US Airways Holds Ace in AMR Merger Scenario

CHARLOTTE, N.C. ( TheStreet) -- The world has three global aviation alliances. The U.S. has three global airlines, one in each alliance. But the Southeastern United States, home to about 80 million people, has just two airline hubs.

That is what makes Charlotte so valuable as hub carrier US Airways ( LCC) seeks a merger with AMR ( AMMRQ.PK), after previously seeking mergers with Delta ( DAL) and United ( UAL).

Currently, two of the big three U.S. carriers lack Southeast hubs. In fact, American doesn't even have an East Coast hub. J.P. Morgan analyst Jamie Baker has written that American is weak in the East, compared with its two rivals, because it cannot gather enough passengers in small cities: It has neither the aircraft nor the hubs to serve those cities. United peripherally serves the Southeast from a Dulles hub and also operates a Newark hub.

Delta, which according to reports has studied a merger with US Airways, could make a lot of money if it operated the only two Southeast hubs in Charlotte and Atlanta: Opinions vary on whether antitrust regulators would allow that. In fact, when US Airways sought to merge with Delta in 2006, its attorneys argued that regulators would readily approve the deal.

Jerry Orr, the outspoken director of Charlotte Douglas International Airport, does not believe Delta would be allowed to operate both hubs. "That would stifle competition, and when you stifle competition, it's called a monopoly," he said. .

"There will always be two competitive hubs in the Southeast," said Orr, airport director since 1989. "Atlanta is one and it's our destiny to be the other one.

"We have an effective airfield here and an effective cost structure," he added. "As long as we maintain that, Charlotte will be attractive to any airline that operates a hub."

US Airways operates 631 daily departures at Charlotte, the third largest U.S. hub operation after Atlanta, with about 997 daily departures, and Dallas, with 740. Houston has 620. US Airways President Scott Kirby has said that Charlotte is the fourth most profitable major airline operation in the country, after Newark, Washington National and Houston. In other words, United has two of the most profitable major airline operations and US Airways has the other two. If you happen to be in the merger market, such assets represent an obvious advantage.

It must be said that Orr's operation of the airport is among the reasons for its success. Now 71, Orr joined the airport staff, after working several years as a surveyor on airport projects, in 1975. He became assistant manager in 1980 and has since presided over about $1 billion worth of expansion projects, including an increase from 25 to 100 gates. He has always kept costs low. Today, airlines using the airport pay an average per passenger cost of 77 cents, by far the lowest for any major airport. Most major airports are closer to $10 and some are over $20.

Last year, Moody's raised the rating on Charlotte Douglas revenue bonds to A1 from Aa3, praising "the airport's extraordinary financial operations in spite of the national economic recession, resilient enplanement levels and the strength of the local demand for air travel.

"The upgrade also recognizes management's conservative approach to financing that has built strengths to offset key credit risks," Moody's said, noting that the airport's only weakness is its dependence on US Airways continuing to operate a hub.

Orr, meanwhile, is looking ahead. The airport currently has three parallel runways and a diagonal runway. He has planned a fourth parallel and said construction could "start tomorrow -- It's already graded and an environmental impact statement is not an issue," since the site is between two existing runways. Orr said the cost would be $320 million, and the project could be funded with existing funds and the airport's passenger facilities charge.

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For the moment, the project is on hold, perhaps awaiting the results of US Airways' current merger effort. Conceivably, a merger with American would push more people through the Charlotte hub. For instance, American's strong presence in Latin America, based on its Miami hub, could mean complimentary service to Charlotte, which has 109 domestic destinations, while the Miami hub has just 46. A deal with American "would be good for this airport," Orr said. Atlanta has 144 domestic destinations.

Three factors combined to make Charlotte/Douglas a top three hub airport, despite being located in a medium-sized city. One is an historical accident: Piedmont Airlines, which merged with US Air in 1987, was founded 80 miles away in Winston-Salem, and began to establish a Charlotte hub in the early 1980s. Secondly, Charlotte is not Atlanta, but rather emerged as the only alternative hub. Third is Orr's stewardship, which has kept costs low, so low that Moody's maintained the airport can "remain on solid financial footing (even with) a complete loss of connecting traffic."

At the moment, nothing seems less likely.

-- Written by Ted Reed in Charlotte

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