United Is in Merger Talks With US Airways

United Is in Merger Talks With US Airways
By ANDREW ROSS SORKIN and JAD MOUAWAD
Copyright by The New York Times
Published: April 7, 2010
http://www.nytimes.com/2010/04/08/business/08air.html?th&emc=th

Correction Appended

United Airlines and US Airways are in merger talks that, if successful, would create the nation’s second-biggest airline. It is the third time in a decade that they have tried to make a deal.

The negotiations represent the latest efforts to consolidate the struggling airline industry, which lost $60 billion over the last decade as fuel costs soared and the number of travelers fell. Both companies have been vocal in calling for greater partnerships.

Of the largest United States airlines, only the low-cost carrier Southwest Airlines turned a profit last year. And analysts have said that despite the steep cuts in capacity by all the airlines in the last couple of years, there are still too many airlines chasing too few travelers. A combination of United and US Airways could help both return to profit faster than they could going it alone.

But mergers in the airline industry have been difficult to pull off, in part because complex labor contracts can offset the promised cost savings. The latest combination, involving Delta Air Lines and Northwest Airlines, creating the nation’s largest carrier, took nearly two years to complete. One reason that merger succeeded was that Delta and Northwest negotiated a seniority plan and a new collective bargaining agreement with the pilots, enabling the two companies to integrate their operations faster and more smoothly.

Disclosure of the talks could spur other airlines, like Continental and American Airlines, to consider bidding for United or US Airways, analysts said.

“The success of the Delta-Northwest merger is reinvigorating consolidation discussions in the industry,” said William S. Swelbar, a research engineer with the International Center for Air Transportation at the Massachusetts Institute of Technology.

In contrast, US Airways still has not integrated pilot seniority since its merger with America West in 2005. That has stalled over union infighting.

The labor issue could turn out to be the biggest hurdle to overcome in any merger with United.

“A tie-up with US Airways is potentially very messy,” Mr. Swelbar said.

People briefed on the matter said Wednesday that a transaction involving US Airways and United was not expected to be announced for several weeks. One issue being worked out is the management structure, these people said. They cautioned that the discussions could still collapse. Terms of the deal were not immediately available.

Jean Medina, a United spokeswoman, and Andrew Christie, a US Airways spokesman, declined to comment.

United’s chief executive, Glenn F. Tilton, has made no secret of his desire to find a partner for the company. In 2008, he held extensive talks to merge with Continental but was rebuffed.

“United has been standing at the altar waiting for the bride to show up and just got tired of waiting,” said Mo Garfinkle, a longtime airline industry consultant. “Maybe by flirting with another girl, it can get Continental’s attention again.”

A combination of US Airways and United is not a natural fit. The two carriers would end up with a large number of hubs, including United’s operations in Chicago and Denver and at Washington Dulles International Airport. US Airways has hubs in Philadelphia, Phoenix and Charlotte, N.C., and has extensive operations in the Washington area, giving it a strong presence on the East Coast. It has about 34,000 employees and operates about 3,100 flights a day.

US Airways is widely viewed as the weakest of the major airlines, with few international routes. At its domestic hub in Phoenix, it competes directly with Southwest.

United, which has hubs in Los Angeles, San Francisco, Denver, Chicago and Washington, operates about 3,300 flights a day on United and United Express. It has 46,000 employees.

Both airlines are part of the Star Alliance, the largest global airline alliance. But analysts said Continental would be a much better match for United, providing a strong management team and valuable routes to South America, as well as access to New York, where United is weak.

United and US Airways have come close to merging several times over the last decade. In 2000, they announced a $4.3 billion deal, only to withdraw after antitrust concerns from the Justice Department and fierce opposition from their unions. They tried again in 2008 but ended talks after several months of negotiations, that time in the face of opposition from United’s board as well as the pilots’ union.

News of the renewed talks caught many analysts off-guard. Shares of both companies rose sharply in after-hours trading.

“That’s a surprise,” said Betsy R. Snyder, an industry analyst with Standard & Poor’s Ratings Services. “Merger talks had actually died down a bit, and there was some expectation that airlines would focus on their recovery before thinking of combining with a partner.”

Michael J. de la Merced and Christine Negroni contributed reporting.

Correction: An earlier version of this article misstated the middle initial of Betsy R. Snyder.