Turbulent times for US Airways' merger plan

TWA's example may be key to getting OK for United deal

March 18, 2001|By Paul Adams | Paul Adams,SUN STAFF

In February 1998, US Airways' stock was trading at $62 per share and the nation's No. 6 airline was well on its way to posting earnings of $538 million for the year.

After suffering record losses in the early 1990s, the airline was finally enjoying a string of profitable years, prompting billionaire investor Warren Buffett to praise Stephen M. Wolf, the airline's chairman, and other senior management for its stunning reversal.

"Few airlines - indeed, few companies - are better managed than US Airways," Buffett gushed in a statement.

Almost three years later to the day and with losses mounting, Wolf sat before the Senate Judiciary Committee in Washington last month and all but predicted US Airways' demise, arguing that a merger with United Airlines is its best hope for survival as it competes with carriers that have larger networks and lower operating costs.

"We know all too well what happened to other similarly situated carriers, such as Braniff, Eastern, PanAm - and now [Trans World Airways]," Wolf said at one point, referring to TWA's pending bankruptcy sale to American Airlines.

With the airline facing more Justice Department questions and delays, some industry analysts say the TWA comparison may play an increasingly prominent role in US Airways' campaign to win approval for its $11.6 billion merger with United. But to make that strategy work, merger proponents may have to convince federal regulators that the same airline Buffett heaped praise on three years ago is on the brink of collapse today.

The facts tend to indicate otherwise. TWA endured 12 years of losses and made two trips to U.S. Bankruptcy Court before its sale to American was approved by a bankruptcy judge in Delaware this month. By comparison, US Airways was largely profitable in the second half of the 1990s before reporting a $166 million loss for 2000.

The airline continues to increase capacity and remains dominant at its hubs in Charlotte, N.C., Philadelphia and Pittsburgh. It is the No. 2 carrier at Baltimore-Washington International Airport, where it increased its passenger totals by more than 7 percent last year. Maryland aviation officials, who oppose the merger on the grounds that it will result in fewer flights at BWI, report that US Airways gained passengers at an even faster pace at the start of this year.

Faced with a slowing economy, however, the airline announced March 1 that it expects its losses to continue in the first quarter of this year and be much deeper than anticipated. United Airlines, Delta Air Lines and Northwest Airlines have all issued similar warnings in the past week.

While few dispute that US Airways' financial troubles are accelerating, analysts remain divided over whether a merger is its only hope for avoiding a fate similar to TWA. If the airline were in such dire shape, some argue, United would not have been willing to pay $60 a share for US Airways stock, which was trading at about $26 per share when the deal was announced in May.

"That argument that if the merger doesn't come about, then the Northeast will have less air service than Outer Mongolia is nothing but a concocted fear bomb," said Michael Boyd, president of the Boyd Group, an Evergreen, Colo., airline consulting firm. Boyd, a critic of the merger, said US Airways' strategy may be to let the losses mount until federal regulators are convinced a merger is in the public's best interest.

"Could US Airways survive without United? The answer is yes. But if they get managed into the ground in order to do a merger, that's another story," Boyd said.

Sam Peltzman, an economics professor who specializes in airlines at the University of Chicago, said US Airways' situation doesn't yet compare to that of TWA, which was just days from shutting down before American came to the rescue.

The airline could still turn things around, he said, but it would take a major restructuring. Management would have to find a way to simplify its route system, cut fleet costs and seek labor concessions in a bid to lower expenses, which are by far the highest in the industry. The airline has made progress on several of those fronts, but expensive labor contracts remain an obstacle at a time when unions are in no mood to bargain.

"However, as an outside observer of the industry, you don't need a merger to solve those problems," he said.

Darryl Jenkins, executive director of the George Washington University Aviation Institute, holds a more pessimistic view. He said US Airways simply can't compete against lower-cost carriers, such as Dallas-based Southwest Airlines, despite tough cost-cutting measures taken by Wolf and senior management. The airline faces a slow, agonizing death - perhaps taking several years - if forced to remain independent.

"I don't think there's a whole lot you can do to save them," he said. "They're the next TWA."

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