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United's New Plan Could Cost D.C.

By Del Quentin Wilber
Washington Post Staff Writer
Wednesday, April 30, 2008

The next potential act in Airline Merger Mania 2008: United Airlines and US Airways are negotiating a tie-up that could have profound implications for Washington-area air travelers, according to sources familiar with the discussions.

Spurned by Continental Airlines over the weekend, Chicago-based United has focused its attention on smaller US Airways for the second time in the past eight years. In 2001, a similar proposed merger was dashed after regulators said it violated antitrust laws.

The United-US Airways discussions come two weeks after Northwest Airlines and Delta Air Lines announced a proposed merger that would create the world's biggest airline, putting pressure on United to find a merger partner.

While a combined United-US Airways would be slightly smaller than Delta-Northwest in terms of total traffic, such a deal would more directly affect air travelers in the Washington area. The combined airline and its regional affiliates would handle just over 50 percent of departures from the region's three major airports, according to an analysis of flight data.

The carrier would control about 75 percent of departures leaving Dulles International Airport, a United hub, and 55 percent of flights leaving Reagan National Airport, a major base of operations for US Airways and its regional carriers.

The two carriers have only about 40 total daily departures from Baltimore-Washington International Marshall Airport, which is dominated by Southwest Airlines, the nation's low-cost behemoth.

The combined carrier's large share of the Washington market would make it easier for it to reduce costs by limiting flights and boosting fares because there would be less competition, according to analysts and academics.

"All things considered, fare prices will go up" in the area, said Dean E. Headley, a Wichita State University professor and co-author of the annual Airline Quality Rating. "The fact that they can dominate more of the market, that will give them more pricing power."

United was forced to turn its attention to US Airways after being spurned by Continental executives on Sunday. The two carriers had reached a deal, but Continental executives backed away because they worried about the increasing financial dangers of such a combination, according to a source familiar with those talks. United posted a $537 million first-quarter loss last week. In a letter to employees, Continental's two top executives said that "the risks of a merger at this time outweigh the potential rewards."

United's top chief executive, Glenn F. Tilton, has been a vocal proponent of consolidation, calling it a necessity if carriers are to achieve profitability. Despite massive cost-cutting in recent years, airlines' efforts to raise fares to keep pace with soaring fuel prices have been hindered, they said, by a fractured market in which no one carrier controls more than 15 percent of domestic flying and by competition from low-cost carriers. The major carriers, with the exception of Southwest, posted more than $1 billion in losses during the first three months of the year.

Sources close to United and US Airways cautioned that either carrier could -- like Continental -- walk away from the table. Both are evaluating other options, including the possibility of forming alliances and improving their stand-alone plans, the sources said.

If they do forge ahead, United and US Airways may face a tougher time selling their merger to regulators than Northwest and Delta will. Executives of those carriers have marketed their proposal as an "end-to-end" merger with little overlap. But analysts said United and US Airways have more overlapping routes and hubs, especially in the Washington area -- a situation that pleases investors eager for cost-cutting but may draw more regulatory scrutiny.

In threatening to sue to prevent a United-US Airways deal in 2001, then-Attorney General John D. Ashcroft said the deal would have harmed consumers, who "would have little choice but to pay higher fares and accept lower quality."

Outside experts and industry executives said the airlines should be able to overcome those objections by arguing that the economic environment has deteriorated so much that airlines have no choice but to combine operations. In recent weeks, at least four airlines have sought bankruptcy protection.

"Times have changed. They are going in with one strike against them, not three," said C. Evan Stewart, an antitrust lawyer in New York.

As they proposed in 2001, United and US Airways would essentially have to give up a large chunk of flights at National, or even Dulles, if they seek a deal this year. Low-cost carriers would eagerly bid for slots and gates at National now held by the two airlines and would not raise objections on anticompetitive grounds, said Darryl Jenkins, a consultant who is working with Delta on its proposed deal.

The business case for a US Airways-United combination hasn't excited analysts as much as the erstwhile Continental-United combination, a carrier that would have leapfrogged Delta-Northwest in size. US Airways doesn't have the international route network of Continental, for example.

But US Airways and United will probably have an easier time reducing costs by eliminating hubs and cutting flights on overlapping routes, analysts said. Their fleets are also similar, and both carriers are members of the same international frequent-flier alliance, making it easier to integrate.

However, those cost savings may be short-lived, according to Kenneth Button, a professor of public policy at George Mason University. He said that labor problems -- both carriers have them -- and economic issues, ranging from low-cost competition to high oil prices, will probably gnaw away at any benefits.

"This is a short-term treatment of a problem without actually curing it," he said.

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