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UA/US Deal? Forget It!

Mon Jul 02, 2001 10:36 am

United Airlines is abandoning its planned $4.3 billion purchase of US Airways, citing regulatory problems and the worsening economy, according to published reports.

United told US Airways at a meeting of the UAL board of directors last week that it wishes to discuss terminating their agreement prior to Aug. 1, which is the first day either side can alter the deal, The New York Times and The Wall Street Journal reported on their Web sites Sunday, citing sources familiar with the discussion.

``We are at the point where we don't believe we can get the deal through the antitrust review process,'' a United executive who declined to be named told The New York Times.

If United ends the agreement, it will have to pay US Airways a breakup fee of $50 million.

Representatives for both airlines Sunday declined to comment to The Associated Press on the reports, which also appeared in varying degrees in The Washington Post and the Charlotte Observer over the weekend. Both papers also cited sources familiar with the discussions.

In an effort to ease anti-competitive concerns and ensure government approval, United agreed in January to sell some US Airways assets to American Airlines, including half of US Airways' Washington-New York-Boston shuttle.

There also had been speculation of more selloffs coming. At one point, United considered dumping its proposal for DC Air, the airline to be headed by Black Entertainment Television founder Robert L. Johnson, which United proposed creating to try to appease antitrust regulators.

But Justice Department lawyers appeared to remain concerned about the concentration of market power in Washington and other markets, prompting Transportation Secretary Norman Y. Mineta last month to say he expected the government to reject the proposed merger.

A weakening economy is also apparently hurting UAL, which is based in Chicago. Sources told the Journal that the airline was unwilling to engage in a costly, complicated merger in the worsening economic climate.

United, the nation's second-largest airline, reported a worse-than-expected first quarter loss of $313 million on revenues of $4.42 billion and has already said it expects a double-digit decline in revenue for the second quarter.

The deal values US Airways at about $60 a share, more than double the US Airways current stock price of $24.30. Shares of UAL closed Friday at $35.15, down $1.21, or 3.6 percent.

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RE: UA/US Deal? Forget It!

Mon Jul 02, 2001 10:42 am

From the beginning I said this deal would never happen, of course lots of folks, not here but on the AOL boards disagreed. Then Bush won and everyone was saying now it will definitely happen. Well, rest in peace UA/US merger, the death of the deal is the best thing that could happen to everyone involved, especially employees of both companies, employees of other airlines such as CO, DL, and NW who would have scrambled to put a merger together, and the flying public. Well, we can all breathe easier until the next time airlines start acting as crazy as they did in the merger mania days of the 80's. Surely they will again.
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RE: UA/US Deal? Forget It!

Mon Jul 02, 2001 1:53 pm

In the words of John McLaughlin: Buy-BYE!

If this report is indeed true, Hallelujah and praise the Lord. We've been down this road before folks....when the oligopoly-cartel-mafia airlines consolidate, as they did in the late 1980's, consumers and communities get screwed with worse service and higher fares. Bottom line. Superconsolidation from Six Families to Three Families would have been consumer hell.

But US's board is still hot to sell, and Steve Wolf is one of the brightest and most determined people in the industry. In the next year he'll probably put the airline up for sale in pieces. If Wolf doesn't break up US Airways immediately, he'll probably try to take the airline into Star Alliance as Aaron has been suggesting.

Wolf might then let US bleed for a few more years, which shouldn't be difficult since the unions will oppose any meaningful attempt to get the airline's untenably voracious cost structure in order. Then he might try, well, crying Wolf again about bankruptcy and someone might actually take him seriously. In any event, US Airways is NOT going to any of the other Oligopoly Crime Families whole. This is very good news for consumers.

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RE: UA/US Deal? Forget It!

Mon Jul 02, 2001 2:06 pm

I cannot understand how people would say that the deal would get approval if Bush is in office. It was pretty simple, no matter who was in office it was not going to pass DOJ muster, unless they really dusted it with a lot of powered sugar and got another smaller carrier involved. Secondly it was an economic disaster to begin with... the costs of integrating the two carriers and dealing with labour costs, contracts, etc... it was just too big and too expensive.

It seems now what will happen is that US will begin to sell itself piece by piece while the buzzards circle overhead waiting for the choice bits.
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RE: UA/US Deal? Forget It!

Mon Jul 02, 2001 2:12 pm

AA will probably try to throw a fit about not getting what it wanted out of the deal, but they did get a lot from TW. It already is consumer-hell in the U.S. from what I've heard/seen...it costs more often to fly within the U.S. even medium - range, than it does to fly between the U.S. and Europe!
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RE: UA/US Deal? Forget It!

