A takeover of USAir by United Airlines would face monumental financial and legal hurdles and, if successful, could trigger a domino effect with other airlines scrambling to protect themselves by consolidating, analysts and industry experts said yesterday.
Compared with recent mega-deals in the telecommunications industry, a merger between Arlington, Va.-based USAir and United might look minuscule. But it would get far more scrutiny from the U.S. Justice Department's antitrust division because of its implications for the traveling public.
The two airlines announced Monday that they were conducting preliminary discussions on a possible deal that would plug USAir into Chicago-based United's global network and give United access to the lucrative mid-Atlantic and Northeast markets, where it has little presence. USAir also said it was in preliminary talks with American Airlines.
"There are significant-enough issues to prompt a major investigation," said Mark Schechter, a Washington attorney and former top official in the Justice Department's antitrust division.
An alliance between the nation's largest and sixth-largest carriers -- with combined revenues of $20.5 billion -- undoubtedly would also face strong opposition from other carriers, which would mobilize their political forces in Washington.
"You could eliminate competition with a move like this," said Jon Ash, managing director of Global Aviation Associates in Washington. "Then you'll have a domino effect and, basically, you'd be headed for three or four airlines. You're looking at a potentially, seriously ugly battle here."
Aside from the antitrust issues, USAir's financial plight could also thwart a deal. Burdened by $2 billion in debt, high costs and competition from discount carriers, USAir has lost $3 billion over the past six years. Although it said it expects to be profitable this year, its future is threatened by its failure so far to win badly needed concessions from its labor unions.
A deal could also be complicated by USAir's alliance with British Airways, which owns 24.6 percent of the company. BA competes with both United and American on international flights.
Indeed, the difficulties any buyer would face were reflected on Wall Street yesterday, where United's shares fell $6.125, to $166.625, and American's $2.125, to $68.50. USAir shares, on the other hand, gained $1 to close at $12.625. It was the third-most-active U.S. issue trading.
While USAir, the largest carrier at BWI, said it is talking with American, a deal with United seems more likely. In a major restructuring in 1994, United gave up 55 percent of the company to employees in exchange for $4.8 billion in wage and work-rule concessions, putting the company on a sounder financial footing.
In contrast, Dallas-based American is still seeking concessions from its labor unions and continues to cut its fleet and eliminate hubs to save money.
"It makes a lot of sense to integrate USAir and United," Mr. Ash said. "The systems fit together really well. This is great added value to United and it puts USAir in a mega-global network."
While the merger appears to be a strategic fit for the airlines, Mr. Ash and others expressed skepticism -- and some cynicism -- about the ultimate outcome.
"What you have here is United looking for a way to get a lock on the East Coast at a fire sale price and USAir looking for a messiah but not thinking about selling at a bargain basement price," said Timothy F. Sieber, vice president of Aviation Systems Research, a Golden, Colo., consulting firm.
"The fear of God"
"The end result will probably be no merger, but in the short run put the fear of God in the unions, bring them to the table and USAir will get what it wants."
But a spokesman for the USAir pilots union in Pittsburgh yesterday downplayed that theory and insisted that the merger makes good business sense.
"No one would put their company into play just to posture against the unions," said Bob Godiozo, a USAir pilot. "When you look at the route structures it fits very well it's a positive business move."
Such a deal would require USAir's unions to be integrated into United's contracts, though perhaps with significantly different terms since the wages of United's workers are based on their buyout plan.
With the highest costs in the industry, USAir tried to get $2.5 billion in concessions over five years from its labor unions. The company ultimately called off negotiations this summer, saying negotiations were making no progress.
Over the next 15 months, it will renegotiate contracts individually with its four major unions, starting with the Machinists.
United said yesterday that it will take a month to examine USAir's books before deciding whether to pursue a deal.
British Airways uses its alliance with USAir to provide feeder service into its trans-Atlantic routes.
Yesterday, British Airways said the prospective merger presents "interesting options" to expand BA's reach into the United States and boost the value of its investment in USAir.