American under pressure
Airline seen countering with own move to offset United/US Air merger
New York (CNNfn) - United Airlines $4.3 million bid for US Airways puts particular pressure on competitor American Airlines to either counter with a deal of its own, or enter a bidding war with United, long viewed as the company's archnemesis, analysts said Wednesday.|
The deal, announced early Wednesday, calls for United, the No. 1 U.S. airline to pay $60 a share in cash for US Airways, the nation's sixth largest carrier. The companies expect to close the merger sometime next year.
But some analysts said the transaction may yet draw a competing bid from the Ft. Worth, Texas-based American (AMR: Research, Estimates), the nation's No. 2 airline, which has long butted heads with United in their battle to rank as the largest U.S. carrier.
"It's incumbent on American to respond to this," said senior analyst Henry Harteveldt, of Forrester Research. "It's possible that American will try to up the bidding for US Airways."
North-south routes the key attraction
For its part, American Airlines declined to comment on the deal and analysts said it is difficult to speculation just how Don Carty, the current head of AMR, will respond.
The attraction to US Airways for both American and United (UAL: Research, Estimates), analysts said, is that the company would significantly boost either airline's presence along the lucrative East Coast market -- a US Airways stronghold.
US Airways primarily flies north-south routes on the East Coast, complimenting United's mainly east-west routes across the country. United has major hubs in Chicago, Los Angeles, Denver, Washington, D.C., and San Francisco. US Airways, of Arlington, Va., has hubs in Pittsburgh, Charlotte, N.C., and Philadelphia.
"This is a pretty spectacular deal," said Michael Zea, vice president of the airline practice at Mercer Consulting, of the United/US Airways proposed merger. "As United's closest competitor, this directly impacts American but it's a difficult deal to replicate."
Like US Airways, American offers multiple international routes as well as domestic flights, with Dallas/Ft. Worth as its biggest hub. The company does offer some north-south routes, but remains primarily an east-west carrier as well and offers few overlap routes with US Airways, said Dan Kasper, manager director of economic consulting firm LECG, of Cambridge, Mass.
Investors, possibly sensing a bidding war, sent both American's and United's stocks tumbling Wednesday. UAL Corp., United's parent company, fell 7 3/16 to 53 3/16 while AMR Corp. parent of American, dropped 2-9/16 to 30-1/16. Meanwhile, US Airways (U: Research, Estimates) shares surged up 22 7/16 to 48-3/4.
Competitive feelings a factor
One factor that could also affect the company's reaction is how its deep competitive feelings for United, its primary rival, might come into play, analysts said.
United and American have long been archenemies, said Jay Campbell, executive editor of Business Travel News. "When United gets a leg up on fares, American will match it. They absolutely hate each other."
Ultimately, American's reaction depends on whether the airline believes the United-US Airways merger will go through, analysts said. United powerful pilot's union, the Air Line Pilots Association, has already criticized the deal.
In 1995, United tried to acquire US Airways but the deal fell through. At that time, Robert Crandall, chairman of AMR, parent of American Airlines, said he would not allow a merger between United and US Airways to proceed, analysts said.
"This deal has been attempted once," Zea said. "American will feel very strongly about this."
However, analysts believe that American could also look at other deals in a way to boost its position.
One possible scenario has American buying Northwest Airlines (NWAC: Research, Estimates), the nation's fourth largest airline, giving American access to Asia, analysts said. Another possible union between American and Continental Airlines Inc. (CAL: Research, Estimates), would give the combined company a presence along the West Coast, Forrester Research's Harteveldt said.
Another possible West Coast candidate is America West Airline (AWA: Research, Estimates), whose stock also jumped Wednesday on merger speculation.
Still, analysts said the pool of potential candidates was small, particularly given the government's close scrutiny of the industry.
"There aren't that many major players left," Kasper said.
Kasper discounted a deal between Northwest and American because of Northwest's involvement with Continental Airlines. However, in 1998, the federal government sued Northwest and Continental airlines over their proposed union, claiming it would give Northwest a majority of voting stock in Continental. The trial is expected to begin this year.
Still, most analysts believe that the United/US Air proposed merger will cause other airlines to rethink their positions.
"Whether its American or British Airways (BAB: Research, Estimates), this puts everyone in the position to rethink their own strategy," said Mercer's Zea. "Whether this causes another round of consolidation, I don't know."
Analysts said Delta Air Lines (DAL: Research, Estimates), the nation's No. 3 carrier, is also likely to eye possible West Coast acquisitions, said Rob Milmore, an analyst with Arnold & S. Bleichroeder.
"If one of these deals goes through, we will see more and more," he said. "That's just the nature of the industry."