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CLT:Losses Put US Airways Merger Plan In New Light

Sun Apr 22, 2001 1:07 am

From Charlotte-Observer

Losses put US Airways merger plan in new light
Prospects for regulator OK may be rising

Staff Writers
A year ago, US Airways' future seemed bright. The airline was growing, the threat of a March flight attendants strike had just passed, and profits seemed headed up.

Today, the future has clouded. US Airways is sometimes compared to Eastern Airlines and Pan American World Airways, which both folded in 1991. The question now is: Will US Airways follow?

In fact, that question has moved to the forefront of debate over whether antitrust regulators from the U.S. Justice Department should allow United Airlines to acquire the airline in a proposed $12.3 billion deal.

So what happened in a year?

For starters, the economy slowed. Fuel prices shot up. Low-cost competitors such as Southwest and JetBlue continued to bulk up in US Airways' core Eastern markets. Last month JetBlue executives even visited Charlotte, US Airways' largest hub, as they scouted for new markets.

Meanwhile, the merger effort faced changes, delays, outbreaks of congressional opposition and intense scrutiny from regulators, who now are not expected to decide until July.

Labor leaders believe US Airways can survive if properly managed. They suggest the airline devised a strategy calculated to woo approval from Justice Department regulators, which looks more favorably on mergers designed to save failing airlines.

"While it's true that time changes things, this has been an abrupt shift," said Chris Beebe, head of the US Airways chapter of the Air Line Pilots Association.

Bill Wise, who heads the Charlotte local of the International Association of Machinists, recalls that in October, US Airways President Rakesh Gangwal spoke to union leaders in Cleveland. Gangwal used a series of charts and graphs to show that United and US Airways were two strong companies that would be made stronger by the merger.

Weeks later, union leaders met in Washington, where Gangwal spoke again. "It was pretty much the same slide show, but this time the outcome at the end was that if the merger doesn't go through, it would be all doom and gloom for US Airways," Wise said.

The shift in tone has not gone undetected on Capitol Hill, where some lawmakers worry that airline mergers have more to do with building monopolistic power and executive wealth than the survival of airlines such as US Airways.

One influential Democrat, Rep. Peter DeFazio of Oregon, said that when US Airways Chairman Stephen Wolf first began advocating for the merger in May, he touted the company's strong financial health.

"This is a radical departure and it merits a little explanation," said DeFazio, who sits on the House Transportation Committee.

"The whole industry has turned down since last summer, but what (Wolf) is saying would make it sound like things are uniquely bad for US Air in this downturn," he said. "If that's so, then they should fire some of their analysts and economists, because they seemed convinced otherwise a short time ago."

Wolf and Gangwal have not changed their position at all, the airline said.

Since he arrived as chairman in 1996, Wolf has been saying US Airways faces an uncertain future as the last of its kind: a midsized regional airline in an industry dominated by international giants and discounters.

In June, Wolf articulated that view to the Senate Judiciary Committee, saying: "At the start of deregulation there were six such carriers. Of the six, three - Braniff, Eastern and Pan American - are gone. The other two, Continental and TWA, have each gone through bankruptcy twice."

In March, Wolf went a bit further, saying US Airways "is facing a perilous future." Without the merger, he said, "We are going to have to size the carrier down."

The threat to jobs has energized congressional supporters in US Airways' key employment centers of Pittsburgh and Charlotte.

Bud Shuster, former Pennsylvania congressman and chairman of the House Transportation Committee, was among the first to sound the alarm. Weeks after the merger was proposed, he said: "If nothing happens, it is my judgment that we will see US Airways in bankruptcy - if not out of business - in the coming years."

In February, Rep. Sue Myrick, R-N.C., of Charlotte, told a subcommittee: "Make no mistake about it, US Airways is now on the perilous path already taken by TWA, Eastern, Pan Am and Braniff."

To a degree, the worries contrast with positive assessments US Airways offered weeks before the merger was announced, and in a July filing with the Securities and Exchange Commission.

