easing some merger logistics. And this time, the price would no doubt be less than the $11.6 billion that United agreed to pay when it first committed. The price with interest grew to $12.3 billion during the 14 months it took the Justice Department to reject it.
That's not to say a deal would be without major issues that would have to be resolved. To begin with, it's unclear who would run the combined airline. While it has long seemed that United CEO Glenn Tilton was committed to find a merger partner and then step aside, it's not as likely as it once seemed that US Airways CEO Doug Parker would take over.
Parker was hailed as a hero when he stepped in to run US Airways after a 2005 merger with America West. For months afterward, it was all systems go given the carrier's unexpectedly strong financial results.
But a botched integration of computer-reservations systems, a failed 2006 bid to acquire Delta and a hopeless effort to merge pilot seniority lists may raise questions about his ability to preside over a far larger deal -- even though Parker has had absolutely nothing to do with pilot seniority integration.
Perhaps the search for a new United CEO would lead outside the company to someone like Bruce Ashby, CEO of India's Indigo Airlines, who has built the New Delhi-based carrier from scratch. Ashby was an executive at Delta, United and US Airways. At the latter, he oversaw marketing, pilot negotiations and merger talks with America West before leaving shortly after the transaction was completed.
Another problem is United's aging computer systems and fleet, for which there are no replacement plans. Some employees contend that spending has been curtailed in favor of the hoped-for deal with Continental and the sale of the maintenance operation. So whoever does merge with United will need to bring a lot of pocket money.
Of course, the difficulty of merging pilot seniority lists would make addressing global climate change appear, by comparison, to be a weekend diversion. Already, a bitter election has led the 5,238 US Airways pilots to split from the Air Line Pilots Association, which had represented them for 57 years. Now add 7,000 United pilots, who remain ALPA members and who are dedicated -- as are all pilots -- to retaining their seniority.
Also, the route synergies, while positive, raise some questions. In New York, United would gain access to LaGuardia, one of the country's most important airports, but not to Kennedy or Newark, the international airports. Star Alliance would still lack a hub in the world's largest travel market, making the Lufthansa investment in
JetBlue
(JBLU) - Get Report
seem all the more worthwhile, even if the final shape of their link-up is not yet clear.
The pressure on Philadelphia's cramped airport, where US Airways has a hub, should ease because of United's hub at Washington's Dulles. But in the nation's capital, a merger would reopen the question of whether one airline should dominate at both Dulles and Reagan National.
On the positive side, it should be easy to make the case to regulators that US Airways on its own will never achieve the international presence sufficient to sustain a legacy carrier in the face of rising fuel costs. Additionally, there is little overlap between the two carriers' route systems.