Bethune agrees. Wolfe.
US Airways at Mercy of Merger Deal
Management Is Gloomy About Airline's Fate Without United Deal, but Its Competitors Disagree
By Keith L. Alexander and Frank Swoboda
Washington Post Staff Writers
Monday, April 23, 2001; Page E01
For almost a year, the management of US Airways Group Inc. has focused on completing a complex merger with United Airlines Inc., a deal that was supposed to be the biggest since the industry was deregulated in 1978.
Now a new question has arisen: What happens to the Arlington-based company if the deal doesn't go through?
On Wednesday, United executives said that because of questions from the Justice Department's antitrust division, they would miss another target date for completing the deal. Now they don't expect it to close until after June 30. It's the fourth time they've changed that date.
The managers of US Airways say it can't survive as a stand-alone airline. But some industry analysts, union leaders and competitors disagree. They say the airline can fix itself by controlling costs, eliminating unprofitable routes and generally tending to the business of running an airline rather than merging one.
Both US Airways and United seem to be suffering. When the merger was announced 11 months ago, the economy was stronger. Earnings and stock prices at both airlines have declined and competing carriers such as Southwest Airlines Co. and AirTran Airways have expanded into their markets. Fuel prices are about 12 percent higher than they were last year and labor costs are nearly 15 percent higher than in 1999.
"Both airlines might be better served concentrating on improving their own operations rather than trying to force this deal through," ING Barings analyst Ray Neidl said.
Last week, United reported a first-quarter loss of $313 million, compared with a $99 million loss in the same period a year ago. The Chicago-based carrier also said it expects to report a loss for the second quarter instead of the profit that analysts expected. United said it will lose money for the full year if current trends of higher fuel and labor costs continue. The price of United's stock has fallen more than 30 percent since the US Airways deal was announced.
Things are grim at US Airways, too. Like other airlines, it has been hurt by a major drop-off in high-paying business travelers. The Arlington company lost $171 million in the first quarter, compared with a $115 million loss a year earlier. It said that it expects the second quarter, usually its best period because of summer vacationers, to be only slightly profitable. The price of the company's stock has fallen 20 percent since the day before the merger was announced.
The $12 billion deal raised questions among Justice Department officials from the beginning. The plan is for United to pay $4.3 billion in cash for US Airways and then spin off the airline's Reagan National Airport operations to a new airline, DC Air, to be headed by Black Entertainment Television founder Robert L. Johnson. United would then sell 20 percent of US Airways to American Airlines Inc. and American would own 49 percent of DC Air. Consumer groups, competing airlines and several members of Congress have said the deal would be anti-competitive since it would give United and American a 50 percent share of the nation's air travelers.
Combining these two airlines today, some analysts say, could be catastrophic for the companies, especially for United's parent UAL Corp.
"You have two broken airlines right now that are financially struggling. In the long run, if there's a merger, UAL will go Chapter 11 in three to five years," said CIBC World Markets airline analyst Sal Colak.
Neidl said predicting a bankruptcy filing might be a little extreme. But, he said, United is "putting themselves in harm's way if there's a recession."
Until recently, US Airways has been showing strength. Although it lost $269 million last year, that was the company's first loss since 1994. From 1995 through 1999, when the economy was at its strongest, US Airways was profitable, earnings hitting a high of $1.02 billion in 1997. Before 1995, the airline regularly lost money.
"When the economy is strong they make money. They have to find ways to make money when the economy isn't as strong," Goldman Sachs analyst Glenn Engel said.
US Airways Chairman Stephen Wolf said his company, the nation's sixth-largest airline, can't compete for long against larger carriers such as United and American Airlines or discount carriers such as Southwest, AirTran and Jet Blue. In the past year, discount carriers, including Southwest and Delta Express, have increased service on US Airways routes by 29 percent.
US Airways executives compare their company's plight with that of Trans World Airlines Inc., which was struggling before its recent merger with American. But there are major differences between the two situations. Before its merger, TWA had lost about $100 million a year for 12 years. It also had three stints in bankruptcy protection.
Analysts say it could be at least 10 years before US Airways is in nearly as much trouble as TWA was, especially since the airline has about $1.3 billion in cash.
Still, US Airways has the highest costs in the industry and remains the only major carrier not partnered with an international airline. "They're not doomed. But clearly US Airways has some strategic challenges out there," Engel said.
In testimony to a congressional subcommittee last month, Wolf said that if the merger doesn't go through, management would "have to size the airline down."
Wolf said there isn't room for an airline the size of US Airways in today's competitive environment. "We do not have the financial wherewithal to grow to become a network carrier and no airline has ever shrunk its way to profitability," he said through a spokesman last week.
Other airline executives, such as Gordon M. Bethune of Continental Airlines Inc., strongly disagree. When Bethune took over as chief executive of Continental in 1994, the company had twice been in bankruptcy, had not had a profitable year since 1978 and had only $50 million in cash.
"We were in a hundred times worse shape," Bethune said. Continental, the nation's fifth-largest airline, has made money every year since 1995 and was one of only two major carriers to earn a profit in this year's first quarter.
"They need management in there that realizes and understands that part of being a good manager is running an airline, not doing a deal," Bethune said. "They have deal guys in there running that airline."
Bethune said US Airways is "rich" in assets: It has dedicated employees, busy shuttle operations and control of sought-after gates and slots at New York's LaGuardia and Boston's Logan International airports.
If US Airways were willing to sell, Bethune said, he would be happy to buy the shuttle operations and the slots. But if US Airways had different management, he said, the airline could survive on its own without selling any of its assets.
"It's a sham transaction. They're pleading death, but they're not dying. And the losers ultimately will be the shareholders, employees and the communities they serve," Bethune said.
Union leaders at the Association of Flight Attendants and the International Association of Machinists said they see no reason US Airways could not survive in its present form if the merger with United fell through.
"I think in our view, US Airways can survive and it can be a viable carrier," said Robert Roach, national vice president in charge of transportation for the machinists. "It certainly is nowhere near the situation at TWA." His union represents the majority of union employees at TWA.
"I believe US Airways can compete in all arenas," Roach said. But, he said, US Airways management "will have to begin to run the airline" for that to happen.
US Airways needs to focus on reducing its money-losing short routes and expand on longer routes, said Neidl, the ING Barings analyst. The company has reduced its costs to 12.78 cents per available seat mile from 13.43 cents a year ago. However, that still is the highest in the industry.
Many industry insiders wonder what the collapse of the United deal would mean for Wolf's future.
"Wolf is a pretty tough character, but I don't know if his strength lies in taking airlines which are financially weak and struggling and making them survivable on their own. That's not his primary strength," said Darryl Jenkins, head of George Washington University's Aviation Institute.
Wolf only wants to talk about working with the Justice Department and getting the deal done. "I am singularly focused on getting this merger accomplished," he said.
But even if the merger doesn't go through, it won't be a total loss, at least for US Airways senior management. Wolf, chief executive Rakesh Gangwal and general counsel Lawrence Nagin would receive a total of nearly $20 million in severance pay, supplemental benefits and vesting stock options just for setting up the deal.
© 2001 The Washington Post Company