usairways on the out side looking in

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Nov 29, 2007
US Airways on the Outside Looking In

By Ted Reed Staff Reporter
1/16/2008 2:16 PM EST

CHARLOTTE, N.C. -- A year ago, US Airways (LCC - Cramer's Take - Stockpickr) was the belle of the consolidation ball. Now, it just wants an invitation to the party.

Between Nov. 15, 2006, when it disclosed a hostile bid for Delta (DAL - Cramer's Take - Stockpickr), and Jan. 31, 2007, when the attempt was dropped, US Airways was the talk of the airline industry, and CEO Doug Parker was the group's audacious new face.

After engineering a successful merger between the former US Airways and America West, he went for broke, seeking to build the world's biggest airline.

It all came crashing down relatively quickly. There was the Senate subcommittee hearing in late January, where Parker was forced to defend layoffs of middle-aged workers after TWA was acquired by AMR (AMR - Cramer's Take - Stockpickr), and there was the precipitous decline of US Airways' stock.

There was also a questionable arbitrator's ruling on pilot seniority, begetting a continuing, bitter battle among the airline's current pilots.

Now, at a time when international expansion is the industry's hottest trend, US Airways has only about one-fifth of its capacity in international markets, compared with one-third to one-half at the other legacy carriers.

So US Airways watches and waits as Delta takes the lead, reportedly pursuing merger talks with both Northwest (NWA - Cramer's Take - Stockpickr) and UAL's (UAUA - Cramer's Take - Stockpickr) United.

"It's not as if we can force this to happen at this point," Parker told an investor conference in November. "Being the sixth of the big six, we're not going to be somebody's first choice," he said. However, he added, "It's hard to marginalize $11 billion in revenue."

If consolidation is to occur, the general expectation is that Delta will seek to make a deal and that other potential mergers will surface in response. At that point, any or all of the six legacy carriers, including Continental (CAL - Cramer's Take - Stockpickr), could be involved.

"US Airways is probably at some risk of being marginalized," says Standard & Poor's analyst Philip Baggaley. "If Delta were to go to one [partner] and Continental went to the other, American would be left apart, but at least they would have started out as the largest airline.

"Then you would have US Airways, who wanted to be involved, left on the sidelines," he says.

But Avondale Partners analyst Bob McAdoo says that even though it isn't anybody's initial option, US Airways remains a strong merger candidate. It's always good to have slots and gates at congested airports in desirable markets like Boston, New York and Washington, he says.

Additionally, in Charlotte, US Airways has the only major Southeastern hub aside from Atlanta. "There's more to the world than international routes," he says.

McAdoo says he expects American to be actively involved in consolidation, even though it has said little to encourage that impression over the last several years. American could bid for Northwest, he says. If that fails, US Airways might be a good second choice, especially if long-time competitor United were to gain a New York presence in a deal with Continental.

Perhaps US Airways would try to combine with United, seeking to revive the failed merger the two attempted in 2000. Consultant Robert Mann says the deal has the advantage of combining two Star Alliance partners, but "it would mean US Airways would compete with a Continental deal, which is hard to imagine."

US Airways could also join the crowd and seek to acquire Northwest. But Mann says US Airways no longer "has the market capitalization, and may not have the private-equity support, to enable another run" similar to Delta's.
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