US Airways Still Seeking the Right Deal - TheStreet

US Airways Still Seeking the Right Deal

Will CEO Doug Parker's next step be another merger attempt or a code-share? No matter what he decides, he isn't likely to sit still.
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CHARLOTTE, N.C. -- In the end, the airline that kicked off the current round of industry consolidation found that it didn't quite get to where it needed to be.

As a result,

US Airways

(LCC)

CEO Doug Parker, an inveterate dealmaker, likely has more tie-ups to at least try to get done.

For the moment, though, US Airways remains, as one-time CEO Stephen Wolf said in 2001, "an in-between airline," with neither low costs nor a global network, creating an uncertain future. For his part, Wolf tried and failed to merge with

UAL's

(UAUA)

United Airlines.

Parker sought mergers with both

Delta

(DAL) - Get Report

and United, and perhaps with others, as well.

But in April, Delta said it would merge with

Northwest

(NWA)

. And in June, United and

Continental

(CAL) - Get Report

said they would join in both the Star Alliance and a domestic partnership, increasing the pressure on US Airways.

Long limited in international routes, US Airways has enhanced its global access through its Star membership and a code-share with United. The next challenge for US Airways, as it is for every airline, is to negotiate the fuel-price crisis. Winners and losers will emerge, but the outcome for US Airways' isn't clear.

"US Airways still lacks critical mass, so I wouldn't be surprised if they look at an asset acquisition," says industry consultant George Hamlin of Airline Capital Associates. "Without acquiring something, either a full partner or significant assets, the road will get harder."

In 2005, US Airways and America West completed the first major airline merger since

AMR

(AMR)

acquired TWA in 2001. The 2005 deal combined two faltering regional carriers into a national airline that, at least in its initial year, was successful beyond anyone's expectations. Then the progress stalled.

The current round of dealmaking left only American and US Airways unaligned among the big six carriers, with no indication they might get together. "They are looking at each other, but I'm not sure it's fondly at this point," says Hamlin.

Though grouped with legacy carriers, US Airways remains an in-between hybrid that combined low-fare America West with US Airways. Unlike the five bigger legacy carriers, it lacks a dominant hub with high levels of origin and destination passengers, strong international traffic flows or adequate infrastructure.

Instead, it has the infrastructure required for a superior hub in Charlotte, high numbers of local passengers in Phoenix, and strong international traffic flows in Philadelphia.

To aviation consultant Jim Feltman of Mesirow Financial Consulting, the first question is whether the Continental and United alliance turns out as envisioned. "Code-shares and alliances have come and gone in the past, so don't think it's a foregone conclusion that it is destined to work," he says.

If it does, US Airways could be left out, excluded from its partners' antitrust-immunized discussions of fares and schedules. But other possibilities also loom. The immunized alliance could be expanded to include US Airways, or US Airways might choose to leave Star.

Last month, US Airways addressed both options, saying "our longstanding code-share relationship with United remains intact, as does our status as a Star Alliance member carrier." The airline noted that it has had no discussions concerning a code-share or other relationship with Continental.

Looking further ahead, US Airways could seek to merge again or to acquire assets. A merger, in Feltman's view, might combine the carrier with

Alaska

(ALK) - Get Report

, which dominates Seattle, a burgeoning gateway to Asia. Or, if a legacy carrier were to face failure, it might be forced to sell international assets.

Much less attractive is the possibility that no expansion opportunities emerge, forcing US Airways to become a seller. "Rather than become marginalized, they could sell what they've got and distribute the proceeds," says Hamlin, who points out that assets such as slots at New York's LaGuardia and Washington's Reagan and a Charlotte hub will have value to other carriers.

"If US Airways can't find some way to grow, they are probably going to contract," Hamlin says. "Then you would want to do it in an orderly fashion to maximize returns."