Could Us Airways Merge?

USA320Pilot

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United Airlines released its third quarter financial results and the bankrupt airline continues to lose money, although its finances remain weak heading into the traditionally weak fall and winter season that is just under way. United is showing signs of progress, but five major challenges remain: the ACA/Dulles issue, EETC renegotiations, municipal bond litigation between the airline and the cities of San Francisco, Los Angeles, Denver, Chicago, and Newark/New York, the underfunded pension, and exit financing.

Today Rueters had an interesting quote from Fitch Rating airline analyst William Warlick. As you know, Fitch Rating will audit United's loan guarantee application and will provide a recommendation to the ATSB on whether or not the business plan will meet loan guarantee requirements.

"The takeaway here would be, yes, clear progress but they still lost money in the quarter...I think there's still room for caution here," Warlick said. At around 9.5 to 9.7 cents per mile, UAL's unit costs are not that different from other bigger, older airlines, Warlick noted. "They still have a lot of work to do if they're going to achieve a sustainable competitive advantage over the other network carriers."

The challenge for United, in addition to the five points listed above, is that the company's unit costs are still too high to successfully compete with the LCC's. In that sense, US Airways and United are in the same boat.

Interestingly, Dave Siegel hinted in a speech to the Washington Aero Club last Tuesday that there may be corporate combinations between network airlines when he said, "Again, I don't have all the answers, but I do sense that increased cooperation, coordination, and potentially consolidation between and among network airlines must be another source of strength through enhanced efficiencies, in both marketing and operations."

I would like to know what he means by increased cooperation and coordination and what he "senses".

The issue for United is the same for US Airways – a rapidly changing industry where RASM is being ratcheted down by LCC's. As I have said on countless occasions, I believe United will emerge from bankruptcy, but it may have to sell assets to emerge.

The company has been and continues to be in discussion with US Airways about the transfer of United assets into US Airways, which could be a means to make both companies survive. In addition to providing exit financing, a deal between RSA and United to shift assets to US Airways could cut United’s costs, improve US Airways revenue, and help United meet the ATSB requirement of a 7% profit margin in 7 years.

Meanwhile, I’m sure the ATSB and its consultants are watching closely the effects that LCC expansion will have on United’s loan guarantee application and revenue forecasts. This LCC problem is going to haunt both companies forever and either they collectively find a way to regain profitability, or both companies could fail.

United Airlines (UA)

UA’s third quarter net loss was $367 million

Break even load factor – 81.2%
Actual passenger load factor – 80.2% (up 4.8 points year-over-year)

RASM – 8.83 cents (up 95 cents year-over year)
CASM – 9.88 cents with special charges and 9.63 cents without special charges(down $1.02 cents year-over-year)

US Airways (US)

US’s third quarter net loss was $90 million, which included a non-cash charge of $24 million for the employee stock distribution plan

Break even load factor – not reported
Actual passenger load factor – 73.5% (up 1.5 points year-over-year)

RASM – 10.56 cents (up 76 cents year-over-year)
CASM – 10.98 cents (down $1.01 year-over-year)

Chip comments: The US – UA operating statistics indicate both companies cut their expenses by about $1.00 per ASM. US maintained a RASM premium of 68 cents over UA, while UA had a higher load factor than US by 6.7 points. UA reported a break even load factor of 81.2%, however, US did not report this statistic.

As you know, US Airways and United have held corporate combination discussions since the last merger attempt was terminated, however, these discussions have focused on the fragmentation of United assets into US Airways. But, due to the rapidly changing industry I wonder if a true merger may be the new option? Siegel’s comments above are suspect and during the past 18 months we have witnessed his communication pattern. This pattern is to provide employees with third-party comments via the news media, recorded messages, in the terminal, on the jump seat, or via email. Siegel’s comment that “there may be corporate combinations between network airlines when he said, "Again, I don't have all the answers, but I do sense that increased cooperation, coordination, and potentially consolidation between and among network airlines must be another source of strength through enhanced efficiencies, in both marketing and operations," was intentional and deliberately put into his speech.

There is no question from this perch that today’s network carrier earnings problem is due to a fundamental change in industry economics due to the explosive LCC expansion. The industry is undergoing a dramatic change and network carriers must adapt or they will go bankrupt. To adapt the major airlines must lower their unit costs in light of depressed revenue, but in an industry with high fixed costs that is not easy. In fact, today Philip Baggaley, analyst at Standard & Poor's, told Rueters the good news was that labor costs were way down. On the flip side, September results looked weak, he said, with an operating loss of $120 million.

Considering that labor would likely vigorously fight any attempt to further lower pay and benefits, could the only way to lower unit costs be through a traditional merger between US Airways and United?

