USAir reached an agreement in principle yesterday to run and possibly buy the Trump Shuttle, increasing the chances USAir will survive in the rapidly shrinking airline industry.
Although Arlington-based USAir Group Inc. described the deal with developer Donald J. Trump's bankers as "an agreement in principle" with hurdles to clear, a source close to the negotiations said there was "a very high probability" the deal would be consummated. USAir officials said they could begin to operate what will be called the USAir Shuttle as early as February.
The Trump Shuttle is the former Eastern Shuttle, which Trump acquired for $360 million in 1989 -- a price that some airline industry observers said even then was too high. Earlier this year, Delta Air Lines acquired the rival Pan Am Shuttle for $113 million.
USAir executives said they plan to step up competition in the shuttle market if the deal goes through. "You betcha, we're going to compete," said Vice President Patricia Goldman. She said the airline would put together a package of competitive measures that might include lower prices and enhanced frequent-flier mileage.
Airline industry analyst Edward Starkman of PaineWebber Inc. said he suspects that any price competition would be short term and limited. "At least during the week, the market is the market and you're not going to stimulate any business by dropping prices," he said.
Under the agreement in principle, USAir would pay $16 million to acquire the right to operate the shuttle under USAir colors for up to 10 years, with the right to buy it after five years at a price that would be determined at the time. If USAir chose not to exercise that right, it would retain the right of first refusal if another buyer stepped forward.
The proposed deal "makes a lot of sense" for USAir, said Kevin Murphy, an airline industry analyst with Morgan Stanley & Co. in New York. The shuttle "fits very well into their existing route structure, which is predominantly in the Northeast. This is the one part of the puzzle they didn't have," he said.
USAir is already the largest carrier at Washington National Airport and has a big presence in Boston and at New York's La Guardia Airport, where it recently acquired major facilities from Continental Airlines.
The deal also allows USAir to hang on to its cash while it contends with losses, Murphy said. "A five-year running start to get their financial house in order before they layer on this additional piece makes a lot of sense," he said.
USAir can also expect a payoff from adding shuttle passengers to its frequent-flier mileage program, he said. Travelers who pile up lots of miles in a program -- as business travelers often do on the shuttle -- tend to book other flights with the same airline to qualify for free flights.
With the recession clobbering the airline industry, the usually lucrative shuttle market also has been hard hit. Compared with 4.2 million passengers who flew the two Washington-New York-Boston shuttles in 1987, the shuttles carried an estimated 2.9 million passengers this year.
USAir will retain the Trump Shuttle's employees and has an "understanding" with its unions over the shuttle's operations, Goldman said. USAir is holding talks with its unions seeking major concessions to help it ride out the recession and its heavy losses.
Chris Beebe, vice chairman of the Air Line Pilots Association at USAir, said he thinks the deal makes sense. "Any time the company can improve its presence in the Northeast, especially in key markets like that, it's important," he said.
An earlier tentative deal for Northwest Airlines to manage the Trump Shuttle collapsed when Northwest's unions objected.
The USAir deal must still win final approval from the group of approximately 40 banks involved in Trump's finances and win regulatory approval from the Transportation and Justice departments.
Trump said yesterday that the deal helps him reduce his debt. "That's what we've been doing for the last year is knocking the hell out of debt," he said. "USAir is a fine company, and the shuttle is a great asset."