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United Attempts 2nd Merger Shot With US Airways

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The Associated Press

Published: May 2, 2008

CHICAGO - United Airlines and US Airways Group Inc. saw their first attempt at marriage foiled earlier this decade by the deal's high cost and stiff opposition from lawmakers, unions and consumers.

This time, a proposal for them to combine could face an easier route to approval in Washington, where the last bid died in July 2001. First it has to get past unhappy pilots and other obstacles that could ground any bid to create the world's largest airline.

The two carriers are in advanced talks to join forces, scrambling to respond to the threat posed by the proposed Delta-Northwest megacarrier. No agreement is assured, and either airline could walk away to seek another partner or an alliance instead.

Industry experts say United-US Airways would be an imperfect union - fraught with risk but making some sense competitively.

UAL Corp.'s United sees the chance to gain a bigger foothold in the Northeast and attract more customers for flights to Europe. US Airways could tap into its larger rival's powerful international network. There also is enough overlap to provide the opportunity for significant savings.

However, US Airways still hasn't resolved pilot seniority and other loose ends from its acquisition by America West in 2005. Also, sky-high fuel prices and an expected decline in air travel demand could limit any savings.

"There's a lot of operational risk there," said Roger King, an airline analyst for CreditSights. "None of this stuff is going to help them tomorrow: It's all long-term, revenue-enhancing possibilities. But it would give an expanded United the largest domestic footprint of any airline."

United unveiled the first plan to couple with US Airways in May 2000. The deal was rejected after 14 months.

This time, the industry consensus is that a United-US Airways combo has a much better chance to be approved by federal regulators, along with Delta Air Lines Inc.-Northwest Airlines Corp., especially in light of questions about the future financial health of both carriers.

Just in case, though, the rush is on to put together a deal that could be signed off on before a new administration takes over in January.

Morningstar analyst Brian Nelson says the carriers likely will need to make divestitures in areas where they overlap in order to be approved - the Washington area and perhaps the West, where both have strong operational bases.

"It's difficult to say how much scrutiny there will be on this because the landscape is in constant flux as carriers are trimming capacity across the board," Nelson said. "It just seems that United is searching for anybody at this point, and I think that speaks potentially to their financial position."

United maintains it is financially sound, despite reporting a $537 million first-quarter loss last week.

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