Mon Jul 02, 2001 6:56 pm

Jim, stop blaming the unions on US' labor costs. They are all at parity with the industry averages. When US starts flying industry average flight stages, with industry average middle management, US's costs will approach industry average. (But, so will their service unfortunately.)

But, i agree. Anyway you slice it, US is better without UA. And now UA realizes UA is better without US.

"AA will probably try to throw a fit about not getting what it wanted out of the deal."
Not hardly! If not for the US-UA attempt, there would not have been a TW buyout. On top of that, UA needed AA to complete its merger since they would get a portion of US. With AA in the top spot if UA didn't merge, why buy part of US just to make UA happy? Trust me. The World's Number One Largest Airline is quite happy with the way things turned out. The only thing that could have been better was if TW flew Rolls.
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RE: UA/US Deal? Forget It!

Mon Jul 02, 2001 8:38 pm

I'm not so sure that US is better without UA -- they still are going to be focused on somehow liquidating or carving up the company. Wolf and company (who still have the support of the BoD) are salesmen -- not managers.

UA is certainly better off without US -- they need to focus on the business of flying and keeping their customers. There has been a UA market share bloodbath in California recently, and the airline couldn't lose money faster if it lit it on fire.

AA is crowned the winner here, at least temporarily. Being #1 is good, but it also constrains your next move. If US was going to put pieces of itself up for bid, there would be less outcry for a non-#1 airline to buy bits of US than there would be for #1 to get even bigger. So CAArty will have to sit where he is for a while, which isn't a bad spot.

The notion of a single national carrier with strong networks in almost every part of the country, in my opinion, is still compelling and attractive. I don't think we've seen the last of the consolidation moves yet.
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RE: UA/US Deal? Forget It!

Mon Jul 02, 2001 8:56 pm

One of the reason's Bush's Administration wouldn't go for UA & US hooking would be UA's subsequent domination of IAD and DCA. The DC Air proposal was an obvious sham.

If you're going to totally dominate a market, don't do it on the regulator's home turf.

Also, UA made their outrageous $60 bid in an effort to remove AA from any thought of grabbing US. Now that AA is busy digesting TW, as well as other factors, UA doesn't need to pay such a steep price for US.

I can only hope that UA will try again to expand in the NE, but do so via CO. If UA could get CO's management, there would be no stopping them.
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RE: UA/US Deal? Forget It!

Mon Jul 02, 2001 8:58 pm

Thank God! But hopefully US will remain independent and will start doing better.
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RE: UA/US Deal? Forget It!

Mon Jul 02, 2001 10:43 pm

So how does this affect jetBlue, Vanguard, and other non-hegemonist oligopolist antichrist, collusionist, imperialist, pig-dog carriers? I doubt that Neelman & co. didn't see this coming. Do we look for mushrooming expansion to second-tier Northeast cities?
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RE: UA/US Deal? Forget It!

Mon Jul 02, 2001 11:13 pm

I am glad to hear that this awful idea is finally getting canned, but I have real fears for the future of US and its employees. I sincerely believe that Wolf, who belongs to the same club as Icahn and Lorenzo, will hack US to pieces.

I believe that US can be made profitable, with some leadership at the top. Unfortunately I don't see Wolf or Gangdesh (or whatever his name is) providing it.

Good luck to all US employees.

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RE: UA/US Deal? Forget It!

Mon Jul 02, 2001 11:59 pm

Consolidation is likely dead for this year, with the end of UA-US. Mergers cost big money. High-'yield' business traffic will need to firm back up before the Oligopoly-La Aerea Nostra is going to want to spend that kind of money. The jury still seems to be out on whether business traffic will recover in 2001, but it doesn't look promising.

When the industry last consolidated in the late 1980's, the buyer-driver airlines were profitable. American, Texas Air, Delta, USAir, and Northwest were all profitable, as were their respective targets AirCal, Continental, Western, Piedmont, Republic. People Express was the only industry loser lucky enough to be bought whole and merged into one of the surviving Families for keeps.

The buyer airlines all realized that Pan Am, TWA, and Eastern were dogs; Texas Air only bought Eastern to rape it if Thomas Petzinger is correct. And United and American only bought the profitable overseas parts of Pan Am and TWA So these money-losers were allowed to die. The profitable airlines had the vast sums of available money necessary to integrate their fleets, employee groups, and operations.

To be sure, the Oligopoly does want to consolidate (with the exception of Continental, who would follow suit to stay competitive). With the profits the Oligopoly earned in the late 1990's, they could afford to indulge their desire; but those profits are no longer coming in. Watch for new developments to take shape once the balance sheets firm up, possibly next year.

LHMark: both the low-fares and the Oligopoly will probably try to make a push in the Northeast. US Airways' point to point routes from medium-size cities like ROC and SYR would be profitable in the hands of any of the other Five Crime Families with their lower costs. But Southwest in particular may move in; if US stays weak they'll probably enter ROC, SYR, and DAY at least.