In the case of the business partners, during the last merger attempt United’s EF&A department believed the failed merger would have increased United’s revenue by $1.6 to $1.9 billion, according to former US Airways chief executive officer Stephen Wolf. This revenue gain was pre-September 11, therefore, it’s likely this figure would be much lower, maybe by one-third due to the deteriorating economics. This revenue would not be new revenue, but a revenue shift from other network carriers. In addition, a merger would lower unit costs due to economies of scale, such as joint purchasing, joint advertising, common facility use, and greatly improved employee productivity. In addition, if US Airways was the surviving business entity, United could legally reject aircraft, office building, and airport facilities to dramatically lower unit costs of the combined business entity prior to leaving bankruptcy and absorbed by US Airways. This cost cut advantage is a strong argument for a merger to proceed, which could legally permit both companies to dramatically cut their unit costs – enough to compete with the LCC’s without further labor pay and benefit reductions.

In regard to antitrust, with United in bankruptcy, US Airways and its principal investor RSA could seek to acquire United and the legal team could use the “failing carrier†guidelines of the Justice Department code, just like AMR did with TWA, to pass regulatory scrutiny.

Also noteworthy, the ATSB could have a hand in helping finance the deal because the loan guarantee guidelines permit funds to be used for M&A activity. According to the OMB loan guarantee regulations, which discuss situations for which a loan guarantee can be applied, the rules say: “If loan funds are to be used to purchase an existing firm (or the substantial assets of an existing firm), the business plan of the combined entity shall contain a discussion of the way in which any required regulatory or judicial approvals will be obtained, including antitrust approval for any proposed acquisition.â€

It’s clear the ATSB has broad power and could shape the industry in the future as witnessed by the board’s decision to deny United’s previous application and to approve US Airways application. In addition, knowledgeable sources believe United’s loan guarantee application could be used by US airways and RSA to help fund an acquisition.

Finally, it appears management may have also “greased the skids†for employee integration issues, when United ALPA agreed to change their seniority integration from a pre-nuptial clause to ALPA Merger & Fragmentation Policy and the Flight Attendants/Ramp Personnel are covered by the same union integration policy. The only change would be for the mechanics because the United mechanics have recently changed from the IAM to AMFA.

Therefore, could the two companies really be planning a merger instead of some other type of corporate combination with US Airways the survivor due to United’s bankruptcy? Will this occur? I do not know, but what I do know is that senior US Airways executives have been spending a lot of time during the past few weeks with their United counterparts in Chicago, thus where there is smoke there could be fire?

Regards,

Chip
 

Fly

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The company has been and continues to be in discussion with US Airways about the transfer of United assets into US Airways

No they have NOT. United has NEVER had a discussion to transfer ANYTHING into US Air. Where do you dream this stuff up?

US Air is about to revisit the courts. UAL is cleaning shop and likely to emerge within 6 months (without revisiting). The United employees are all pulling for the same side *unlike UAL's "partner" U*. Face it, U is in the worst possible position they have probably ever found themselves in....it doesn't look good. A year from today I doubt U will even be around.
 
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USA320Pilot

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Fly:

As a United Flight Attendant who is married to a United pilot, I think you should contact WHQ reception and inquire who has recently signed the visitors log from Arlington.

By the way, would you care to comment on why United ALPA changed their merger policy to match US Airways ALPA merger policy verbatim?

It would not surprise me that the UCT may now be dead and replaced with a merger, especially since Siegel told the Wshington Aero Club two days ago that he sensed "that increased cooperation, coordination, and potentially consolidation between and among network airlines must be another source of strength through enhanced efficiencies, in both marketing and operations."

Fly, could you comment on what Siegel means "by increased cooperation and coordination and potentially consolidation" and what he senses? Could it be that US Airways chairman of the board David Bronner and his airline advisor Rono Dutta might finance the deal, along with ATSB money, since Bronner controls $25 billion in liquid assets?

Can you tell me one other major airline chairman of the board who can write a check for this kind of money and does not need an investment banker to handle a M&A transaction?

Regards,

Chip
 

xoxo

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Fly,

I fully disagree with you on everything. You probably are a UA employee. I say this because when we were going to merge way back when..the UA f/a's were very nasty towards U f/a's everytime we came face to face.. I sleep very well at night knowing that I am a good person and I treat others well and I do not wish that UA goes under or any airline for that matter. I can not beleive you have the nerve to be saying the things you have said about U on this board. As far as having the name UA on the tail and not U's..well, I do not care who it says..will say..will not say...as long as both airlines and their employees are still around and working and living a comfortable life, and able to take care of their families, that my friend is what matters at this point in the game. So, do not get to happy with the "rumors" that U will file bankruptsy again. Because it is not written in stone, and the so called analysts have been wrong many, many times.
 

737nCH11

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Folks,

Let's not get started down this slippery slope. Bad things were said on both sides. Both sides want to protect their seniority, and rightfully so. That's the nature of the beast.

I don't want to see a merger. Not because I have anything against U employees, but because I have yet to see a merger where both sides were treated equally. This leads to bitter feelings that last for years. I still talk to old National guys who hate the old Pan Am guys. I'm sure you can find PSA or Piedmont folks among your ranks who are not happy after all these years.

With that being said, I believe a merger will happen. UAL CEO Tilton has alluded to it with comments made this summer. The rumor of a merger has never completely gone away at UAL, but the whispers have increased over the last six months.

Let's not start insulting one another, O.K.

