Airline experts say they expect the proposed United Airlines-US Airways merger, in the end, to go through, but only after significant divestitures of routes and other assets that United is hoping to avoid.
The analysts who make a living tracking airline fortunes are closely examining the deal and believe it can be accomplished, but only if US Airways operations at Ronald Reagan National Airport in Washington, D.C., are sold to a major competitor of United.
“US Air becomes the sacrificial Conrail of the U.S. airline industry but without the bidding war,” said Sam Buttrick, airline analyst for PaineWebber in New York, alluding to the battle for Consolidated Rail Corp. that erupted in 1997 after CSX Corp. proposed buying the quasi-public railroad. The end result was a split of Consolidated between CSX and another railroad, Norfolk Southern Corp.
If the United/US Airways deal goes through, Buttrick predicted, AMR Corp., the parent of American Airlines, will end up with US Airways gates and landing and takeoff slots at Reagan/National, including the coveted US Airways shuttle. Meanwhile, he predicted, Delta Air Lines Inc. would get many of US Airways gates in Philadelphia.
These divestitures, which would amount to about a third of US Airways, may be the painful medicine the federal Justice and Transportation departments prescribe to let the deal go through, Buttrick said.
But officials of American and Delta, the No. 2 and 3 airlines behind United, the world largest, aren’t waiting for the government to step in to help them.
AMR Corp. last week proposed a merger with Eagan, Minn.-based Northwest Airlines. This week, AMR and Delta officials began discussing a merger . AMR also has talked with officials of Houston-based Continental Airlines about a union. Northwest owns a controlling interest in Continental.
“We’re talking to everyone,” said one person close to the discussions.
But of all the deals, the American-Delta one seems to be the least likely. Significant route overlaps that exist between the two carriers would pose major antitrust problems . Many analysts are theorizing that the real intention of Delta and American officials is to force regulators to bar a UAL-US Airways deal by raising the prospect of massive airline industry consolidation that could hurt consumers.
“I think either way American would be happy because either way they’ll be at the same type of market size as United at the end of the day,” said Susan Donofrio, airlines analyst with Deutsche Banc Alex. Brown in New York.
A number of other factors, particularly the web of pre-existing alliances among the airlines, could also affect the current round of merger discussions.
One such case was confirmed on Wednesday. British Airways, which has an alliance with American, said it is in merger talks with KLM Royal Dutch Airlines, which has an alliance with Northwest.
A merger of American with Northwest combined with a merger of British Airways and KLM would permit American to leapfrog United by allowing the Ft. Worth-based airline to become a two-ocean airline.
That could challenge United’s long-held Pacific dominance. United controls about 18 percent of the Pacific market, but a combined American-Northwest would have about 16 percent of the market.
Moreover, Northwest’s 15-year-old alliance with KLM combined with American’s operating agreement with British Airways would permit the carriers to become significant challengers to the United/Lufthansa Airlines-conceived Star Alliance, which dominates air travel over the Atlantic.
A deal of that magnitude could force a realignment of the major airline alliances–the Star Alliance and the American/British Airways-backed Oneworld alliance.
“What is happening is we’re entering the poaching stage in this alliance game, and, consequently, you may see a whole realignment,” said Julius Maldutis, an analyst for CIBC World Markets in New York. Many airlines could be looking for new alliance partners if the United-US Airways, American-Northwest and British Airways-KLM deals are consummated.
“The American Oneworld would probably break up,” he said. Other Oneworld alliance members are Aer Lingus, Cathay Pacific, Finnair, Iberia, Lanchile and Qantas.
Members of that alliance likely would try to realign with a new alliance being formed by SwissAir. And a new alliance involving Delta Air Lines and Air France that is to be announced later this month may already be in jeopardy.
Currently, United controls about 20 percent of the domestic market, while US Airways controls about 6.5 percent. American controls about 19 percent of the U.S. market, Northwest flies about 12 percent of the U.S. traffic, while Delta controls about 17 percent of the U.S. market.
“We think that domestic alliances are poor substitutes for true consolidation, which can only be brought about by mergers,” according to Brian Harris, airline analyst for Salomon Smith Barney in New York.
