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Airlines' merger fever troubles some experts

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Like a player near the end of a game of musical chairs, American Airlines Inc. doesn't intend to be left standing alone after the latest round of airline industry consolidation.

For the world's second-largest carrier, a purchase or merger is a necessity now that archrival United Airlines Inc. has proposed buying the nation's sixth-largest carrier, US Airways Inc., said a person close to the Fort Worth-based airline.

If approved by federal regulators, United's acquisition would increase its dominance as the world's largest airline, increasing the competitive pressure for Fort Worth-based American.

The carrier has approached both Northwest Airlines Inc. and Delta Air Lines Inc. to discuss combining operations, according to news reports. None of the carriers would comment on whether they were in discussions.

Some industry analysts regard American's talks with other carriers as an attempt to force U.S. antitrust regulators to weigh what could happen if they don't block United's deal.

If the merger trend continued, some analysts said Wednesday, the nation would be left with three large airlines instead of the six in existence today.

"All the pressure is pushing ... [American] to do something," said Sam Peltzman, an economist who specializes in airline and regulatory issues at the University of Chicago's Graduate School of Business. "If they want to break the United-US Airways merger up, the more outrageous [the deal] the better."

The latest report, in Wednesday's Wall Street Journal, linked Delta with American. Northwest, based near Minneapolis, and Delta are the only candidates large enough to enable American to match a combined US Airways-United, industry experts said.

"American is looking at ... [its] options," said Raymond Neidl, an airline analyst at ING Barings Inc. in New York, adding that an American-Delta merger is unlikely.

"That one, I would really, really doubt," he said, adding that it would contain too many overlapping routes.

United's rivals would not be the first to try to influence regulators by suggesting that a merger would spur further consolidation. Northwest, Delta and American would be taking a page from the freight railroad industry.

In December, Fort Worth-based Burlington Northern Santa Fe Corp. announced a merger with Canadian National Railway Co. that would have created the country's largest railroad. If the deal were approved, competitors quickly warned, they, too, would require merger partners to compete.

Faced with the prospect of only two major railroads serving the nation, the U.S. Surface Transportation Board imposed a 15-month moratorium in March on any major combinations. The agency is working on merger rules aimed at preserving competition.

Combining American and Atlanta-based Delta would create a behemoth that would be about 30 percent larger than United-US Airways, estimated Samuel Buttrick, an airline analyst at PaineWebber Inc. in New York.

"We believe it could be risky for American and Delta to pursue such a strategy insofar as it could have the unintended effect of making a United-US Airways deal look good by comparison," he wrote in a Wednesday report.

In the unlikely event of such a merger, he added, it would be structured as a stock transaction with little or no takeover premium for the seller.

Shares of AMR Corp., American's parent company, inched up 13 cents Wednesday to close at $28.44 a share. Delta investors saw their stock end the day at $52.50, up $1.63 a share.

United's proposed acquisition of US Airways, based in Arlington, Va., faces an uphill fight at the Justice Department, industry experts say.

United, based in suburban Chicago, has hired a team of influential Capitol Hill lobbyists to persuade government regulators that the deal won't harm competition or lead to higher fares.

Already, the U.S. Department of Justice is suing Northwest Airlines to force it to surrender its controlling stake in Continental Airlines Inc. Northwest acquired the stake in 1998.

And last year, antitrust regulators alleged in a lawsuit that American used predatory pricing to drive out three low-fare carriers at Dallas/Fort Worth International Airport. American denies the charges and is fighting the lawsuit.

"The Justice Department is very sensitive to antitrust issues in this industry," Mr. Peltzman said, adding that the department will closely examine the number of hub airports controlled by a combined United-US Airways.

American and Delta are the two largest carriers at D/FW. Including their regional carriers, American controls 70.5 percent of passenger traffic at the airport; Delta, 17.5 percent.

Besides Dallas, a merged American-Delta would operate hub airports in Atlanta, Miami, Cincinnati, Chicago, Salt Lake City and New York.

American would benefit from Delta's East Coast network, while Delta would be able to capitalize on American's routes to South America.

If the two airlines were to combine, they also would bring together the nation's two largest regional carriers, American Eagle and Comair.

"Overall, they are so big that they would eliminate so much competition," said Michael Boyd, an industry consultant in Evergreen. Colo. "Congress would [be hard-pressed] to ignore this one."
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