In April 2000, as US Airways announced a $218 million first-quarter loss because of bad weather, high fuel prices and the threat of a flight attendants strike, Gangwal said: "The unique challenges US Airways faced over the past year are largely behind us, and we look forward to operating a quality airline and realizing US Airways' potential."

In the July filing, Salomon SmithBarney, the airline's adviser during the merger, said US Airways flying would increase 20 percent between 2000 and 2004, while per-share earnings would increase nearly five times to $8.61.

But those estimates were based on seven assumptions, of which three - fuel prices, a favorable economy and level of competition - have changed.

Last week, US Airways said higher fuel costs, more competition and a drop in business travel due to the slowing economy caused it to lose $178 million or $2.66 a share in the first quarter.

"Business travel is definitely tailing off during the slowdown," said Bill Mastoris, managing director of fixed income investments at Bank of New York Capital Markets.

But Mastoris rejected the comparisons with Eastern and Pan Am, saying US Airways "is still filling seats and still flying major business routes."

In addition, US Airways has $1.2 billion in cash and remains the fastest-growing major airline. Its demise, if that were to occur, would be lengthy and would require that low-cost competitors keep growing.

It's unclear whether the Justice Department will consider that outlook sufficient to require a merger this summer.

The division considers a variety of factors when deciding whether to approve a merger. They include how much market concentration would increase in a merger and competition on specific routes.

Another is a company's financial condition. A failing business has an advantage in seeking a merger: TWA benefited because as it ran out of cash - during its third visit to bankruptcy court - it appeared close to a shutdown.

US Airways, clearly, is not close to the TWA model for failure, but it could meet the standard for being a "diminished competitor," said Alan Marx, former chief of the general litigation section of the antitrust division.

Marx said a diminished competitor would have to show declining financial trends, inroads by competitors and the chance that without a merger it could return to regulators as a failing carrier.

"But then, you're starting to talk about crystal ball gazing," said Marx, now a Nashville, Tenn., attorney and adjunct professor of antitrust law at Vanderbilt University. "The division would ask questions such as, `Why can't you adapt?' and, `Why can't you form a low-cost subsidiary?'

"It's a hard sell," he said. "The department doesn't view its role as offering a crutch for companies that haven't gone to the extreme."

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RE: CLT:Losses Put US Airways Merger Plan In New Light

Sun Apr 22, 2001 1:51 am

USAirways didn't seem to worried about the loses and have not (to my knowledge) announced any savings plabs as airlines such as NW and UA have. Seems to me like USAirways is trying to make themselves look worse off than they really are and aren't too worried about trying to fix any of their problems because then the merger would be blocked.

Any thoughts?
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RE: CLT:Losses Put US Airways Merger Plan In New Light

Sun Apr 22, 2001 1:59 am

What the above poster said echoes the sentiments of quite a few people I know, including myself. Then again, the "Disturber" never has been one to have anything good to say about their hometown airline since August of '89.
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RE: CLT:Losses Put US Airways Merger Plan In New Light

Sun Apr 22, 2001 5:38 am

If you follow US Airways' logic, then all future airline passengers should subsidise the current jobs of the US employees, as we all know that an UA/US merger reduces competition and raises fares. Any argument otherwise is not sensible.

The rational to save employee jobs by forcing travelers to pay higher fares due to a merger is idiotic.

Let US compete. If it cannot, let it peacfully cease to exist. It seems that US is afraid to compete, and instead complains about competition. Well, last time I checked, ever other US airline has to compete as well.

I'm glad to see the sentiment towards this merger decreasing.

Matt D
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RE: CLT:Losses Put US Airways Merger Plan In New Light

Sun Apr 22, 2001 5:40 am

I agree Republic. It seems that the prevailing attitude of "Big Air" is that they want to be free to compete with everyone else, but they don't want anyone else to compete with them.
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RE: CLT:Losses Put US Airways Merger Plan In New Light

Sun Apr 22, 2001 5:48 am

US Airways won't merge with UA. The Justice Department will not let this happen and rightly so. It is anticompetitive, will drive up already sky-high fares in the saturated East Coast market, and further erode the quality of airline service. US Airways is a basket-case of an airline. Always was. It can't get a grip on its cost structure, one of the highest in the industry, and does not have the clout or the resources to become a truly national carrier. Sadly, I predict that US Airways will go the way of TWA, only this time, US will be broken up, with its assets sold off to UA, AA, CO, DL and others. This should have happened long ago.

