United Ramps Up Merger Talk

The perfect match would be a carrier with a presence in the Northeast and the South.
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After several years of proclaiming its longing for a merger partner,

United

(UAUA)

has laid out the specifics.

Wanted: A compatible mate, with a presence in both the Northeast and the South and a yen for travel in Latin America.

It almost sounded as if United CFO Jake Brace, speaking at a Merrill Lynch conference last week, was trying to revive the failed merger with

US Airways

(LCC)

, which collapsed in 2001 after losing United's backing and then failing to win support from the Justice Department.

To be sure, either

Continental

(CAL) - Get Report

or

Delta

(DAL) - Get Report

would also meet Brace's standards.

For that matter, United could conceivably meet its needs by acquiring both

JetBlue

(JBLU) - Get Report

and privately held Spirit, which would provide hubs at New York's Kennedy Airport and in Fort Lauderdale, Fla.

Whatever the goal, Brace offered an unprecedented and unusually explicit assessment of what United would want in a consolidation scenario.

"What United lacks is we don't have a strong Northeast presence," he said. "We also lack a southern-tier hub. A southern-tier hub is important for service to Latin America and the Caribbean,

where you can see that we're one of the smaller carriers that has international service."

Brace said the Northeast is "domestically a brutal market, but it's very important to support the Atlantic." He continued: "We think we're very strong in the Atlantic. Obviously combining with somebody who's also strong in the Atlantic would be helpful, and I think there are a couple candidates out there for that."

To watch Chris Nichols and Janet Alvarez discuss this column, click here

.

As for the Pacific, he said, United is happy with its presence.

Brace acknowledged that United cannot act unilaterally in the merger arena, as the failure of US Airways' hostile bid for Delta demonstrates. "Consolidation is not something that one company can do in isolation," he said. "We have been very vocal about our position in that. If you look at the experience with US Airways and Delta, that didn't work so well."

Aviation consultant Robert Mann called Brace's statement a "remarkable public invitation to consolidation." He said it provides an indication of United's frustration that, despite three years of calling for mergers, CEO Glenn Tilton has been unable to convince anyone to join him in the effort.

Last week it was left to executives from other carriers, who spoke at the same conference as Brace, to lay out the difficulties of airline combinations.

Continental CFO Jeff Misner called them "incredibly complex transactions," largely because of the difficulty of labor integration. "Our people are happy, they have opportunity, there's growth out there, they're moving up the scale, they're moving from the right seat to the left seat."

With a merger, while "the short-term pop in the stock would be great," worker contentment could be sacrificed.

For evidence, look no further than US Airways, where pilots are fuming over a proposed plan of seniority integration following the 2005 merger between America West and US Airways.

"US Airways is having some trouble pulling that labor group together," Misner said. "Look at the TWA situation," he added, referring to the 2001 American-TWA merger, which created headaches -- but no value -- for the acquirer.

Why must things be so difficult in the airline industry? "If you look at other industries, when you eliminate destructive competition, that benefits the companies, and that benefits the employees," said American CEO Gerard Arpey.

For airlines, he said, consolidation faces labor resistance, extreme execution difficulties and government opposition.

"It wasn't that long ago that United was involved in a transaction to acquire US Airways," Arpey recalled. "The government stepped in and prevented that deal from occurring."

Just maybe though, if US Airways can straighten out its labor issues, they should try again.