UAL pilots attack U.S. Airways merger prospect

CHICAGO/WASHINGTON Thu Apr 8, 2010 7:13pm EDT

1 of 4. Passengers wait to check-in at the U.S. Airways ticket counter at Phoenix International Airport in Phoenix, April 8, 2010.

Credit: Reuters/Joshua Lott

CHICAGO/WASHINGTON (Reuters) - United Airlines' pilots union lashed out against efforts to merge the airline with US Airways Group LCC.N, underscoring the challenges facing decade-old attempts to unite the carriers.

Tough antitrust enforcement could also pose another stumbling block to a merger, which would form the world's second-largest airline after Delta Air Lines (DAL.N), industry experts said.

But the possibility of consolidation in the industry spurred airline shares higher on Thursday, although US Airways and United parent UAL Corp UAUA.O would not confirm the discussions that sources said were advancing.

Chicago-based United, the No. 3 U.S. airline, has a $3.39 billion market value, based on Thursday's close. Tempe, Arizona-based US Airways, the No. 6 U.S. airline, ended the day with a $1.22 billion market capitalization.

Sources with knowledge of the situation told Reuters the negotiations began more than a month ago, although much of the groundwork was laid in 2008 when the two held similar talks.

The sources said the parties are currently focused on general themes, and issues like deal structure and management will be discussed in coming weeks.

The parties were said to be mindful of hurdles to a successful merger, including competition concerns and serious labor questions at both carriers involving pilots.

"Everybody is aware of the problems," said one source.

United's pilots said Thursday they were vehemently opposed to a merger, while US Airways' pilots said they were open to a merger and wanted to be part of the discussions.

United's flight attendants said they would not support a deal that would "distract from contract negotiations."

Goldman Sachs (GS.N) and JPMorgan Chase & Co (JPM.N) are advising United, several people familiar with the matter said. Citigroup Inc (C.N) is advising US Airways, the sources said.

All three banks declined to comment.

UAL shares closed up 6.8 percent at $20.23 on Nasdaq. US Airways shares gained 10.7 percent to finish at $7.55 on the New York Stock Exchange.

CHANGING LANDSCAPE

US Airways and UAL have courted for a decade -- interrupted only by their turns in bankruptcy between 2002 and 2005.

An offer in 2000 by United to buy US Airways crumbled in 2001 over fears the U.S. government would block the deal.

Talks revived in 2008 but fizzled amid the recession.

Aviation experts generally agree that consolidation would help the airline industry, and a merger with US Airways would help United. But some said a deal with Continental Airlines CAL.N would be best for United.

United and Continental held merger talks in 2008 and later opted for an alliance, which has been successful.

Airlines are recovering from a painful downturn that forced massive downsizing in the last two years. A merger could accelerate fleet reductions, helping improve balance sheets.

Philip Baggaley of rating agency Standard & Poor's said a merger with US Airways would improve United's route network but could lead to higher labor costs. The combined company would probably emerge with heavy debt, he said.

"Clearly these potential talks are a massive positive for US Airways and United, but I think it speaks volumes to the changing landscape in the airline industry," said Morningstar Equity analyst Basili Alukos.

He said a potential major airline merger, combined with the capacity cuts of 2008 and 2009 hint that the industry "could be en route to earning its cost of capital."

"History is not on the side of the airlines, but maybe the horrible losses encountered recently have scared newcomers enough to reconsider starting an airline," Alukos said.

The chief executives at both companies, Doug Parker at US Airways and Glenn Tilton at United, were, and continue to be, vocal proponents of further consolidation in an industry that has long suffered from competitive pressures and overcapacity.

The last merger of two major U.S. airlines was between Delta Air Lines (DAL.N) and Northwest Airlines, which concluded in 2008 and analysts consider successful.

LABOR ISSUES

Alukos and other experts said the biggest challenge would be integrating unionized employees.

US Airways, formed in 2005 from a merger with America West Airlines, still has two pilot unions.

Airline labor groups - especially pilots - are notoriously hard to merge because pay and work rules are closely tied to seniority. A pilot could easily lose seniority in a merger and end up flying less desirable routes and planes.

James Ray, spokesman for the US Airline Pilots Association (USAPA), which represents pilots at US Airways said the union is open to a merger, but wants to be part of the discussions.

"Our union president has talked to Doug Parker and said we are open-minded and look forward to being an active partner with U.S. airways should they pursue a merger with anyone," Ray said.

The Air Line Pilots Association (ALPA), which represents pilots at United, said it was vehemently opposed to a merger with US Airways, that would benefit neither the airline nor its pilots.

"United CEO Glenn Tilton is well aware of our position regarding mergers and US Airways," said a statement by union official Capt. Wendy Morse.

Bill Swelbar, an airline researcher at MIT, said union troubles could be a fatal impediment.

"It is my opinion that the labor issues will significantly undermine the synergies. I'm just not convinced there is an attraction. There is nothing about this that has me going 'this just seems like a great deal'," Swelbar said.

Delta and Northwest worked out their labor issues before announcing their deal.

ANTITRUST

Prospects of a US Airways-United marriage have for years raised questions about market concentration in the eastern portion of the United States, particularly at airports in the Washington D.C. area.

Any proposal would have to satisfy Justice Department antitrust officials under the Obama administration.

The Delta-Northwest merger was approved by the Bush administration, which was considered more business friendly.

"Now you've got a more aggressive enforcement regime. It seems to me the antitrust hurdles are no lower than they were in 2001 and maybe higher," said John Briggs, an antitrust expert with Axinn Veltrop Harkrider LLP.

US Airways is trying to beef up its already strong presence at Washington's Reagan National airport and held 11 percent of the regional Washington market overall in 2009. United is big at Dulles airport in Virginia and commanded 22 percent of Washington air travel last year, according to government data.

US Airways biggest hub is Charlotte, North Carolina, followed by Phoenix and Philadelphia. United spreads the rest of its operations at Chicago, Denver, San Francisco and Los Angeles.

"There are still some significant overlaps between United and US Airways, and I think the government would take a close look at that. I'm not necessarily saying to block it, but to decide what may need to be taken away in certain markets," said Edward Faberman, an aviation attorney with Wiley Rein LLP.

(Reporting by Kyle Peterson and John Crawley; Additional reporting by Karen Jacobs in Atlanta, Deepa Seetharaman and Jui Chakravorty in New York, and Diane Bartz in Washington; Editing by Derek Caney and Tim Dobbyn)

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Comments (8)
bakercraig wrote:
I don’t see how this can be good for the consumer: It seems that every time there is a merger/acquisition, the promised efficiencies and improved service not only don’t materialize, they get worse. The argument of “staying competitive with foreign carriers” is a red herring.

Apr 07, 2010 9:58pm EDT  --  Report as abuse
Storyburn_com wrote:
Two bad airlines trying to form a good one….it never works

Apr 07, 2010 11:00pm EDT  --  Report as abuse
waldo382 wrote:
Look at the internal mess at USair after America West bought out and changed the name slightly. No way to integrate pilot groups, and still have keep operations separated because of all the difficult conditions in every area of daily operations.they have never been able to realize the true savings of the merger. Now merge that with United, whom never met a consolidation (furlough/layoff) it didn’t like. Heavy overlap in the east, could be ugly….

Apr 07, 2010 12:33am EDT  --  Report as abuse
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