USAir gets reprieve, but doubts persist

Airline's bankruptcy exit is OK'd

it plans merger with America West

September 17, 2005|By Meredith Cohn | Meredith Cohn,SUN STAFF

When US Airways won approval yesterday to exit bankruptcy and join America West to form a discount giant to take on the likes of Southwest Airlines, it marked the latest attempt by two airlines to fortify themselves through a merger.

But during a week in which two other large airlines entered bankruptcy court, many industry observers think that aviation needs to allow some weaker carriers to disappear.

After a generation of many failed airline mergers, some are saying that the healthier airlines should resist the urge to merge, relieve some of the intense competition in the skies and then zero in on the good assets. A more solvent industry could better absorb the discarded planes, routes and workers, they say.

"The smart move for other airlines is patience," said Anthony Sabino, an airline industry expert and professor at St. John's University's Peter J. Tobin College of Business in New York. "You don't want to buy someone else's problems."

More than a decade ago, Delta Air Lines Inc. became the North Atlantic market's biggest airline after it plucked the prized European routes from a dissolving Pan American World Airways. Now Delta is seeking Chapter 11 protection.

It filed for bankruptcy protection Wednesday in New York, along with Northwest Airlines Corp. They join another major carrier, UAL Corp.'s United Airlines, which has been in bankruptcy protection since 2002.

There has been speculation that Delta and Northwest might also want to merge.

Over the past quarter-century, airline mergers and acquisitions have largely failed or not helped. The purchase of Air California by AMR Corp.'s American Airlines in 1987 failed to produce the expected savings.

American's merger with Trans World Airlines in 2000 was hurt by the 2001 terrorist attacks, which forced American to scale back at many of the hubs it wanted to control.

US Airways acquired Pacific Southwest Airlines' gates and facilities in the late 1980s for long-haul routes but shut a regional network that might have been more profitable.

And US Airways and Piedmont Airlines were unable to merge corporate cultures after joining in 1989.

"It's unpalatable to workers and lenders to let the airlines go for the good of the industry," said Hugo Burge, president of Boston-based cheapflights.com, an online fare finder. "But we need a shakeout. ... I'm sure we'll see more attempts at mergers, when what we need is more innovation."

In the case of the US Airways-American West combination, cleared by U.S. Bankruptcy Judge Stephen Mitchell yesterday, analysts are mixed on whether a smaller, newer airline such as American West can successfully absorb a once debt-laden major carrier that is emerging from court protection from creditors for the second time in three years.

Mitchell approved US Airways' reorganization plan yesterday after allowing the airline to provide $12 million in severance pay to 11 executives who will not be given jobs at the merged airline. The ruling allows the Arlington, Va.-based airline, the nation's seventh-largest, to be purchased by America West, the eighth-largest, as soon as Sept. 27.

The new airline is expected to be the nation's fifth-largest, with headquarters in Tempe, Ariz. It plans to keep the US Airways name.

With different company atmospheres and labor unease growing, many analysts aren't sure how well the combination will go, even though the two airlines have complementary routes and US Airways has shed billions in costs and debt.

Merging airline staffs has often proved difficult, and the marriages often don't end up cutting costs. There is also no guarantee that antitrust regulators will approve future mergers.

Regulators opposed a US Airways-United merger five years ago and rejected Northwest's effort to acquire an interest in Continental Airlines Inc. in 1998.

In the past decade, the Department of Justice has approved one other merger besides the US Airways-America West union. That was the one between TWA and American.

Various interests are applying pressure to keep struggling airlines alive, including workers and pensioners. Creditors fear the loss of their investments. Lenders fear that no one else would want the airlines' planes. The government fears a lack of competition and a return to high fares.

As old-line carriers - the ones that were in operation before federal deregulation in the late 1970s and have higher debts, higher payrolls and higher pension costs - reduce flights in some markets to save money or focus on more profitable routes, discount carriers such as Southwest and JetBlue Airways Corp. fill the void.

Southwest has more than made up for the US Airways flights lost at Baltimore-Washington International Airport. In New York, JetBlue has taken over as the dominant carrier at John F. Kennedy International Airport, where Delta and American once reigned.

"People want cheap fares, and, ultimately, these [bankrupt] guys are going to have to learn to run their businesses or go away and make room for someone else to do it," said Darryl Jenkins, a Washington-area aviation consultant and visiting professor at Embry-Riddle Aeronautical University.

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