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United to drop bid for US Airways

Citing fears that the Justice Department will never approve the huge deal, United is expected to back out today.

©Washington Post

© St. Petersburg Times, published July 2, 2001

Citing fears that the Justice Department will never approve the huge deal, United is expected to back out today.

United Airlines plans as early as today to call off its $12.3-billion acquisition of US Airways, according to the Washington Post and other published reports.

The decision by Chicago-based UAL Corp., United's parent, to abandon the biggest merger proposal in U.S. aviation history raises questions about the future of US Airways Group Inc. and its 46,000 employees.

US Airways Chairman Stephen M. Wolf has maintained that the airline cannot survive as a stand-alone carrier against larger operations, such as United or American Airlines, or smaller, low-cost carriers such as Southwest Airlines.

The move also nullifies the creation of DC Air, the airline that was to be headed by Black Entertainment Television founder Robert L. Johnson. United, the nation's second-largest airline, proposed creating DC Air to answer antitrust regulators' concerns that a combined United-US Airways would be too dominant on the East Coast. DC Air would have been the largest airline owned by a minority. Johnson declined to comment on the latest development.

It was continued scrutiny by Justice Department antitrust officials, who showed no sign of approval after 14 months of talks and revised proposals, that led United to back out, said a United executive, who requested anonymity. The executive said it was unlikely United would return to acquire US Airways even with a lower bid.

US Airways declined to comment on United's move. But an executive familiar with US Airways said United's decision left the airline "disappointed."

Kevin P. Mitchell, the chairman of the Business Travel Coalition, a strong opponent of the merger, expressed relief on Sunday. "Had this been approved it would have transformed the competitive landscape of the airline industry here and abroad with negative implications for consumers for years to come," he said.

He added that few new airline combinations were likely to be proposed for some time. "This puts the brakes on," he said.

If US Airways, the nation's sixth-largest airline, can't find another partner, Wolf has said the airline could end up filing for Chapter 11 bankruptcy protection. Last year US Airways reported a loss of $269-million and revenue of $9.27-billion. In the first quarter this year, US Airways reported a loss of $178-million and revenue of $2.24-billion.

Some industry analysts, airline union leaders and other airline executives have said US Airways could improve financially and remain independent by controlling its costs, eliminating unprofitable routes and generally tending to the business of running the airline.

"It is very unlikely Wolf will be there three years from now," said Darryl Jenkins, head of George Washington University's Aviation Institute. "I doubt they'll go into bankruptcy any time soon, but they're going to have to do some real serious reorganization."

While the airline's executives have focused on completing the proposed acquisition, competitors such as Delta Air Lines and low-fare carriers including Southwest, AirTran Airways and JetBlue Airways have increased operations in US Airways' Northeast route system.

Jenkins said US Airways, based in Arlington, Va., has the highest operating costs in the industry, so it is unlikely another airline would be interested in acquiring it in its entirety.

US Airways' value is higher if it "sold components off rather than being sold as a complete entity," Jenkins said.

However, US Airways executives have said in the past that selling off its most profitable components would make it more difficult for the airline to restructure itself into a profitable operation.

Under terms of its agreement, United has to pay US Airways $50-million if it pulls out of the deal. US Airways senior management, including Wolf, still would receive a total of almost $20-million in supplemental benefits and vesting stock options for having set up the deal.

Wall Street is expected to applaud United's move. Airline analysts have said United's offer of $60 a share was too much, especially now that the economy is much weaker than a year ago.

United chose to call off the agreement now instead of waiting until after Aug. 1, the deal's deadline, so United executives could focus immediately on improving operations, the executive said. Since United announced the deal in May 2000, shares of UAL have fallen 41 percent, closing Friday at $35.15 a share. Shares of US Airways have fallen 7.6 percent since the deal was announced, closing Friday at $24.30 a share.

Now, with the collapse of the deal, United finds itself the No. 2 airline, behind its archrival American Airlines, which surpassed it in size earlier this year when it bought the ailing Trans World Airlines. Paradoxically, American's purchase of TWA was designed in part to defend against United's proposed takeover of US Airways.

America, United, and Delta Air Lines now each carry about 18 percent of domestic passengers.

United, which last year reported a profit of $50-million and revenue of $19.3-billion, has had a rough start financially this year. The parent company reported a first-quarter loss of $305-million and revenue of $4.42-billion. The company also expects a loss in its second fiscal quarter as the number of travelers decline and fuel costs rise. The airline, with operations that were severely affected last summer by contentious negotiations with its pilots union, is now in talks with leaders of its machinists union.

- Information from the New York Times was used in this report.

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