TEMPE, Ariz. TheStreet) -- Before US Airways ( LCC) broke off merger talks with United ( UAUA) on Thursday, the two airlines had talked for months and had reached agreement on many key issues including the selection of Glenn Tilton as CEO of the merged company, say people familiar with the talks. But United executives were uncomfortable with the requirement that because US Airways pilots have a change of control provision in their contract, the deal would have to be structured in a way that US Airways acquired United, said the people, who could not be named because they were not authorized to speak about the negotiations. The United executives' feeling was that it would be extremely difficult for US Airways to assemble the financial resources needed to amply reward shareholders in a far larger company with three times the market capitalization. Nevertheless, the talks progressed. Eventually, the two sides "agreed the company would be named United (and) headquartered in Chicago, would have two thirds of the board from United and (would have) Tilton as CEO," a source said. US Airways CEO Doug Parker was willing to step aside, the source said, noting: "Doug was going to act in what he believed to be the best interest of his company and his employees." United's preference to merge with Continental ( CAL) was, obviously, not news to US Airways executives. But those executives believed they should go ahead and pursue a deal that would so clearly benefit the company. Parker, like predecessor Stephen Wolf, believes that US Airways is not well-positioned for long-term survival because it is neither a major global airline nor a low-cost domestic airline. Parker was also well aware that the necessity to structure a deal as a US Airways acquisition was a problem. On March 17, at the conclusion of a meeting with pilots at US Airways' Charlotte training center, he raised the topic, telling pilots that the change of control provision was a barrier to any merger the carrier might pursue. The provision snaps wages back to a pre-2000 level, far higher than today's pilot wages, if a change of control occurs.
About four to five dozen pilots attended the meeting, and many said afterward that they found it odd that Parker would raise the topic on his own, unprompted. "We've had talks with airlines in the past," Parker said, at the meeting. "This (provision) always comes up. (It) is a large issue in consolidation talks. There will not be a merger if that's where the pay rates go. Anybody we would merge with can't let the pay rates go to those levels. "You can't have both," Parker added. "You can't have a merger with that provision. (It) will either result in a merger never being done or it will be a merger that doesn't trigger that provision." Later, Parker met with USAPA leaders to discuss the potential merger, and they agreed to work with the airline to facilitate it. Certainly, United saw merit in a deal with US Airways. Tilton, like Parker, has long been a strong advocate of consolidation. The two carriers' route systems could be rationalized to enhance revenue and reduce costs: in particular, the two carriers' Phoenix and Denver hubs do many of the same things, as do hubs in Philadelphia and at Washington Dulles airport. At the same time, Continental could bring more international resources to a deal. Moreover, such a merger would more closely resemble the merger between Delta ( DAL) and Northwest, which has been well-received by investors. When press reports of the talks with US Airways surfaced, Continental executives were surprised, Robert Roach, general vice president of the International Association of Machinists, has said. But once Continental wanted to talk, United felt it had no choice but to listen. Eventually, some on the US Airways side came to believe that United's resistance to the proposed structure was an indication that the talks were a façade, intended to entice Continental to step in. That belief intensified as US Airways executives read media reports about ongoing discussions with Continental. On the United side, the feeling was that months and months of negotiations with US Airways represented a sincere effort to reach a deal.
Now US Airways executives are unhappy with various representations that they have somehow been hurt or have "burned tail feathers" as a result of the scenario that unfolded. "It is puzzling that anyone would describe a decision to walk away from a potential transaction as an emotional decision; indeed, it's anything but emotional," said Elise Eberwein, US Airways executive vice president for people and communications. "Rather this is a business decision made with the best intention for our airline. Being 'played' makes for good industry gossip and I guess that explains why reporters are picking up on this mysterious informed-but-not-close-to-nor-involved-in-the-transaction source. "At the end of the day, this was a decision made without emotion, and our view remains the same: any consolidation in this industry is a positive for all," Eberwein said. "And that makes us happy, not hurt or angry." -- Written by Ted Reed in Charlotte, N.C. .
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