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News > Deals
UAL-US Air deal may die
July 2, 2001: 12:47 p.m. ET

Airlines talk of dropping merger plan due to regulatory opposition
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NEW YORK (CNNfn) - United Airlines' parent company and US Airways Group Inc. said Monday they were discussing ending their $4.3 billion merger, a move that would scuttle what would have been the biggest acquisition in the airline industry.

A source familiar with the situation told CNNfn that United's parent, UAL Corp., decided to pull out of the deal because of problems getting it cleared by regulators.

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graphicCNNfn's Fred Katayama has more on the merger's troubles.
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The companies, in a joint statement Monday, said they were "in discussions regarding the possibility of terminating the proposed merger between the two companies prior to the Aug. 1 termination date."

The end of the deal would come as no surprise to most observers. It has faced opposition from Justice Department antitrust regulators, and Secretary of Transportation Norman Mineta has questioned whether the merger would win approval.

Shares of US Airways (U: down $3.22 to $21.08, Research, Estimates) tumbled Monday, and were well below the $60-a-share cash purchase price set when the deal was announced in May 2000 -- a sign investors also doubted the deal would be completed. Shares of UAL (UAL: down $0.14 to $35.01, Research, Estimates) gained Monday morning on the reports of the deal's collapse.

Critics in Congress and elsewhere noted that the merger of the nation's No. 1 and No. 6 airlines would have given the three biggest U.S. carriers control of about 75 percent of domestic air traffic. That, they argued, would lead to higher fares and decreased service.

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United executives had continued to insist until recently that the deal would be good for its customers, employees and shareholders.

The collapse of the deal is a setback for United, the world's biggest air carrier, which now stands to lose that ranking to AMR Corp.'s (AMR: down $0.22 to $35.91, Research, Estimates) American Airlines once American integrates recently purchased Trans World Airways into its system.

It also leaves an uncertain future for US Airways, whose executives have said it may not be able to survive as an independent carrier.

"US Airways today is neither a low-cost carrier nor a network carrier in an industry that has no place for an 'in-between' airline," Stephen Wolf, US Airways' chairman, told a congressional committee in March. "There is no dispute but that US Airways, with its high cost structure, is struggling as Southwest Airlines (LUV: up $0.09 to $18.58, Research, Estimates) , JetBlue, AirTran (AAI: down $0.45 to $9.80, Research, Estimates) and other low-cost, low-fare carriers expand rapidly in the eastern United States."

Ray Neidl, analyst with AMN Amro, told CNNfn's Market Call that he doubts US Airways can make it on its own long term, although he said that despite ongoing losses it has the resources to avoid the liquidity problems that put Trans World Airlines into bankruptcy earlier this year.

But Neidl said that it may be difficult to find a buyer for all of US Airways, given regulators' concerns, and that the best solution may be to break up the airline.

"I think the best alternative for them may be to look to sell the airline piece by piece because it does have a lot of valuable assets," he said.

In January, when AMR announced its deal for bankrupt TWA, it also entered the UAL-US Airways deal, agreeing to purchase a share of the US Airways assets.

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Under the deal, AMR would have operated US Airways' profitable Northeast shuttle -- the prize of its system -- jointly with United, while owning 49 percent of DC Air, the start-up airline that United and US Airways unveiled with the deal in a bid to assuage regulators' concerns.

United and US Air said they would not comment further. Officials at American and DC Air were not available for comment Monday.

The Wall Street Journal reported Monday that AMR still is interested in buying US Air assets. But AMR CEO Donald Carty told USA Today last month his interest in the assets had waned, given the current downturn in the airline industry. AMR warned last month it expects to lose $100 million or more in the second quarter.

"The acquisition of US Airways or any assets of US Airways involves more capital, and therefore we have some ambivalence about spending capital in this kind of environment," Carty was quoted as saying.

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Neidl said the collapse of the deal may actually be a positive for United, allowing management to focus on the service and profitability problems that have plagued it since last summer.

"The management there can now concentrate on fixing the problems they have with their franchise," he said. (283KB WAV) (283KB AIFF)

The end of the deal could also remove the pressure on other major carriers such as No. 3 Delta Air Lines (DAL: up $0.47 to $44.55, Research, Estimates), No. 4 Northwest Airlines (NWAC: down $1.01 to $24.24, Research, Estimates) and No. 5 Continental Airlines (CAL: down $0.55 to $48.70, Research, Estimates) to find merger partners.

Any deal involving those carriers would have been difficult, due to an agreement that gives Northwest the right to block any purchase of Continental, but also prevents Northwest from acquiring Continental itself.

Gordon Bethune, CEO of Continental, had said he thought additional mergers would be bad for his carrier and the industry, but that he could not sit by and do nothing as other carriers made deals. graphic


-- CNNfn correspondent Fred Katayama contributed to this report

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UAL-US Air deal draws fire - June 13, 2000

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  RELATED SITES

CNN.com - Fred Katayama: United, US Airways merger not taking off - July 2, 2001

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