Losses put US Airways merger plan in new light
Prospects for regulator OK may be rising
By TED REED PETER WALLSTEN
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."