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Turbulent times for US Airways' merger plan

THE BALTIMORE SUN

In February 1998, US Airways' stock was trading at $62 per share and the nation's No. 6 airline was well on its way to posting earnings of $538 million for the year.

After suffering record losses in the early 1990s, the airline was finally enjoying a string of profitable years, prompting billionaire investor Warren Buffett to praise Stephen M. Wolf, the airline's chairman, and other senior management for its stunning reversal.

"Few airlines - indeed, few companies - are better managed than US Airways," Buffett gushed in a statement.

Almost three years later to the day and with losses mounting, Wolf sat before the Senate Judiciary Committee in Washington last month and all but predicted US Airways' demise, arguing that a merger with United Airlines is its best hope for survival as it competes with carriers that have larger networks and lower operating costs.

"We know all too well what happened to other similarly situated carriers, such as Braniff, Eastern, PanAm - and now [Trans World Airways]," Wolf said at one point, referring to TWA's pending bankruptcy sale to American Airlines.

With the airline facing more Justice Department questions and delays, some industry analysts say the TWA comparison may play an increasingly prominent role in US Airways' campaign to win approval for its $11.6 billion merger with United. But to make that strategy work, merger proponents may have to convince federal regulators that the same airline Buffett heaped praise on three years ago is on the brink of collapse today.

The facts tend to indicate otherwise. TWA endured 12 years of losses and made two trips to U.S. Bankruptcy Court before its sale to American was approved by a bankruptcy judge in Delaware this month. By comparison, US Airways was largely profitable in the second half of the 1990s before reporting a $166 million loss for 2000.

The airline continues to increase capacity and remains dominant at its hubs in Charlotte, N.C., Philadelphia and Pittsburgh. It is the No. 2 carrier at Baltimore-Washington International Airport, where it increased its passenger totals by more than 7 percent last year. Maryland aviation officials, who oppose the merger on the grounds that it will result in fewer flights at BWI, report that US Airways gained passengers at an even faster pace at the start of this year.

Faced with a slowing economy, however, the airline announced March 1 that it expects its losses to continue in the first quarter of this year and be much deeper than anticipated. United Airlines, Delta Air Lines and Northwest Airlines have all issued similar warnings in the past week.

While few dispute that US Airways' financial troubles are accelerating, analysts remain divided over whether a merger is its only hope for avoiding a fate similar to TWA. If the airline were in such dire shape, some argue, United would not have been willing to pay $60 a share for US Airways stock, which was trading at about $26 per share when the deal was announced in May.

"That argument that if the merger doesn't come about, then the Northeast will have less air service than Outer Mongolia is nothing but a concocted fear bomb," said Michael Boyd, president of the Boyd Group, an Evergreen, Colo., airline consulting firm. Boyd, a critic of the merger, said US Airways' strategy may be to let the losses mount until federal regulators are convinced a merger is in the public's best interest.

"Could US Airways survive without United? The answer is yes. But if they get managed into the ground in order to do a merger, that's another story," Boyd said.

Sam Peltzman, an economics professor who specializes in airlines at the University of Chicago, said US Airways' situation doesn't yet compare to that of TWA, which was just days from shutting down before American came to the rescue.

The airline could still turn things around, he said, but it would take a major restructuring. Management would have to find a way to simplify its route system, cut fleet costs and seek labor concessions in a bid to lower expenses, which are by far the highest in the industry. The airline has made progress on several of those fronts, but expensive labor contracts remain an obstacle at a time when unions are in no mood to bargain.

"However, as an outside observer of the industry, you don't need a merger to solve those problems," he said.

Darryl Jenkins, executive director of the George Washington University Aviation Institute, holds a more pessimistic view. He said US Airways simply can't compete against lower-cost carriers, such as Dallas-based Southwest Airlines, despite tough cost-cutting measures taken by Wolf and senior management. The airline faces a slow, agonizing death - perhaps taking several years - if forced to remain independent.

"I don't think there's a whole lot you can do to save them," he said. "They're the next TWA."

Raymond Neidl, an airline analyst with ING Barings, echoed those comments, saying US Airways is too small to support its high cost structure and is especially vulnerable in the current economic downturn.

"It's not a failed carrier, but it's a failing carrier," he said.

It matters who is right. Antitrust experts agree that federal regulators will be much more likely to overlook competitive concerns about the merger if it comes down to a choice between saving US Airways from bankruptcy or letting the carrier fail, putting thousands out of work. That's why TWA's sale to American so easily won antitrust approval on Friday.

But analysts say there are numerous signs that US Airways faces a tougher battle than originally anticipated. Sources say Justice Department officials may be having a difficult time sorting out antitrust concerns with respect to the more complex United/US Airways deal, and may demand further changes in the agreement in order to preserve competition.

On March 6, the airlines announced that they would delay their merger a third time after Justice requested more information. Among the issues under review are United's plans to sell 20 percent of US Airways' assets to American, which would jointly operate US Airways' business shuttle between Washington-New York and Boston-New York. American also would own 49 percent of DC Air, a new airline being formed to take over much of US Airways' operations at Washington Reagan National Airport.

A regulatory decision had been expected in early January. The deadline was extended to Jan. 20, and then to April 2. The airlines now say they expect the deal to close sometime in May.

The Justice Department isn't the airlines' only problem.

Some powerful members of Congress have been blistering in their criticism of the merger, saying it will lead to more airport delays, passenger complaints and higher fares as another round of consolidation sweeps the industry.

Though Justice has final say over the deal, Reps. Louise M. Slaughter, a New York Democrat, and Peter A. DeFazio, an Oregon Democrat, have introduced a bill calling for a one-year moratorium on airline mergers to give federal regulators more time to study such combinations' impact on competition.

In addition, Transportation Secretary Norman Y. Mineta said recently that his department will expand its regulatory review to include a study of how such mergers will affect consumers, among other things. Previously, the Transportation Department's role largely consisted of providing transportation data used by Justice to render its decision.

United also is facing fresh resistance from its flight attendants and machinists unions, which are withholding their approval of the merger until contract disputes are settled.

Even so, most observers still give the merger high odds of winning approval, though it might need to be reshaped considerably.

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