Merger plan questions: Review to look at effect on travelers

Thursday, May 25th 2000, 12:00 am
By: News On 6

WASHINGTON - Whether clear skies beckon for the marriage of United Airlines and US Airways turns on a basic issue: The merger's effect on travelers and ticket prices.

That's the focus of federal regulators and policy-makers as they weigh United's $11.6 billion acquisition of US Airways.

The Justice Department's antitrust division promptly promised careful study.

"We're aware of the transaction, and we will review it closely," said spokeswoman Jennifer Rose.

The department's antitrust division has gone to court twice in the last two years over airline-competition issues.

It sued American Airlines in 1999 over what it termed predatory pricing at Dallas/Fort Worth International Airport. The year before, it sought to block Northwest Airlines' takeover of Houston-based Continental Airlines.

The merger now before regulators would combine the nation's largest airline, United, with the sixth-biggest, USAirways.

"This transaction will face a significant uphill regulatory fight," Samuel Buttrick, an airline analyst at PaineWebber Inc. in New York, wrote in a Wednesday report.

Perfect fit

United executives, meeting with reporters in New York, defended the combination as a "perfect strategic fit."

"There's very little route overlap. Consequently, it simplifies some of the antitrust issues," said James Goodwin, chairman of United parent UAL Corp.

Passenger-rights advocates suggested that it's too early to assess the merger's near-term effects on competition and pricing.

But if this union spurs a new round of airline mergers as expected, "We'll have a very concentrated industry that's likely to result in higher fares and less service, particularly higher fares," said Paul Hudson, executive director of the Aviation Consumer Action Project.

On Capitol Hill, where airline executives briefed members of Congress and their aides on the merger plan, key lawmakers were taking a wait-and-see attitude.
"Any time two major companies that provide services and products merge, we have to look at the ramifications to competition," said Sen. Kay Bailey Hutchison, R-Texas, who serves on the Senate aviation subcommittee. "I'm open to seeing if this will enhance consumer service or inhibit it."

The chairman and the top Democrat on the Senate anti-trust, business rights and competition subcommittee issued a joint statement Wednesday saying the proposed merger "will require very careful scrutiny."

Sens. Mike DeWine, R-Ohio, and Herb Kohl, D-Wis., promised hearings soon. "If this action precipitates a wave of consolidation in an already consolidated industry, it is hard to see how that result will be good for consumers," they said.

But, they added, "Based on early reports, it does appear the merger may offer significant network benefits to consumers."

On the House side, the top Democrat on the House aviation subcommittee, Rep. William Lipinski of Illinois, is likely to cast a skeptical eye on the union, according to his chief of staff, Colleen Corr.


Some aviation analysts predicted federal regulators ultimately would sign off because there is little overlap between United, which flies primarily east-west routes, and US Airways, which covers the Eastern Seaboard north to south.

"I give it a little more than a 50-50 chance," said Raymond Neidl, an airline analyst at ING Barings Inc. in New York.

Both airlines, he said, seem confident the merger will pass muster with the Justice Department.

Others warned of turbulence ahead.

Mr. Buttrick, the Paine Webber analyst, noted that the Justice Department already is challenging Northwest Airlines' controlling stake in Continental Airlines.

In late 1998, the Justice Department filed a civil antitrust suit seeking to block the deal, saying it would boost ticket prices and degrade service.

The United-US Airways combo would dwarf the No. 2 carrier, Fort Worth-based American Airlines.

Revenue for the pair reached $26.6 billion in 1999, compared with $17.7 billion for American.

Anticipating regulators' concerns, United announced that it intends to spin off most of US Airways' operations at Washington's Reagan National Airport, selling them to entrepreneur Robert L. Johnson.

Mr. Johnson, a US Airways board member and the founder of Black Entertainment Television, would form DC Air, which will become the nation's first large black-owned airline. DC Air would serve 44 cities with 122 daily departures, Mr. Johnson said.

The combined United-US Airways, which would have more than 6,500 flights daily, should be required by regulators to divest itself of some key routes and hubs, suggested Mr. Hudson of the Aviation Consumer Action Project.
United's main hubs are in Chicago, Los Angeles, Denver and San Francisco; while US Airways has major bases in Pittsburgh, Philadelphia and Charlotte, N.C.

Staff writer Katherine Yung in Dallas contributed to this report.