Piedmont Aviation Inc. has its headquarters in Winston-Salem, N. C., not Charlotte, as was reported in an article Saturday. (Published 11/3/87)

The Department of Transportation yesterday approved the $1.59 billion merger of USAir Group Inc. and Piedmont Aviation Inc., creating the nation's seventh-largest air carrier.

In so doing, DOT rejected a recommendation by a hearing officer that the merger be turned down, holding fast to its generally hands-off policy toward airline mergers.

That attitude has resulted in rapid industry consolidation in the eight years since deregulation. USAir and Piedmont argued that concentration required them to merge to remain competitive against such megacarriers as Texas Air Corp., American Airlines, United Airlines and Northwest.

For a short time after deregulation, the skies were full of new airlines battling for a place in the industry. But failures and mergers have taken a heavy toll among the new entrants, leaving behind an industry dominated by a handful of giants as it was in the days before deregulation.

Piedmont will continue to operate as a separate airline using its own name for at least nine months before merging into USAir, which is headquartered at National Airport. Earlier this year, USAir also acquired Pacific Southwest Airlines, giving it a strong West Coast presence and transforming the former regional carrier into a national carrier.

USAir's principal hub is in Pittsburgh and many of its flights are in the Northeast. Piedmont, with headquarters in Charlotte, N.C., and principal hubs there and at Baltimore-Washington International Airport, is a stronger presence in the Southeast.

"This combination stands a good chance to be among the really fine airlines in the country over the long term," said USAir Chairman and President Edwin I. Colodny.

"It should be the finest airline," he said. "If we go about our business conscientiously and don't forget how we got here, it will work."

USAir and Piedmont are both strong and profitable carriers that often have higher operating profit margins than other airlines. "This is the first merger between two airlines of the same size, both of which were strong companies," said Robert J. Joedicke, an airline industry analyst with Shearson Lehman Bros. Inc. "In this case two and two makes more than four."

Edward Starkman, an analyst with PaineWebber Inc., said the merger might reduce earnings slightly in the short run, "but the savings that are garnered from the combination are going to more than make up for it."

The principal opponent of the merger was America West Airlines, a carrier based in Phoenix. Edward R. Beauvais, its chairman, said yesterday that the company would seek a reversal of the decision from the U.S. Court of Appeals and a stay of the decision in the meantime.

America West had argued that the merger would result in increased concentration in ownership of landing and departure rights at National and LaGuardia Airport in New York and would amount to an anticompetitive barrier to the entry of airlines seeking to serve those markets.

At most airports, carriers are free to begin new service in competition with airlines already providing service. But at National and LaGuardia, the number of daily departures and arrivals is limited by the federal government.

As a result, carriers that want to provide service to those airports have to acquire take-off and landing rights from another carrier.

America West, which said it has been unable to persuade other carriers to sell it landing rights at National, argued among other things that the "slot" situation at the two airports represented a barrier to entry into certain markets and served to reduce competition.

Ronnie A. Yoder, the administrative law judge who recommended disapproval of the merger, said that the merger would reduce competition in some markets and had raised concerns that barriers to entry in some markets might prevent new competitors from entering.

In addition to the barrier raised by slot-controlled airports, he mentioned computer reservation systems and frequent-flier programs as factors that increased the market power of existing carriers and made it hard for new entrants to compete. He also said that the merger appeared to present a problem in terms of "a substantial reduction of competition" on the East Coast, where both USAir and Piedmont operate.

Matthew V. Scocozza, DOT's assistant secretary for policy and international affairs, who made yesterday's decision, noted that Yoder found that the acquisition would not reduce competition in the national market and that the conference report to the Airline Deregulation Act called for the industry to be govern "by the forces of the marketplace."

"We do not find that a persuasive case has been made that barriers to entry exist that would preclude effective competition in the relevant markets in this case," the DOT said. It also noted that neither USAir nor Piedmont have a computerized reservation system, one of the items that Yoder mentioned in his catalogue of tools that build market power.

According to analysts, the combined carrier needs a computerized reservation system, noting that such systems confer a huge marketing advantage on the airlines that have them. Colodny said he is exploring ways of linking up with one.

Some analysts also believe the airline needs a hub west of the Mississippi to tie together its coastal operations. Colodny said yesterday, however, that many of the company's West Coast markets can support direct service to the East Coast and that such a hub may not be necessary.