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United Airlines and US Airways are nearing the zero hour to ink a deal if the mainline carriers expect the potential merger to be reviewed in the current administration, a senior industry source told dealReporter.
The deal could also call for an outside investor to boost the capital base of the combined company, potentially in the form of a foreign strategic airline or financial sponsors, this source and two other senior industry sources said.
Subsequent to failed merger talks between United, an unwaveringly strong proponent of mainline consolidation, and Continental – which always took a more conservative stance on mergers – the former reignited talks with its second choice partner, US Airways.
However, according to the first industry source there are only a couple of weeks left to strike a deal and ensure a review by the Bush administration. The source, who is familiar with consolidation, but not involved in United/US Airways talks, expressed doubt as to whether United and US Airways would be able to design a divestiture package that would work for both companies as well as the DoJ within the rapidly closing window for announcement.
He referenced United/US Airways’ attempted 2001 merger in which the overlap in Washington DC crushed the potential of a combination. He said the divestment package for the 2001 attempted merger had taken an extensive amount of time to construct, and added that a fixture for this deal could be expected to take time as well.
In 2001 United and US Airways proposed selling assets at their Washington DC airports to Robert Johnson, founder of Black Entertainment Television (BET). Johnson would have used the assets to create a new regional carrier named D.C. Air.
According to a source familiar with the situation, the potential combination faces equally difficult social and economic issues. He acknowledged the difficulties with integrating three pilot groups, namely those of US Airways, America West – which combined with US Airways in 2005 but never integrated its pilots – and United. However, he said he believed US Airways was chugging towards integration of its pilots and America West’s which would be good for a tie-up with United.
In relation to company location, the senior industry source and two additional senior industry sources familiar with consolidation but not involved in United/US Airways talks, said it is likely the combined carrier would not be moved to Arizona where US Airways is currently headquartered. Rather, it is expected that the new entity be located in Chicago, United’s corporate headquarters, but run by Douglas Parker, US Airways’ CEO.
Still, the first senior industry source questioned why US Airways, already in a difficult financial position, would opt to pursue consolidation with United and risk further financial woes. He acknowledged Continental’s decision to back away from consolidation on grounds of insufficient liquidity, and said he would have thought US Airways might do the same. However, he noted that US Airways’ Parker is a strong leader and avid proponent of consolidation.
On 24 April, US Airways issued a press release detailing first quarter results in which the company said it had USD 2.8bn in total cash and investments. The same release noted that the mainline carrier had “recently amended its credit card processing agreement. Under the terms of that amendment, among other improvements, the level of collateral required to be maintained by the Company has been reduced to the level of reserve at March 31, 2008 and may be subject to further reductions in certain circumstances.”
Meanwhile, the first and second senior industry sources each said they believed it to be very difficult to realize a deal between the passenger carriers from a financial standpoint without a third-party investor. United and US Airways would be significantly less liquid than Delta/Northwest, they said. The second senior industry source further noted that attempting to realize synergies always requires extensive capital which would have to be paid up front, likely to boost pilot wages.
The most likely place to troll for capital would be within the Star Alliance, which United and US Airways are both members of, the senior industry source and industry banker said. Lufthansa, among the best positioned in the alliance, would be the most logical place to turn, the source said, but added that the worldwide German airline had ruled itself out of an investor position in a combined mainline carrier on its conference call on 25 April.
However, the second senior industry source said that if the carriers felt it were necessary to have a third party investor, Lufthansa would benefit from the combination. He noted that Lufthansa’s investment in Jet Blue this year would not disqualify or impede in its potential to invest in a combined carrier. Furthermore, he said the legacy carriers could also look outside of Star and potentially tap private equity players to invest.
In discussing the likelihood of recruiting an Asian investor from the Star Alliance like Singapore Airlines pr All Nippon Airways (ANA), both senior industry sources said independently that it was highly unlikely either would invest in a combined United/US Airways.
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