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RE: CLT:Losses Put US Airways Merger Plan In New Light

Sun Apr 22, 2001 5:57 am

If the financial situation at USAirways is as bad as some may want us to believe why does UA intends to pay a large premium per share (I'm not entirely certain about the exact takeover price per share) over the shareprice before the takeover (didn't UA want to pay USD 60 a share, compared to a USD 30 share price before the announcement of the US-UA merger)?????
I'm not an expert on takeovers, but paying a premium for a financial disaster seems very stupid and hard to sell to your own shareholders and employees.

Laurens Janssen
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RE: CLT:Losses Put US Airways Merger Plan In New Light

Sun Apr 22, 2001 6:21 am


Exactly. And how do you think UA will recover this overpayment. By offering more competition and lower fares? Ha!

UA is willing to pay a super premium for US. They know very well once they control US, they can effectively set the fares as high as they like, as there will be minimal competition in certain markets.

The closer you analyze this merger, without emotions involved, the more you conclude that it is not in the best interest of the flying public.

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RE: CLT:Losses Put US Airways Merger Plan In New Light

Sun Apr 22, 2001 6:39 am

US route structure is a mess. Serving obscure markets for the sake of maintaining market share i.e. ABE-MCO with mainline US jets against DL Express. The hodgepodge that is Metrojet; the mix and match fleet all conspire against US bottom line.

The PIT and PHL hubs seem to cannabalize each other. US should shut PIT down, focus on PHL and CLT, and resume service to western markets.

It seems that Wolf and Gangwal don't want to get their hands dirty by restructuring the route system to where it needs to be.

LGA, BOS, DCA are the crown jewels of the operation. They should build on their strengths and remain independent. DL costs are lower than most majors because their fleet utilization rate is higher than many of its competitors. Look at a an ATC map at midnight, and you'll see dozens of flights headed east on all night flights from the west, especially LAX and LAS.

US would be better suited with another carrier, namely AWA rebuild its presence in the west after the gutting of PSA's routes.

Wolf and gang are projecting an image of doom in order to slam dunk this deal and make justice feel good about stamping this deal by making them think they did it to preserve jobs in Pennsylvania and North Carolina.
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RE: CLT:Losses Put US Airways Merger Plan In New Light

Sun Apr 22, 2001 8:05 am

A surprisingly fair article from the Charlotte Observer. The guy at the end is right: DOJ is NOT a crutch for airlines that havent' gotten their cost act in gear, and can't compete. It should not be a crutch for US Airways.

All of you have put the case against approval so well, I only would add: this merger is corporate welfare for US Airways employees. I know a number of US Airways employees, and they seem to genuinely think themselves exempt from the New Economy you and I must face. What makes them special? Why should we pay damn inflated fares on supermerged carriers to protect their current seniority and domiciles?

The answer is, *we shouldn't.* Now I think very well of US Airways--their service is good and their employees professional and courteous. But it's time for some painful truth here. The desire of US employees and unions to use consumers as a welfare program, it pains me to say, is immoral and unjust. As is Steve Wolf's and Jim Goodwin's desire to get rich and destroy competition, as corporate welfare for their own already-fat bank accounts.

The sad fact is that US Airways should be allowed to die a natural death and not get the "assisted suicide" of an anticompetitive supermerger. The world in Charlotte and Pittsburgh WILL NOT end if US Airways gradually downsizes and closes itself down over the next eight to ten years. Their politicians are wrong.

These two cities are such excellent markets, and such excellent airports, to host domestic hubs that someone else will build up there as US declines. I predict that there will not even be disruption in either city. Or PHL for that matter. Other airlines with more reasonable costs--including other Big Air carriers-- will make plenty of money with hub operations at these cities.

