UAL, US Air merger would reshape industry, cut seats
A merger between UAL Corp.'s United Airlines and US Airways Group Inc. would reshape the U.S. industry and cut seating capacity as an improving economy rekindles travel demand, analysts said.
The tie-up probably would be an all-stock transaction, with the smaller US Airways as the acquirer, said two people familiar with the matter, who asked not to be identified because the negotiations are private. Spokesmen for the companies declined to comment.
A United-US Airways combination would become the second- largest U.S. carrier by traffic, vaulting past AMR Corp.'s American Airlines. It also could funnel more domestic passengers onto overseas flights, Jim Corridore, a Standard & Poor's equity analyst in New York, said today in an interview.
"What US Airways doesn't have is a strong international network, which is where the money is," Corridore said. "United has a high-cost problem, and US Airways has shown they figured out how to turn a high-cost airline into a low-cost airline."
The company would keep United's name, said one of the people, who added that talks began about mid-February. No terms have been presented to the airlines' unions, nor have the carriers' boards been asked to vote on a deal, the person said.
Consolidation PushA business-travel revival after the recession and greater access to capital increase the likelihood of consolidation now, Jamie Baker, a JPMorgan Chase Co. analyst in New York, told clients in a note. British Airways Plc, Europe's No. 3 carrier, and Spain's Iberia Lineas Aereas de Espana SA said today they signed a definitive agreement on a $7.5 billion merger."The true value of consolidation, in our view, comes in the savings associated with less flying," Baker wrote.UAL climbed $1.70, or 9 percent, to $20.65 at 12:35 p.m. in New York in Nasdaq Stock Market composite trading. Tempe, Arizona-based US Airways jumped 84 cents, or 12 percent, to $7.70 to lead gains among the 12 carriers in the Bloomberg U.S. Airlines Index.UAL ranks third in the U.S. by traffic and market value, at $3.17 billion, based on Bloomberg data through yesterday. US Airways is No. 6 by traffic and No. 8 by market value, at $1.1 billion. Chicago-based United's hubs include Washington's Dulles airport, while US Airways has a base at Washington Reagan.Overseas Travel"US Airways would feed United's international network and bring in a bigger base of business travelers, especially in Washington," said Michael Derchin, an analyst at CRT Capital Group LLC in Stamford, Connecticut. "They could also take out some unprofitable capacity. It would have some ripple effects for everybody else."SP's Corridore recommends buying US Airways and holding UAL, while Baker advises buying both. Derchin doesn't rate either one.The recession-driven slump in travel dragged both carriers to losses in 2008 and 2009. Now, traffic is picking up again, with a 2.2 percent gain in March among the six largest U.S. carriers marking the largest increase since at least May 2008. Shrinking seating capacity helps airlines raise fares.Southwest Airlines Co., the fifth-largest U.S. carrier, is the only one among that group with an investment-grade debt rating. The Dallas-based discounter was also alone in posting a profit last year, with net income of $99 million as revenue tumbled 6 percent to $10.4 billion.Third RoundThe new United-US Airways talks revive an effort that collapsed in 2008, less than two months after Delta Air Lines Inc. agreed to acquire Northwest Airlines Corp., a deal that formed the world's largest carrier and spurred merger discussions across the industry. A previous bid by United to buy US Airways was scuttled in 2001 when U.S. regulators objected."United and US Air are already in the Star Alliance, so that's a hurdle that's already been cleared," said Hunter Keay, a Stifel Nicolaus Co. analyst in Baltimore who advises buying UAL and doesn't rate US Airways. "Both of their top executives are the biggest proponents of consolidation in the industry. And they tried twice before to merge.""We don't comment on rumors or speculation," said Jean Medina, a spokeswoman for United. "We've been consistent on our position on consolidation generally for several years, and that position is well known."James Olson, a US Airways spokesman, also declined to comment.Merger ChampionsUnited Chief Executive Officer Glenn Tilton has championed mergers since before the carrier left more than three years in bankruptcy protection in February 2006. United held merger talks in 2008 with Continental Airlines Inc., which ended the discussions and later formed an alliance with the UAL unit.US Airways CEO Doug Parker made a hostile bid for Delta in 2006. The previous year, he was running America West Holdings Corp. when that airline merged with US Airways in bankruptcy. The combined carrier kept the US Airways name.News of the United talks came as a surprise, said James Ray, a spokesman for the US Airline Pilots Association, the union representing US Airways pilots. Parker has a previously scheduled meeting with the pilots today, Ray said. David Kelly, a spokesman for the United chapter of the Air Line Pilots Association, didn't return messages seeking a comment.US Airways is the more dependent of the two airlines on domestic flights. In 2008, the latest year available, 63 percent of UAL's $20.2 billion in revenue came from the U.S. and Canada, based on data compiled by Bloomberg. US Airways posted $10.5 billion in revenue last year, with 79 percent from the U.S.Hub AirportsUnited operates U.S. hubs in Chicago, Denver and San Francisco in addition to Dulles, and has routes to Europe and Asia, including London's Heathrow and Tokyo's Narita airports. US Airways' hubs are in Phoenix, Philadelphia and Charlotte, North Carolina.United has 360 planes in its main fleet, according to a regulatory filing. It flies a mix of jets from Airbus SAS and Boeing Co. US Airways has 347 aircraft in its main fleet, according to the carrier's Web site. Narrow-body Airbus jets are the most-numerous plane type.Continental held talks with Fort Worth, Texas-based American in 2008 while also in merger discussions with United, a person briefed on the matter said then. Continental abandoned the United talks that year. Southwest sought to acquire Frontier Airlines Inc. last year out of bankruptcy court, only to lose to Republic Airways Holdings Inc.Spokesmen for Continental and American declined yesterday to comment on United and US Airways.