United to call off merger with US Airways
By Dave Carpenter
Associated Press
CHICAGO — United Airlines is moving to pull the plug on its $4.3 billion acquisition of US Airways, a deal that's been in trouble for months due to the weakened economy, airline industry woes and lingering antitrust concerns.
While stopping short of publicly declaring the 13-month-old deal dead, UAL Corp.'s United and US Airways both announced Monday that they are in talks "regarding the possibility of terminating the proposed merger" immediately.
But even if US Airways balks at scrapping the plan before an Aug. 1 deadline, United intends to drop the acquisition altogether, according to a person familiar with the matter, speaking on condition of anonymity.
United will have to pay US Airways a $50 million breakup fee if it ends the agreement after Aug. 1. Before that date, the breakup fee is substantially higher, but United is asking to pay only $50 million.
The collapse of the largest-ever airline merger leaves the nation's second- and sixth-biggest carriers on their own to sort out imposing challenges — United's slip behind American Airlines for the industry's top spot and US Airways' shaky finances.
But some experts see the long-expected breakup as good news for not only the two airlines, but for air travelers.
"It's good for United because it can focus on its real business challenges. It's good for US Air because they can focus on being a stand-alone carrier. And it's good for the consumer, who won't lose a lot of competition because of the merger," said airline industry consultant Michael Boyd, president of the Boyd Group in Evergreen, Colo.
United unveiled the merger plan May 24, 2000, bidding to dramatically increase its presence in the lucrative East Coast market, strengthen its entire network and nearly triple its daily flights to more than 6,400 a day.
It quickly ran into turbulence amid opposition from the airlines' rivals, labor unions, Congress, consumer groups and state attorneys general, many of whom complained it would create a dominant airline that limited competition, particularly in the Washington, D.C., area.
In an effort to ease anticompetitive concerns and ensure government approval, United agreed in January to sell some US Airways assets to AMR Corp.'s American Airlines, including half of US Airways' Washington-New York-Boston shuttle.
United ultimately decided to drop the merger because it was convinced it wouldn't win regulatory approval, according to the AP's source. Transportation Secretary Norman Y. Mineta had said last month he expected the government to reject it.
But airline-watchers have said for months that the expensive deal no longer made economic sense regardless, suggesting that Elk Grove Village, Ill.-based United was looking for a way out.
"United saw they were going to end up with a giant mess to merge, while American was in a position to eat their lunch," said Boyd.
American's takeover of failing Trans World Airways gives it about 900 jets and three east-west connecting hubs in Dallas-Fort Worth, St. Louis and Chicago,— compared with United's 700 jets and two east-west hubs in Chicago and Denver, he noted.
"United's going to have to work hard to get their efficiencies up — they've got a real competitive crisis to face," he said. "United has to focus on its strengths, which are quality customer service and middle management that's as good as any airline in the country."
United would have paid $60 a share for US Airways shares, nearly triple of US Airways' current stock price.
Shares of US Airways sank $3.41, or 14 percent, to close at $20.89 Monday on the New York Stock Exchange — the lowest since before the merger was announced. Shares of UAL declined 45 cents to $34.70.
United 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.
Analyst Julius Maldutis of CIBC World Markets speculated that United's pullout from the deal before the August deadline could be aimed at helping its stock or its labor relations, with the merger having added to contract disputes with mechanics, customer service representatives and flight attendants.
"By going back to the basics, it's going to be an important step forward for United," Maldutis said. "United Airlines faces a large number of great opportunities, including a great alliance with Lufthansa" which reaps some of the same benefits a merger would, he said.
The Association of Flight Attendants, which had threatened to strike United if the merger proceeded, said Monday it is still opposing the airline for its recently announced plan to enter the business jet market.
