Deal buys respect for US Air

Takeover by United lifts stagnant airline out of doldrums

`Needed to link up'

Lifeless stock's value would increase by 130 percent


May 28, 2000|By Robert Little and M. William Salganik | Robert Little and M. William Salganik,SUN STAFF

The $4.3 billion in cash that United Airlines dangled in front of US Airways last week might have simply been too tasty to turn down.

For shareholders, it will mean a 130 percent payoff for an otherwise lifeless stock. The chairman and the chief executive will take home $130 million and $88 million, respectively. And the deal will pad the account and the reputation of US Airways' largest stockholder - a prominent hedge fund that had withered along with the value of its investment in the airline.

But regardless of the money involved, many industry observers say US Airways had to agree to a takeover by the world's largest airline for it to become the world-class carrier it has long hoped to be.

Since its early days as regional carrier Allegheny Airlines, and through its mutations into USAir, US Airways and MetroJet, the Arlington, Va.-based company has been an airline that consistently offered more promise than progress.

By selling to United Airlines, US Airways becomes something it could never be on its own, observers say - an airline with a diverse and profitable portfolio of worldwide routes and customers.

"They're just an airline that hasn't gotten very far in 15 years," said Randy Petersen, editor and publisher of Inside Flyer magazine. "It's a nice little airline, but it still doesn't get much respect."

If stockholders and regulators approve, United Airlines would buy US Airways early next year for $4.3 billion in cash and acquisition of aircraft leases and other debt that place the transaction's value at more than $11.6 billion.

United is the largest airline in the world, but the addition of US Airways' heavy concentration of flights on the East Coast would create the most comprehensive travel network ever formed. The deal faces intense antitrust scrutiny from the Department of Justice over worries that it would create too powerful an industry giant - one that could control prices in most major markets nationwide.

US Airways officials reject the notion that they were forced to sell, saying they agreed to the deal because the two airlines have complimentary routes and because the price was attractive.

At a news conference Wednesday announcing the acquisition, US Airways Chairman Stephen M. Wolf said the two airlines began discussing a deal in November.

The airline with roots dating back to a 1930s Ohio Valley airmail service has never enjoyed a secure stake in the modern passenger airline business.

The former Allegheny Airlines changed its name to USAir in 1979 after a customer satisfaction survey showed that travelers considered USAir superior to Allegheny - even though USAir didn't exist at the time.

The airline continued to grow by acquisition, buying Pacific Southwest airlines in 1987 and then Piedmont Airlines in 1989, but those deals prevented the carrier from turning a profit for six years.

By 1995, when the airline finally started making money again, its courtship with United Airlines began. The two companies proposed a merger, but United backed out over objections from its employee owners.

When Wolf, a former United executive, took over in 1996, USAir had the highest labor costs in the industry. Though he had visions of expansion, he threatened to shrink the carrier if new labor agreements weren't reached. The name was changed to US Airways in 1997.

By the time new deals with the company's labor unions were reached - four years later - US Airways was losing money again because of computer glitches, maintenance delays and cancelled flights. The creation of its low-fare MetroJet subsidiary in 1998 helped reduce costs, but the airline still lost $281 million from late last year to early this year.

Most Wall Street analysts think that US Airways' operating problems are behind it, and they expect the airline to start making money in the summer and record a modest profit for the year. But unless federal regulators object, US Airways won't get another chance to recover. By next year, it will be absorbed by United Airlines.

"US Airways was basically squeezed," said David S. Stempler, president of the Air Travelers Association. "They were sort of in no-man's land. They were developing their discount carrier, MetroJet, as a defensive move, but it wasn't an overall strategy.

"In the long run, with the globalization of airlines taking place, they needed to link up with somebody."

To be sure, there were other pressures on the airline to do something dramatic.

Management's relationship with its workforce had soured. US Airways ended four years of contentious bargaining with its labor unions only two months ago - and after threatening to shutter the airline rather than accede to employee demands.

Also, the company's stock plunged as it lost money. After trading near $80 a share in early 1998, its shares fell as low as $17.4375 in March - about a 75 percent drop. Those losses helped eviscerate the airline's largest stockholder, the Tiger Management hedge fund managed by renowned investor Julian H. Robertson Jr.

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