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United, US Airways in merger talks again

By Sholnn Freeman and Tomoeh Murakami Tse
Washington Post Staff Writers
Friday, April 9, 2010; A01

A possible merger being negotiated between United Airlines and US Airways would create an airline that dominated the Washington market and could lead to higher ticket prices and fewer flights for passengers traveling to and from the region.

The two airlines control much of the turf at two of the region's airports, with United the major carrier at Dulles International Airport and US Airways on top at Reagan National Airport, and they compete with each other to keep prices low.

"The D.C. area is the one in the target zone if United and US Airways merge," said Rick Seaney, chief executive of the Web site FareCompare. "Anytime you take away competition, it's bad for consumers."

The two airlines would control 60 percent of the seat capacity for flights at the two airports, according to the Official Airline Guide. A region dominated by one major carrier could lead to fewer flights as the merged company looks to reduce costs and cut redundant services, longtime industry observers said. That, in turn, could cause demand to rise, pushing up fares.

But analysts noted that the Washington region is served by numerous low-cost carriers, such as Southwest, JetBlue and AirTran Airways, which would help keep prices competitive.

"The low-cost carriers are certainly going to provide a leveling effect in the markets that they serve, but certainly in markets that are dominated by legacy carriers, they have carte blanche to raise those fares to whatever the market will bear," said Denny Lewis, owner of WorldTravelService, a corporate and retail travel agency based in the District.

Seaney said ticket prices usually drop when a new airline is introduced into the market. He cited as an example lower prices that resulted from Southwest's entry into Minneapolis, Boston and Milwaukee. Mergers can have the opposite effect. "An airline merger is like taking one airline out of the competition in cities where there is overlap," he said.

The talks heating up now are the latest courtship involving the two companies, which have held on-again, off-again discussions over the past decade. A merger proposal is not imminent, and the talks could still fall apart, said sources who spoke on the condition of anonymity because the talks are private. The companies did not confirm the talks and declined to comment.

If it goes forward, the merger would create one of the world's largest carriers and could touch off a fresh wave of consolidation in the airline industry. On Thursday, British Airways and Iberia of Spain signed their merger pact, more than a year after announcing they were in talks. The two companies plan to operate under their individual brands under a holding company to be called International Airlines Group.

United parent UAL Corp. and US Airways have forcefully advocated consolidation within the airline sector. A proposed merger of the two crumbled in 2000, with United blaming the deal's failure on antitrust objections raised by the government. In 2008, the two companies backed away from a planned combination as credit markets tightened in the months before the global financial crisis.

The carriers' latest proposal would probably be subject to close regulatory scrutiny, particularly on antitrust grounds.

"The concerns that motivated the Justice Department in 2000 are still true today," said C. Scott Hemphill, a professor of antitrust law at Columbia University. "There's significant concentration in the Washington area. . . . What that means is for some pairs of cities . . . United-US Air could be the only game in town. For some consumers, that's going to be a major concern."

The two airlines have overlapping service from Dulles or National to 40 U.S. cities, according to an analysis by the Official Airline Guide.

United has major hubs in Chicago and at Dulles, and it operates 3,300 flights a day in 230 cities. US Airways has a strong presence on the East Coast, operating 3,000 flights in 190 cities. Both airlines have been partners for several years through the Star Alliance, a global airline marketing network. Together the two airlines employ more than 77,000 people, though a combined United-US Airways might seek to cut costs by slashing its workforce.

The talks, which were reported late Wednesday by the New York Times, have reawakened speculation that United is actually maneuvering toward a different target: Continental Airlines. With a strong presence in New York and Houston, Continental has long been seen by many analysts as a better match for United. United discussed such a merger in 2008, but Continental decided it would be better off on its own.

"It's hard to take this talk seriously," said David L. Yermack, finance professor at New York University's Stern School of Business. "Either they're looking at this as the next best option or they're bluffing, hoping that Continental gets panicked enough to come to the table."

Nonetheless, many analysts say that consolidation is good for the industry and that any merger may be better than nothing. They note that the customer base cannot support all of the nation's five major airlines -- American, Continental, Delta, United and US Airways -- which have collectively lost tens of billions of dollars over the past decade.

Since the Sept. 11, 2001, terrorist attacks, the airline industry has been squeezed by sharp fluctuations in fuel prices and other economic pressures. Several major carriers, including United and US Airways, have reorganized under Chapter 11 bankruptcy protection, some more than once, and slashed operating costs. But those savings have not been enough to allow airlines to earn an adequate return, analysts said.

Labor issues could present another complication in a possible merger. Past deals have evaporated amid fierce union opposition and complicated labor contracts.

Capt. James Ray, a spokesman for the U.S. Airline Pilots Association, which represents 5,000 pilots at US Airways, said "snap back" provisions in their labor agreement would force the airline to boost pilots' wages and benefits if the carrier was merged or sold. He said the provisions, which were part of concessions negotiated by the union during US Airways' previous bankruptcies, could make a merger "very expensive."

According to the Metropolitan Washington Airports Authority, United accounted for 57 percent of passenger traffic among major carriers at Dulles during the 12-month period ending in February, the most recent data available. During that period, US Airways made up nearly one-third of the passenger traffic at Reagan National, where the airline is the top carrier. US Airways served 382,000 passengers in February, more than double the total of the nearest competitor, American Airlines. United carried 806,000 people at Dulles, more than seven times the passengers for the next biggest airline there, JetBlue.

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