United/US Airways merger and its affect on consumers and investors, The

Weekly Corporate Growth Report, May 29, 2000 by Nasri, Jennifer

In terms of what the $4.3 billion acquisition of US Airways by United Air Lines means for consumers, analysts are in agreement, forecasting higher airfares due to the decline in competition. According to Terry Trippler, an analyst for 1travel.com, "It's going to mean higher prices, and if it doesn't, it's going to be the first time in the history of the free enterprise system."

The combined airline would make American Airlines, United's closest rival in terms of size, look miniscule in cornparison. United and US Airways had a combined revenue of $26.6 billion in 1999, while American posted revenue of $17.7 billion during the same time.

In an effort to ease consumer doubts and win government approval, United has guaranteed a two-year freeze on domestic airfares, except for adjustments to reflect inflation and increased fuel prices. However, as Mr. Trippler noted, this merger will "definitely reduce competition, and any time you reduce competition the consumer does not win."

According to the Aviation Consumer Action Project, a nonprofit group, the combination of United, the world's largest airline, and US Airways would account for nearly one out of every three airplane seats. "When you get to those levels of consolidation, classically competition breaks down," stated Paul Hudson, executive director of the group.

Julius Maldutis, an aviation analyst with CIBC World Markets points out that the creation of an international airline with twice the amount of flights as its nearest competitor may cause other airlines to strike up their own mergers and alliances. "This is going to trigger a major realignment in the airline industry," Mr. Maldutis stated.

United has agreed to pay $60 a share for US Airways, a significant premium over US Airways closing stock price on the day before the announcement of $25.94. However, United's share price plummeted more than 18 percent following the announcement of the merger, falling $10.44 to $49.63 in morning trading.

Following United's acquisition .announcement, Donaldson Lufkin and Jenrette downgraded the airline's rating from buy to underperform. The brokerage firm cited several reasons for the downgrade, including labor problems, anti-trust issues and problems involving integration. US Airways shares, on the other hand, shot up 88 percent, to $47.86 after opening at $25.94.

There are several obstacles that might prevent the acquisition from taking place at all. First is the Justice Department antitrust division, which is closely reviewing the deal. Additionally, there are United's own employees, which own 55 percent of the company and have two representatives on its board, one representing the pilots' union and the other representing the machinists' union. According to the company's bylaws, for this type of transaction to take place, at least one of the union's two representatives must approve the deal. The pilot's union is believed to oppose the transaction, and has expressed concerns about combining seniority lists.

(Source: The New York Times, Associated Press, Financial Times, abcNews.com)

By Jennifer Nasri

Editor-in-Chief