Analysts See Merits Of Potential United, US Airways Tie-Up

Amid rampant news reports that the two carriers once again are in talks to merge, aviation analysts today said a tie-up between United Airlines and US Airways likely would prompt other merger scenarios, such as discussions between Continental Airlines and United, and face significant regulatory hurdles. Such a major consolidation ultimately would reduce supply in the market, remove a competitor and strengthen airline pricing, but also help stabilize the financial basket case that is the U.S. air industry, analysts said.

"We have long viewed a United-US Airways merger as both the most logical and feasible among potential legacy combinations," said J.P. Morgan aviation analyst Jamie Baker in a research note today, calling the merits of a such a deal "considerable." Baker said a similar fleet structure, membership in the same alliance and a comparable labor makeup would make for a good fit when compared against other possible domestic mergers.

Baker said the purpose of a United-US Airways merger would be less about revenue and integration synergies and more about the "savings associated with less flying" that would result in a tie-up.

UBS aviation analyst Kevin Crissey in a research note today said he would expect a merger of the magnitude of the United and US Airways to reduce capacity by up to 3 percent, "with most of the reduction in domestic markets." Compounding the already dramatic capacity cuts of recent years, such a result would enhance pricing power for carriers, analysts said.

Though some pointed to union pushback as one hurdle to the potential merger, Baker said pilot wages are similar at both United and US Airways "and among the industry's lowest, requiring no such labor approvals before integration can occur," compared with other, more complicated labor integration efforts that would follow other air merger scenarios.

Still, regulatory hurdles would remain a challenge, Baker said, noting that since US Airways and Delta "can't pull off a simple slot transaction, how likely is a combination that rivals Delta in size and scope, particularly when neither carrier is failing?"

United and US Airways pursued a deal in 2000 and again discussed a merger in 2008, but the latter talks ceased when oil prices surged and survival dominated both carriers' priorities, Crissey said. "With the financial outlook better now, renewing talks seems reasonable," he said. Still, Crissey expects "United to also speak with Continental," a partner he considered "probably a better alternative."

Like US Airways, Continental also has been down this road with United before, but after some discussions the carrier in 2008 chose not to merge with United. Calling that "a point-in-time decision," Continental CEO Jeff Smisek during the J.P. Morgan Aviation, Transportation & Defense Conference last month said it was "the right decision at the time."

Smisek, who this year, assumed Continental's chief executive role, continued, "I voted against it myself as a member of management and a member of Continental's board. That said, that was a point-in-time decision, and we'll continue to watch the competitive dynamics, and if we think it's in our best interest to bulk up defensively, we'll do so. I think it's premature to make that decision at this time."

Even if this fresh movement toward mergers sours, Crissey said, "Consolidation is very likely in the next couple years." Still, he said reports of United-US Airways talks, which the carriers won't confirm, only "slightly increase the chance of consolidation near-term, nothing more."

"The airline industry remains a financial mess with no major U.S. airline earning its cost of capital," Crissey said. "Consolidation, though not easy, riskless or free, is a logical way to attempt to rectify this long-standing problem. Consolidation reduces capacity, the number of competitors, and the capital employed in the sector."