The ORF-and-RIC announcment indicates that they think they're big enough that their 10-daily-flight profit matrix can now work in medium-size neighbors. Kelleher's successors share his "strike where the iron is hot" philosophy, and the NE will likely heat up next year.

JetBlue will likely simply keep adding cities and frequencies to JFK as its route network grows and offers more competing route opportunities. Once they add a Washington-area airport and a Boston-area airport, the Jet-A should hit the fan. Vanguard is busy building MCI so they're unlikely to be a factor in the Northeast.

AirTran's effect in the NE will depend upon how much they build up PIT and PHL. With only an ATL hub, they won't be much of a factor *within* the NE otherwise. AirTran will probably continue to add service to ATL at new NE cities, but that will have a smaller effect on business travel.

The Oligopoly will continue to operate the Shuttle, and will probably continue to dominate smaller airports where the low-fares carriers have not yet figured out a profitable way to enter. The questions will be: will CO and AA want to fight for point-to-point service in medium size NE markets? Will Delta build up regional-affiliate service to replace what it lost when American Eagle snapped up Business Express? And finally, will United still try to grow somehow in the NE?

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RE: UA/US Deal? Forget It!

Tue Jul 03, 2001 12:12 am

The only way US can surive if Gordon Bethune can clone himself and put the clone to work at US  Smile/happy/getting dizzy
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RE: UA/US Deal? Forget It!

Tue Jul 03, 2001 1:35 am

Well consolidation in wholesale mergers may be dead at least for this year, but I think we can expect swift action on the part of US to put itself up for bid in 3 or 4 parts.

Look, no one should be surprised that US isn't a long-term player. Wolf isn't a manager, he's a salesman. He always has been. The BoD hired him, for chrissake, because the BoD thinks that the best (read: most profitable for shareholders) way out is to self-destruct and sell the pieces.

Wolf, as far as everyone knows, still has the support of the BoD. So, the strategy continues.

US is polishing itself up for sale. I think we can expect the pieces to be MetroJet, BOS/Shuttle, PHL/CLT, PIT, and Express carriers. I think that we'll hear more about this before the year is out.

Even though it's carving up in pieces, it's still consolidation. US, from my perspective, is hell-bent on that.
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RE: UA/US Deal? Forget It!

Tue Jul 03, 2001 2:01 am

The US BOD faces the immediate short term decision of whether to a) break the airline up immediately, or to try to b) forge ahead for a year and see whether the prospects for breakup next year are better, and take it from there. There isn't any question that the BOD is intent upon selling, it's just a matter of how and when.

One point that just occurred to me is, if US pursues a short term goal of continuing to exist, will Star Alliance want them? Will the financial benefits to the alliance outweigh the costs of having a member carrier whose BOD doesn't want that carrier to exist a year from now?

The breakup of the smallest oligopoly-crime family does not seem to me to constitute industry consolidation. Five Families will remain instead of three. Their boards and managements will need to determine how and whether wholesale industry consolidation would work in a better economic situation.

The pieces will probably be exactly as you describe them, Aaron. One interesting question: will anyone want MetroJet, other than for a/c to redeploy? WN won't want a bunch of 732's, and MJ's route structure exists to compete with WN. Will anyone want to buy an airline specifically to compete with WN at one of its major hub-ish operations?

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RE: UA/US Deal? Forget It!

Tue Jul 03, 2001 2:32 am

I could see maybe AirTran going for MJ - they have at least fleet experience with 732s, even though they've made it clear that they're retiring them. It would give AirTran a quasi-DC presence and another place to stage a Northeast expansion from.

Or, I suppose, DL for their Express operation, although they've tried to stay out of WN's way to an extent.

Another interesting thought would be ATA - they've gotten their financial house a little in order, and they're building a 737 fleet (albeit NG). They have no problem with ancient planes, and it would free them from the constraints of Midway, to an extent.

The most interesting position that an airline has here is WN itself. It could manage to buy MetroJet to get some interim lift, better infrastructure back east, and most importantly, kill a competitor. I think we'd see, though, that WN would pare down the routes almost to where you couldn't see where MetroJet once existed. How would Southwest sit then in the hearts and minds of consumers and legislators?

I guess the final possibility is that an outside group comes in to run MetroJet as an independent carrier. Anyone know what the pertinent stats (RASM, CASM, Loads, etc.) for MetroJet are alone? If someone was foolish enough to do this, and I believe that there is such a fool somewhere in the US, I can't believe that it would be successful -- we'd see a bloodbath at the hands of our red, orange, and newly canyon blue friends.

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