IT's time for air travelers nationwide to stand up and speak the truth: US Airways must be allowed to die gradually, and its employees not use you and I as a corporate welfare program. United must not be allowed to use it as a way to cover Jim Goodwin's sorry incompetent ass and destroy competition. Other airlines will take over, and we can avoid the specter of a Big Three. Big Three, make no mistake about it, means Bend Over for consumers--and destruction of low-fare carriers.

Need a new airline paint scheme? Better call Saul! (Bass that is)
Tan Flyr
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RE: CLT:Losses Put US Airways Merger Plan In New Light

Sun Apr 22, 2001 8:14 am

All of you guys make some great seems that US management can't or won't see the forest for all the trees. Some highly motivated high school business students could figure out which routes to cut,etc.

The merger should not go thru. US is not in eminent danger of BK as TWA was. Perhaps if they had kept what the purchased with PSA & Piedmont they would not be in the jam they are in now.If it is sold off piecemeal, then so be it. Perhaps AA and NW can get a better share of the NE market.

RE: CLT:Losses Put US Airways Merger Plan In New Light

Sun Apr 22, 2001 9:19 am

PHL will not die down. The only reason we don't get more service here is that all the gates are taken up. Look at TW. They have about 5 flights/day, but they have 4 gates that handle them and ATA(extra 3/day). They are adding 55 new gates, including 4 in D that will allow AirTran to get 1-3 of them.

RE: CLT:Losses Put US Airways Merger Plan In New Light

Sun Apr 22, 2001 12:00 pm

I have read the above posts with sincere interest, and all of them present adequate reasons for the merger not to be approved. As a US Airways employee of sorts (I fly for a wholly owned US Airways subsidiery) I feel that I should weigh in on this discussion.

What I believe we have here is a battle of extreme views on both sides of the equation. There are those who believe that the merger would be the end of all airline competition on the east coast and there are those who believe that if the merger does not go through thousands of dedicated airline employees will instantly find themselves out on the street washing car windows for spare change. I think that a truly honest review of the facts would show that neither case would be an apocolyptic occurance.

Face it folks, if the merger is approved most communities will realize an increase in the quality of air service relative to their access to major hubs. The industry accepted view of United's business plan is that it will make it so that from any United or United Express orgin city, you can go to any city in United's system in two legs or less. This creates an extremely beneficial situation for the traveler, especially if that person is traveling internationally. It is also true that fares will probably not increase much, if at all, in a post merger world. Many of the cities we are talking about are talking about are one or two carrier cities anyway. The only thing that would change is the paint on the airplanes. Despite what many folks think, the low cost, high frequency carriers such as Southwest and Airtran would privide adequate travel options, since they tend to serve a different market (high frequency, short stage length) than United (low frequency, long stage length).

If the merger is not approved it is not the end of the world either. US Airways, whether by design or by accident, will eventually fail. DCA-ROC GUY (who's posts I always enjoy) is absolutely correct when he says that US Airways current hub markets, indeed many of their smaller markets as well, are too profitable to ignore. US Airways would probably be broken up in to pieces and many of it's employees would find gainful employment with the purchasing airline(s). Be forewarned, however, that If the merger is not approved now we will see the same principles involved in a buy out 3 to 5 years down the road. And it may not be on such nice terms as it is right now.

So what do I think? I believe that the question of the failure or success of the merger is insignificant. What we are seeing is yet another necessary evolution of the highly volatile airline industry. This has happened about every 15 to 20 years since we first flew the mail in biplanes. The majors get big and concentrate their resources on long hual routes and the regionals become nationals and concentrate on long skinny routes going north-south or east-west. This opens a void at the bottom of the industry for new regional start ups. Carriers such as Southwest, Jet Blue and Airtran are outside of this structure since they serve only those cities where they avoid competion and usually only short haul, high capacity, high frequency routes. These airlines are good at what they do but will never wander outside the confines of their business plans. You will never fly a Southwest 747 to London.

So sit back relax and enjoy the ride... its all gonna change no matter what so you might as well enjoy it!


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