UAL-US Airways Marriage? Holly Is Happy for the Couple

It's a good deal, but it will take some time before UAL sees the benefits.
Author:
Publish date:

Now that we've seen Jim Goodwin, chairman and CEO of

United Airlines

parent

UAL

(UAL) - Get Report

, and Stephen Wolf, chairman of

US Airways

(U) - Get Report

, get up in front of the masses and discuss their merger in predictably glowing terms, what to make of it all?

First of all, instead of saying the deal presented "a vibrant new array of competitive thrust," (whatever that means), Mr. Wolf should have just gotten up and thanked Goodwin profusely for saving his ... er ... competitive rear.

Let's put it this way. It would have been much more impressive if he had gotten down on his hands and knees and kissed Goodwin's shoes at the Waldorf-Astoria, which would have been a perfectly acceptable acknowledgement of the significance this deal has for US Airways. And for Stephen Wolf.

What we have here is a classic Stephen Wolf exit. We knew the man would not go down with the ship. And once again, shareholders were rewarded. Bada boom, bada bing.

However, unlike Mr. Wolf's last exit (from United, of all places), which had United employees paying the price of his departure for many years, this is a much cleaner deal. All cash, no squirrely employee concessions, full no-furlough protection for both employee groups.

Bottom line? I like it. This deal will give United a strong route structure that has both excellent north-south feed, along with very well established east-west transcontinental routes.

Furthermore, I think that the

Justice Department

will approve it. These two carriers overlap very little, and it is truly one of the better match-ups out there among US domestic airlines.

Apparently long-time Wolf-backer Julian Robertson likes the deal as well, as it was reported earlier Wednesday that he has been picking up shares of now-depressed UAL stock. As we suggested again in

last night's column, Robertson apparently did know about the deal in March when he

closed down

Tiger Management

. He acknowledged today that he has been in the loop on the deal since February.

During Wednesday's news conference, Wolf avoided answering a reporter who asked when the deal was first brought up, saying that his airline has probably been looking at a possible deal with every airline in the western world. But Goodwin acknowledged that he first broached the possibility with Wolf last November.

As usual, the Wall Street analyst community does not seem to be overly thrilled with the idea, but what else is new? This is the same Wall Street community that chastised United when it announced it would be the launch customer for the

Boeing

(BA) - Get Report

777 aircraft five years ago. Why? Because it was seen as an example of an airline that was spending way too much money.

Thanks to that move, United now has a decided advantage over its competitors when it comes to wide-bodied aircraft.

However, this deal will put pressure on the United stock in the short-term. Just the sheer magnitude of the deal guarantees a long transition period before the full economic benefits are realized. United estimates that shareholders should start to fully see the benefits of the deal in 2002.

And while United will be assuming some $7 billion in debt, it is important to note that only $1.5 billion of that debt will be on the airline's balance sheet. The rest of that debt is in the form of aircraft lease obligations. I have no problem with the $1.5 billion of debt on the balance sheet.

Okay, now for the hard part. What about the union issue?

On the positive side, all the major unions of both airlines are represented by the same union groups. In other words, the pilots are represented by the

Air Line Pilots Association

(ALPA), the flight attendants are both represented by the

Association of Flight Attendants

(AFA), etc., which makes things much easier.

My take on the situation with the US Airways' unions is that you might as well wrap them up and mark them "sold" on the idea. This deal is much better than what they could see clearly as the alternative.

But that still leaves us with the United unions -- the most powerful of which is the pilots' union.

My take on this fight? I think it can be negotiated. It is not going to be easy. Seniority issues are going to be a big deal. But, in their statement to the press this morning, it seemed to us that the United pilots, while initially sounding negative, actually acknowledged that the strategic value of the deal was good. I also hear that the initial feedback from the United flight attendant Master Executive Council has been positive.

It won't be easy -- but it could be worse.

Finally, the one part of the deal we don't like? This spin-off of a new carrier that will be known as

DC Air

. To help alleviate anti-trust issues, both airlines have agreed to spin-off most of their presence at

Washington National Ronald Reagan Airport

into a new airline, which will be headed up by Robert Johnson, Chairman of

BET Holdings

.

OK, so this helps keep the Justice Department, but I don't like it. No offense to Mr. Johnson, but how much does he know about running an airline? Some reports today suggest that Johnson wants to emulate the ever-colorful Richard Branson, chairman of

Virgin Atlantic

.

Sorry, but that strikes me as silly as someone starting up some low-fare airline and saying it will emulate

Southwest

(LUV) - Get Report

.

So, who wins, who loses? What are the other airlines supposed to do? Sit around and mope? Not hardly. Check back here later for my take on the winners and losers from this deal in our next column.

Holly Hegeman, based in Barrington, Rhode Island, pilots the Wing Tips column for TheStreet.com. At time of publication, Hegeman held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. You can usually find Hegeman, publisher of PlaneBusiness Banter, buzzing around her airline industry Web site at

www.planebusiness.com. While she cannot provide investment advice or recommendations, she welcomes your feedback at

hhegeman@planebusiness.com.