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United to buy US Airways
May 24, 2000: 7:41 a.m. ET

Largest airline to pay $4.3B cash, assume $7B in debt for No. 6 carrier
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NEW YORK (CNNfn) - United Airlines announced Wednesday it is buying struggling US Airways for $4.3 billion in cash -- a move that would strengthen its position as the world's largest airline.

United's parent company, UAL Corp., said it agreed to pay $60 a share for US Airways, the nation's sixth-largest carrier -- 130 percent above its closing price Tuesday -- or a total of $4.3 billion. It would also assume $7.3 billion in debt and aircraft leases in the deal, which would give it access to US Airways' lucrative East Coast routes.

Combined, the companies have about $27 billion in sales, 980 aircraft, 145,000 workers and 6,500 flights a day. United earned $1.2 billion last year while US Airways' net income tumbled 63 percent to $197 million -- even after a $274 million gain on the sale of a computer reservation system stake.

However, some analysts believe the offer will spark a bidding war for US Airways, and that could be bad for airline stocks as whole.

Donaldson, Lufkin and Jenrette downgraded both UAL and AMR Corp. (AMR: Research, Estimates), the owner of No. 2 carrier American Airlines, and Merrill Lynch also downgraded AMR.

Jim Higgins, airline analyst at DLJ, says he believes the winning bidder will probably pay more than the $60 a share price, while the loser will be left with a weaker position. "I see it as a lose-lose situation," said Higgins. "Integration problems with airline mergers are legendary."

No. 3 carrier Delta Air Lines also stands to lose from a United-US Airways deal, according to analysts. Delta has a marketing deal with United, while American has a marketing pact with US Airways.

graphicUS Airways has struggled for years with high costs and stiff competition in the East. It has hubs in Pittsburgh, Philadelphia and Charlotte.

US Airways Chairman Stephen Wolf has repeatedly threatened to put the carrier up for sale unless unions agree to cut costs and change restrictive agreements. Wolf is a former chairman and chief executive of UAL who lost the top job there when the unionized employees bought the company in 1994.

Some industry experts say the carriers' union will object to the deal, and that there will also be concerns among antitrust regulators. Higgins said that US Airways pilots are relatively senior as a group, and many United pilots would be bumped back if the merger goes through.

"A lot of United captains won't be captains the day after this merger," he said. "So far, from what we've heard, they're not giving their full approval to this."

The pilots have great power at UAL, owning about 25 percent of the company's shares and holding a seat on the board of directors.

"The hurdles are so many I don't think they can even count them right now," Michael Miller, editor-in-chief of Aviation Daily, told CNNfn's Ahead of the Curve. "The unions have had a habit of disrupting any deals the management of airlines have wanted to make for the last decade." (101KB WAV) (101KB AIFF)

History of consolidation

US Airways held merger talks with United in 1995 after a trans-Atlantic alliance with British Airways (BAY) collapsed, prompting Britain's biggest airline to sell its 35 percent stake in USAir. US Airways then set a marketing pact with American, linking the airlines' frequent flyer programs.

graphicAnalysts noted that United's route network -- with hubs in Chicago, Denver, Los Angeles, Miami, San Francisco and Washington -- does not overlap greatly with that of US Airways, and the deal will give it access to the busy Northeast market in the United States.

United's pursuit of US Airways follows an abortive attempt to jointly market flights with Delta Air Lines (DAL: Research, Estimates) -- a deal watered down by regulators concerned about consolidation. United and Delta eventually linked their frequent-flyer programs but were not allowed to "code share," or jointly market flights.

Regulators in the United States and Europe, concerned about competition, may require concessions before approving the deal.

United is likely to sell some of the combined companies' assets at the congested Reagan National Airport in Washington to alleviate regulators' concerns, news reports said before the deal was announced. US Airways board member Robert Johnson is planning to form a new carrier, called DC Air, to take over some Washington assets.

But Higgins said that DC Air would not get the lucrative Washington to New York shuttle, and that he doubts its formation would answer regulators' concerns.

"That is a competitive straw man," said Higgins. "A peanut entrant can not possibly compete with United."

US Airways (U: Research, Estimates) stock jumped to 51 in before-hours trading Wednesday, according to Instinet, almost double Tuesday's close of 26-5/16. UAL (UAL: Research, Estimates) was not trading early Wednesday after closing up 13/16 at 60-1/16 Tuesday. Back to top


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