United balks at pursuing USAir Board says deal wouldn't help value of airline's stock

November 14, 1995|By Suzanne Wooton | Suzanne Wooton,SUN STAFF

United Airlines said yesterday that it will not pursue a takeover of USAir, which forced the Arlington, Va.-based carrier to continue efforts to cut its astronomical costs and remake itself into a long-term profitable venture.

The decision came after a six-week study of USAir that began shortly after United told its employees in early October that it was talking with USAir about a possible takeover.

But after a board meeting in Chicago yesterday, United Chairman Gerald Greenwald indicated that buying USAir wouldn't substantially increase the value of United's stock and could hurt the company's efforts to attain investment-grade rating for its securities.

`While our study confirmed that a transaction would have significant revenue benefits from increased customer choice, we were disappointed that we were unable to satisfy all of the criteria we set for a potential transaction,` Mr. Greenwald said.

Acquiring USAir, valued at an estimated $8 billion to $10 billion, would have given United a stronger presence along the East Coast, with an opportunity to establish a lucrative shuttle service much like United's West Coast one.

But the merger possibility was viewed with considerable skepticism -- especially by United's employees, who own 55 percent of the company -- because of USAir's past losses, its high costs and the difficulty of merging two different work forces and fleets.

"Logic prevailed," said Timothy F. Sieber, vice president of research for Aviation Systems Research, a Golden, Colo., aviation consulting firm. "When United looked at what it was going to cost them monetarily and in mental anguish, it was insurmountable."

USAir Chairman Seth E. Schofield issued a statement yesterday saying that talks with United had been "but one of several long-term strategic alternatives being examined.

"With our return to profitability, we now are able to focus more closely on the transformation of our route structure and the continuing cost rationalization," he said.

USAir officials said the talks had underscored what a valuable franchise USAir operates.

"I think we came out of this process, at a minimum, with an understanding by everyone -- from Wall Street to Ms. Average Traveler -- that our franchise is a very, very solid one," said Richard M. Weintraub, a spokesman for the carrier, which handles half the 30,000 daily passengers at Baltimore-Washington International Airport.

USAir has lost $3 billion since 1988, but recently it has had a turnaround. It earned $59 million in the first nine months of 1995, compared with a loss of $362.9 million in the same period a year ago. It is predicting its first profitable year since 1988.

Despite recent improvements in its financial outlook, USAir had given signs it might welcome a takeover by United. "It was an easy way out," Mr. Sieber said.

There has been no significant merger in the airline industry since USAir bought Piedmont Airlines in 1989. And a marriage between United, the nation's largest carrier, and USAir, the fifth-largest, would have faced serious scrutiny by the U.S. Justice Department.

Analysts said yesterday that ending the talks -- and the inevitable months of further negotiations -- frees USAir and United to focus on their own problems.

"There was only a one-in-15 or -20 chance of it ever getting accomplished," said Jon Ash, managing director of Global Aviation Associates in Washington, D.C. "It would have been terribly distracting to both companies, neither of which has an overwhelming level of strength right now."

USAir's willingness to be bought sent a message to its labor unions, but its inability to find a buyer may send yet another.

"Now the unions realize that USAir can't hold this United club over their heads," Mr. Sieber said. "But they also realize something needs to be done."

Richard Obermeyer, a spokesman for the USAir pilots, said yesterday that "the merger was one option, and now we'll go look at others. From our point of view, it's no more urgent now. The company has tremendous value, and we'll see what needs to be done to make it even more valuable."

Critical to USAir's survival will be efforts to reach cost-cutting agreements over the next year and a half with the pilots and the company's other major unions. Earlier this year, USAir abandoned efforts to reach a collective agreement with its unions to cut $2.5 billion over the next five years.

United's announcement to end the talks came after the stock market had closed yesterday. United's shares added 12.5 cents, to $182.625, and USAir was up 12.5 cents at $15.375, both on the New York Stock Exchange.

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