United Airlines Abandons Merger
With Keith Alexander
Washington Post Staff Writer
Tuesday, July 3, 2001; 11 a.m. EDT
United Airlines plans to call off its $12.3 billion merger with US Airways. US Airways Chairman Stephen M. Wolf has maintained that the airline cannot survive as a stand-alone carrier against larger operations.
"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 try to appease antitrust regulators that a combined United-US Airways would not be too dominant on the East Coast. DC Air would have been the largest airline owned by a minority." Read the Post article "United Calls Off Merger."
The Post's business travel reporter, Keith L. Alexander, talks about what happened to the United Airlines and US Airways deal. Why did it fall apart and what
does this mean for US Airways, DC Air and Washington travelers?
Alexander specializes in the coverage of the airline and business travel industries. Every Wednesday in the Post's business section, he writes the Business Class column. Prior to joining the Post in February 2001, Alexander was a business reporter for USA Today for over five years covering airlines and business travel. He also has covered the media industry and such
companies as Walt Disney, Time Warner and Seagram.
Below is the transcript.
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Keith Alexander: Hello everyone. Thank you very much for joining this discussion on United/US Airways. I look forward to a very lively chat and I will try to answer most of your questions as best I can. So let's begin.
If the merger agreement is terminated prior to August 2001, will UAL have to pay 50 million, 100 million, 150 million or 200 million dollars?
Keith Alexander: If United decides not to acquire US Airways, United must pay US Airways $50 million which is part of the contract.
I have a bunch of frequent flyer miles on USAirways. Do you recommend hurrying to use them?
Keith Alexander: This is a very popular question Laurel, Md. Frequent flier points are extremely important to travelers these days; almost as important as their bank accounts. I wouldn't recommend hurrying to use your points. If United does acquire US Airways, United has said it would honor US Airways frequent flier points. If United doesn't acquire the airline, US Airways won't go away anytime soon. Most analysts agree it would be at least 10 to 15 years before the airline winds up in a Chap. 11.
As a loyal US Airways frequent flier and time-to-time stockholder in the airline, I am absolutely amazed that there has not been more criticism of Stephen Wolf and Rakesh Gangwal and their management of the company. Their motiviations have seemingly been only monetary. They stated for months that they had no "Plan B", cried that the airline would certainly fail, and argue that US Airways has no place as a mid-sized carrier.
Those sentiments were disagreed with by the CEOs of both Continental and Northwest. Interestingly, Continental also fits into the role of a mid-sized carrier.
Thoughts on the way the company has been managed and the arguments made by Wolf/Gangwal?
Keith Alexander: Indeed, US Airways executives have said publicly that they didn't have a "Plan B." But these are savvy executives and it's a safe bet that they had one, they just didn't want to disclose it. Wolf and Gangwal are known for fixing up airlines and selling them. If US Airways isn't sold off, it's very unlikely that the two gentlemen will remain with the airline for any lengthy period.
Most analysts agree that the brass at US Airways have two options in the event of a balked merger. The first is to sell off the airline, piece by piece, and the second is to turn the airline around, much like Gordon Bethune and Gregg Brenneman accomplished at success story Continental during the mid-1990s. Which of those two options is more probable?
Keith Alexander: This is another popular question. As I'm sure many of you read in our Saturday story where the head of United's pilots union and board member said United just plans to wait until US Airways sells off parts of the airline. US Airways has said that wouldn't be an option because selling off parts wouldn't enable the airline to make it on its own in the long term if it's forced to do so. A likely scenerio if this deal doesn't go through, and that's still a big IF, is that US Airways will seek an alliance partner, rather than an acquirer.
If United is getting cold feet, what are they afraid of?
Keith Alexander: United's shares have dropped more than 40 percent since they announced the deal a little more than a year ago. The airline's operations are suffering greatly mainly because of the downturn in the economy, higher fuel prices and a dramatic decline in business travel. As a result, United reported a loss for its first quarter and expects a loss for the second quarter as well. United is also currently working on a deal with its machinists union. In other words, United has its own problems right now. Acquiring US Airways would only increase United's debt load, increase problems with its labor unions and most likely disrupt operations.
I have now read in several places where USAirways Chairman Wolf is insisting that USAirways can't survive if this merger doesn't happen. Can you explain how he can make this statement? USAirways seems to be fairly dominant on the east coast.
Keith Alexander: Hello Arlington, Va., the hometown of US Airways. I'm sure that's just a coincidence. Wolf has said because US Airways is a second-tier airline, there's no room for it to compete against the larger airlines such as United and American and low-cost, smaller airlines such as Southwest, Air Tran or Frontier. Indeed, US Airways is dominant on the East Coast, which is also its most valuable asset. But Wolf has sad its East Coast operations aren't enough to sustain it over the long term.
What will become of the DC Air plan?
Keith Alexander: DC Air is the start-up airline that was supposed to be created out of the United/US Airways deal. Robert Johnson, the founder of Black Entertainment Television was to be the majority owner of the airline, which would have made Johnson the first minority owner of a major carrier. That's something that government officials had long sought after which is why United and US Airways proposed DC Air. The airlines had hoped DC Air would have helped get the deal pass government regulators. However, if this deal doesn't go through, DC Air won't exist. And Johnson will return to running BET, which is now part of Viacom.