737
 
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USA320Pilot

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Fly:

By the way, US Airways has nearly $2 billion cash on hand with $1.4 billion unrestricted and $600 million resricted.

United has cash balance of $2.4 billion, with $646 million in restricted cash and $1.754 billion in unrestricted cash.

United posted a $367 million loss, including $330 million in special charges, and September results looked weak with an operating loss of $120 million.

For the entire quarter US Airways had a net loss of $90 million, of which $24 million was a one-time charge for the employee stock distribution plan -- thus the real net loss was $66 million.

Moreover, the traditionally weak fall and winter season is just under way.

Considering United is not paying its airport muncipal bonds, some EETC's, and other items; as well as the company has twice the revenues of US Airways, I wouldn't throw stones if I were you or compare balance sheets.

Regardless, there are merger signals in the air and Siegel dropped a hint about it two days ago, shortly after he left WHQ.

Regards,

Chip
 

USFlyer

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Listen, anyone who thinks US's ultimate fate is to remain independent is truly delusional. Siegel is doing exactly what Wolf failed to do. But, this time around Siegel is getting the US house in order so that the eventual integration will be near seemless operationally. US's transatlantic, Caribbean and LGA/DCA/PHL/southeast US market share would make for a great addition to the United network. But, both companies need to get their acts together before any of this can take place and not have it explode.
 
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USA320Pilot

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737nCH11:

I agree with your reasoned and well put comments. Fighting about seniority when all network carriers are at risk of failing is not a good idea.

Each airline union has a Merger Committee and they should fight for the best deal possible for their members. If United and US Airways attempt to merge again, I expect the United unions to fight for the best seniority they can obtain and I expect the US Airways Merger Committee's to do the same.

However, if our two companies merge we need to "bury the ax" and move on.

I too do not want a merger, but I now sense and believe it's in the cards between our two companies again, once some details are worked out like Mesa/ACA, the pension, EETC/s, and the municipal bond litigation.

Moreover, could the real reason United has not obtained exit financing be that the end result is a merger?

USFlyer, I believe you are correct.

Regards,

Chip
 

Colby

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In response to this Message.... All I have to say is that if this does happen.... If it is anything like AA over TWA....I would rather be on the AA side than the TWA side. <_< Something to think about !!!
 

ISP

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well from what I gather, Chip believes US=AA and UA=TWA. I guess that would leave the tails painted in navy with a flag!
 
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USA320Pilot

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In my opinion, the only way US Airways and United can dramatically lower unit costs is by merging, which would create significant economies of scale and improved productivity. In addition, the two companies could increase their combined revenue by let's say two-thirds of the pre-September 11 United EF&A estimate of $1.6 to $1.9 billion or about $800 million to $1.2 billion per annum.

The CASM reduction and RASM increase would be a damaging blow to AMR, Delta, Northwest, and Continental and would position the combined US Airways and United business entity to effectively compete with any airline, LCC's and other network airlines alike.

Moreover, the combined CASM could be dramatically cut with US Airways the survivor and United rejecting duplicate leases, EETCs, or municipal bonds while in bankruptcy. This would be a huge advantage over the other network airlines that cannot do the same unless they file for bankruptcy.

In addition, a merger would take the heat off of further labor pay and benefit cuts, which would be welcome relief for employees at both airlines.

The network synergies are too good for the two companies to not merge and a complete integration could solve enormous financial challenges for both airlines.

Regards,

Chip
 

Pacemaker

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Chip, in 2000 the number bandied about for integration costs for the deal at the time was a billion dollars. How would these costs be afforded in the current environment, even if synergies would eventually be realized?

Employee issues would still be huge. For example, at US Airways you have pilots with 15 years' seniority on furlough while if I'm not mistaken the same seniority at United still equals a captains' seat. I would expect the UAL pilots to try and kill the deal - for the third time. No one can afford a "Summer of 2000" replay.
 

FlyingHippie

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In response to this Message.... All I have to say is that if this does happen.... If it is anything like AA over TWA....I would rather be on the AA side than the TWA side. Something to think about !!!

Colby, no need to preach to the choir here. All of the mergers within this airline have been DOH. Employees here know better than anyone how important that is. Yeah, there are still people whining about something from the previous tail colors, but for the most part everyone knows it was done fairly.
 
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USA320Pilot

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Pacemaker:

United is in bankruptcy and their pilots no longer have a say since they lost their ESOP.

Furthermore, what are the United pilots going to do -- slow down like the summer of 2000 so the airline can miss its DIP targets and liquidate?

In regard to merger integration costs, they would be much less because the companies are smaller and many leases/EETCs and the PIT hub could be rejected by United and US Airways because of the bankruptcy code.

This point has tremendous economic impact because there would be no merger excess like in the US Airways - Piedmont and US Airways - PSA mergers.

For example, all of the PIT operations could go without retribution and no cost to the combined business entity, unlike the last merger attempt.

The bankruptcy lease rejection is a huge cost benefit, which would be unavailable to the other airlines and would dramatically drive down the combined US Airways - United CASM. This is a key reason, along with Bronner's money and Dutta's advice, why US Airways could be the surviving business entity.

Regards,

Chip