United-US Airways Deal Would Face Hurdles

CHARLOTTE, N.C. -- The airline industry's second merger this year, if there is to be one, will likely be far more difficult than the first.

In the three weeks since Delta ( DAL) and Northwest ( NWA) announced their plans to combine, their four legacy competitors have discussed a variety of options to join forces.

UAL's ( UAUA) United and Continental ( CAL) talked, but Continental walked away.

AMR's ( AMR) American had discussions with Oneworld alliance partner British Airways about "opportunities for cooperation," as did Continental.

And finally, United and US Airways ( LCC) continued their talks, with the possibility that a deal could be completed as early as this week or next, sources say.

So far, nothing has been announced, but in a sense, the last of the theoretical combinations above is the obvious one. Both United and US Airways are members of the Star Alliance, they already code-share in 270 markets and they have been the most consistent advocates for consolidation. Then there's the fact that the two tried in 2000 to reach a merger pact, but the arrangement collapsed, in part because United lost interest.

However, a United-US Airways deal would face potential problems that don't confront Delta and Northwest.

Route overlap is an obvious problem. In the Washington area, United has an international hub at Dulles, while US Airways dominates Reagan National, with about 40% of the traffic.

To remedy this in 2000, the carriers proposed a spinoff to newly created DC Air, a National-based airline owned by Black Entertainment Network founder Bob Johnson.

This time, valuable slots at National could be up for grabs. "The low-cost carriers would belly up to the trough and American might be there as well," says aviation consultant Darryl Jenkins.

There is also overlap on a few dozen routes in the West, where the carriers operate a collection of hubs and focus cities.

Labor issues are daunting, as well. Integrating Delta's largely nonunion workforce with Northwest's heavily unionized one might appear to be a reason for concern, but it pales in comparison with integrating unionized workers at United and US Airways.

In particular, US Airways pilots are bitterly divided following the 2005 merger with America West, which led to a controversial seniority ruling that placed hundreds of America West pilots with a few years at the company ahead of pilots from the former US Airways with 15 years or more.

The dissatisfaction led to replacement of the Air Line Pilots Association, which embraced the ruling when it might have backed away, with a new union, the U.S. Pilots Association. While backed by most of the 3,500 former US Airways pilots, USAPA has virtually no support from the 1,800 America West pilots.

Understandably, United's 7,000 pilots are put off. "US Airways' pilot integration problems have created a toxic stew," said Steve Wallach, chairman of the United ALPA chapter, in a prepared statement.

A merger would likely bring another election. "ALPA would get a second shot," said aviation consultant Daryl Jenkins. "You don't get too many second chances in this world, but this might be one."

USAPA spokesman Scott Theuer says the potential merger is an unwarranted distraction, because a new federal law requires seniority issues between two companies with different unions to be resolved before a new representational election.

Meanwhile, the Association of Flight Attendants, which represents 21,000 flight attendants at the two carriers, says it will oppose a merger unless salaries and working conditions are improved first. And the International Association of Machinists, the largest airline union, flatly opposes a deal. The IAM represents 3,400 fleet service workers and 3,000 mechanics at US Airways, as well as 16,000 agents and fleet service workers at United.

As for United's 9,300 mechanics, they voted last month to join the Teamsters, so a merger could lead to a representation battle with the IAM. The Teamsters will oppose any deal that is "to the detriment of our members," said spokesman Galen Munro.

Congress has no direct influence over whether mergers occur, but it has taken an interest in the union representation issues in the Delta-Northwest merger, and no doubt it would weigh in on a United-US Airways deal as well.

Last month, in a Senate Judiciary Committee hearing, New York Sen. Chuck Schumer called the Delta and Northwest merger "a good one" and said the "negatives seem more benign" than in other transactions. Still, he said that "anyone that supports this merger does not indicate a general support of mergers in the airline industry."