Silver Spring, Md.:
I travel to Dayton, Ohio quite frequently to visit family and US Airways is the only airline from Reagan National to Dayton. What will happen to this route if US Airways goes into bankruptcy?
Keith Alexander: Hello Silver Spring. It's still unclear which routes US Airways may be forced to give up. Dayton was once a major operation for US Airways so that may mean its a profitable destination from this area. If anything, US Airways may reduce the number of flights between Reagan and National, if it's forced to do anything at all.
Now that the merger has been terminated will Wolf and Rakesh stick around or will the company bring in someone new?
Keith Alexander: Again, the acquistion has not been terminated. The airlines said they're only "in talks" of terminating the deal. If Wolf and Rakesh stay or leave will be up to the board of directors.
If BWI is to bear the brunt of the effect of the merger's cancellation, what can travellers expect who are holding tickets for summer travel? If flights are cancelled, is USAir responsible for rebooking at the same fare -- even with another carrier?
Keith Alexander: Hello Annapolis, thank you for your question. If US Airways is forced to begin eliminating routes, it's very unlikely that would happen before the end of the summer.
HLB - Mt. Lebanon, Pa.:
Frankly, I'm glad the merger has tanked. When I fly US Air, I find a thoughtful program in place to provide me a comfortable and, for the most part, "speedy delivery" to where I'm going. Why would any member of the traveling public want large business units to merge and metamorphize into Apathetic Crap Airlines? After all, don't we have enough unstable corporate megaliths -stones in the marketplace, motto: "To hell with you, give us the money." Thanks much.
Keith Alexander: Very interesting comments Mt. Lebanon. Consumer groups and members of Congress have voiced very similar concerns.
One well-founded criticism is that US Airways, being a traditional east coast carriers, flies short hops and used to use a hodge-podge fleet to do the job - hence a high cost per mile. Moreover, the east coast focus necessarily leads to a big hole in the midwest and west coast.
US Airways has seemingly made strides to change that by increasing flying to Europe, the Caribbean and the west coast. Unfortunately, only so much can be done from Philadelphia, Charlotte, and Pittsburg.
A proposed remedy is to enter a code-share alliance or merge with a small or mid-sized carrier like Alaska or America West. Thoughts?
Keith Alexander: Good point Arlington. And you may already know this, but the original deal between United and US Airways started out as merely a preliminary look at creating a code-share agreement.
Will hubs at BWI and National Airport and Dulles will change?
Keith Alexander: It's very likely you will see major changes at BWI and Dulles, if the deal doesn't go through. National is US Airways strongest and most profitable airport, so it's unlikely the airline will do any major reductions there. BWI has been hit hard by Southwest Airlines. Dulles has seen increased growth from United, Delta and Air Tran.
What's the point that Johnson will be the first minority airline head? Who cares about his color?
Keith Alexander: Good question. Former Secretary of Transportation Rodney Slater wanted more minority ownership of airlines. When this deal was orginaly struck, it was under Slater's term. United and US Airways figured giving the government a minority-owned airline would help get their deal through.
Do you think its possible that any other carriers that are midsized such as delta or continental would attempt to merge with us airways to compete with united and american?
Keith Alexander: Anything is possible. But an outright acquistion of US Airways by another airline given today's weakened economic environment seems a little remote. But again, anything is possible.
What alternative solution does US Airways have to survive in todays market?
Keith Alexander: Good question Springfield. If this deal doesn't go through, it may be easier for US Airways just to create an alliance with another major airline rather than trying to sell itself off.
Foggy Bottom, D.C.:
The bigger question is what happens to all the smaller cities and towns that USAirways now serves those are most certainly not profitable, and will probably die off (i.e. Lebanon NH, Augusta ME, Charleston SC, etc). Those areas will be hit harder, since they often don't have viable airport alternatives.
Keith Alexander: Very good point Foggy Bottom. That's what Wolf and other US Airways executives continued to say to members of Congress in hopes of getting this deal passed. US Airways serves smaller East Coast and midwest cities that unless the airline is operating, these cities could lose air service.
Takoma Park, Md.:
Everyone is talking about merger this acquisitions that what about the thousands of employees who have both partners working with the same airline no one has addressed that not even congress what about all this unemployment does any one care!
Keith Alexander: Good point Takoma Park. US Airways has more than 46,000 employees who will be directly affected by whatever happens.
I would think that Delta has too much east coast presence to merger with US Airways. DOJ was concerned about United/US Airways. DOJ would be outright panicked by Delta/US Airways.
Continental and Northwest seem too small to effectively acquire US. Only Northwest has a fleet of aircraft which resembles US Airways' fleet.
As to Dulles, I would point out that US Airways had a big operation there until just before the merger was announced. They had at least 130 flights a day out of Dulles. They're down to about 35 now.
Keith Alexander: Thank you Arlington, very good insight from US Airways hometown. Yes, Delta wouldn't be a viable option. Continental too has a large presence in the Northeast thanks to its Newark hub.
Will this effect the standing US Air Vacation Package ticket holders, if anything?
Keith Alexander: Again, if this deal doesn't go through, it would be some time before US Airways begins to disrupt its established promotions such as its Vacation Package.
Wow, time has just about run out. That will be the last question everyone. Thank you all for your time, questions and comments. I will try to address many of your points in the Business Class column which runs tomorrow.
That was our last question today. Thanks to everyone who joined the
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