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US Air deal still circling
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May 28, 2001: 11:49 a.m. ET
Market questions deal's chances as United awaits OK a year after pact
By Staff Writer Chris Isidore
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NEW YORK (CNNfn) - It was supposed to be a marriage that reshaped the U.S. airline industry. But a year after the engagement was announced, there are serious doubts whether the bride and groom will ever make it to the altar.
The deal was to join United Airlines, the world's largest airline, with US Airways, the nation's No. 6 carrier, giving United the strength on the East Coast it was missing and giving it about a quarter of the nation's air traffic.
But the first anniversary of the proposed deal was reached May 24 with the merger still on hold awaiting regulatory approval, even as United competitor American Airlines announced and closed on its own purchase of bankrupt Trans World Airlines, and nudged its way into a portion of the US Airways deal as well.
While James Goodwin, CEO of United parent UAL Corp., told shareholders that he's confident the deal will still be done along the lines of the current purchase agreement, the market clearly has doubts.
Shares of US Airways Group (U: Research, Estimates) closed Friday at $24.28, down 47 cents on the day and less than half the $60 a share purchase price that it would fetch if the deal is completed. The price is even $2.03 below the price the day before the UAL deal was announced, and it is near a 52-week low.
Meanwhile increased costs and lower traffic and service levels that United suffered during difficult labor negotiations has led to losses and driven down the share price of UAL (UAL: Research, Estimates) to a close Friday of $38.39, about two-thirds of its value the day before the US Airways deal was announced. The two carriers have a combined market capitalization of $3.7 billion, less than No. 3 carrier Delta Air Lines (DAL: Research, Estimates), despite a strike and other labor woes that have caused losses at that carrier.
Other airline executives, including Donald Carty, CEO of American parent AMR Corp., have publicly stated they don't believe the UAL-US Airways deal will go through. Analysts speculate on a not-for-attribution basis that if the deal is done, it will be at a lower price with even fewer US Airways assets than now included in the deal in order to gain regulatory clearance.
"The problem is they've got a US Airways franchise that's not in great shape," said one analyst who spoke on condition that his name not be used. "They'll have to take whatever pieces they end up with and basically turn them around. That tends to be more difficult to do."
That analyst believes it possible that the lucrative Washington-New York shuttle, which United is now supposed to operate in conjunction with American, may have to be cut loose from the deal to satisfy regulators.
"The shuttle is very important for local market presence," he said. "If they (UAL) want this deal badly enough to give it up, they'll end up paying less for what's left."
United insists deal is still on track
United spokespeople insist that the delays are normal and not the sign of a deal in trouble. They point out that the deal changed when AMR entered the agreement in January, requiring a new round of reviews, and that the change in administrations in Washington caused a shake-up in the Justice Department's anti-trust division, which they said slowed things down.
"AMR purchased TWA under the failing company doctrine, which bypassed a whole host of reviews," said United spokeswoman Susana Leyva. "We're committed to deal. And despite perception of opposition, in fact support continues to grow." She pointed to a letter sent recently by Speaker of the House Dennis Hastert, a Republican from UAL's home state of Illinois, asking the DOJ for "timely approval" of the deal.
Still, United executives have said it will be the third quarter before they expect final approval.
Other members of Congress have criticized the deal, seeing it as a precursor of further consolidation that could leave most airline passengers with only a few choices, higher fares and worse service levels. Even some airline executives echo those fears.
"You know how Chicago works? You're either on United or American; that's it," said Gordon Bethune, CEO of No. 5 carrier Continental Airlines, in February when he said that mergers would hurt both consumers and the airlines themselves. "You take what they give you at the same fare, which means the whole United States would look like Chicago."
But Bethune vows that Continental would respond with its own deal if UAL is given approval to buy US Airways.
"If the government lets United and American get together and run half the country, we have to do something," he told Reuters in February. "I don't know what that is, but it ain't going to be nothing."
But Continental's options are limited because of a agreement it signed when No. 4 U.S. carrier Northwest Airlines. Northwest can't buy shares of Continental, under a settlement of a Justice Department anti-trust case against the carriers, and it can block any other carrier's purchase of Continental.
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Bethune said last week he thought that Delta and Continental might be a good fit for one another. But for Continental to buy No. 3 Delta Air Lines, which has a current market cap of $5.8 billion, it would have to be a difficult and expensive all-cash deal.
Some analysts said while carriers other than United and American would be at a competitive disadvantage if those two carriers handle half the nation's air traffic, there might not be another major deal on the horizon.
"What really needs to happen is for Northwest, Delta and Continental to become two airlines," said Jim Higgins, analyst with Credit Suisse First Boston. "But I don't know how you get there. I don't think anyone does anything fast." 
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