Why the United-US Airways deal collapsed

A provision in US Airways' contract with its pilots halted merger talks between the airlines.

By TheStreet Staff Apr 23, 2010 11:36AM

TheStreetAir travel © Christie & Cole/Corbis By Ted Reed, TheStreet


Before US Airways (LCC) ended merger talks with United Airlines’ parent UAL (UAUA) on Thursday, the two airlines had talked for months and agreed on many key issues, including the selection of Glenn Tilton of chief executive of the merged company, say people familiar with the talks.


But United executives were uncomfortable with a change-of-control provision in the US Airways pilots’ contract that would require US Airways to acquire United, say the sources, who could not be named because they were not authorized to speak about the negotiations.


United executives were concerned about US Airways’ ability to assemble the financial resources needed to reward shareholders of United, whose market capitalization is three times larger.

Nevertheless, the talks progressed. Eventually, the two sides "agreed the company would be named United and headquartered in Chicago, would have two-thirds of the board from United and Tilton as CEO," a source said. US Airways CEO Doug Parker was willing to step aside, the source said, noting: "Doug was going to act in what he believed to be the best interest of his company and his employees."


Bing: More on Airline Consolidation


United's preference to merge with Continental Airlines (CAL) wasn’t news to US Airways executives. But those executives believed they should go ahead and pursue a deal that would benefit the company. Parker, like predecessor Stephen Wolf, doubted US Airways’ long-term survival because it’s neither a major global airline nor a low-cost domestic airline.


Parker knew it would be difficult for US Airways to be the acquirer. At a meeting with pilots at US Airways' Charlotte training center on March 17, he told pilots that the change-of-control provision was a barrier to any merger the carrier might pursue. The provision would return wages to pre-2000 levels, far higher than today's pilot wages, if the company were to change hands.


About four to five dozen pilots attended the meeting, and many said afterward that they found it odd that Parker would raise the topic on his own, unprompted.


"We've had talks with airlines in the past," Parker said at the meeting. "This (provision) always comes up. (It) is a large issue in consolidation talks. There will not be a merger if that's where the pay rates go. Anybody we would merge with can't let the pay rates go to those levels.


"You can't have both," Parker added. "You can't have a merger with that provision. (It) will either result in a merger never being done or it will be a merger that doesn't trigger that provision." Later, Parker met with USAPA leaders to discuss the potential merger, and they agreed to work with the airline to facilitate it.


United saw merit in a deal with US Airways. Tilton, like Parker, has been a strong advocate of consolidation. The carriers' routes could be combined to enhance revenue and reduce costs. The carriers' Phoenix and Denver hubs do many of the same things, as do hubs in Philadelphia and at Washington Dulles airport.


At the same time, Continental could bring more international resources to a deal. Such a merger would more closely resemble the merger between Delta Air Lines (DAL) and Northwest, which has been well-received by investors. When press reports of the talks with US Airways surfaced, Continental executives were surprised, Robert Roach, general vice president of the International Association of Machinists, has said. But when Continental wanted to talk, United felt it had no choice but to listen.


Eventually, some on the US Airways side came to believe that United's resistance to the proposed structure was an indication that the talks were a façade, intended to entice Continental to step in. That belief intensified as US Airways executives read media reports about ongoing discussions with Continental. On the United side, the feeling was that months and months of negotiations with US Airways represented a sincere effort to reach a deal.


Now US Airways executives are unhappy with various representations that they have somehow been hurt or have "burned tail feathers" as a result of the scenario that unfolded.


"It is puzzling that anyone would describe a decision to walk away from a potential transaction as an emotional decision; indeed, it's anything but emotional," said Elise Eberwein, US Airways executive vice president for people and communications. "Rather this is a business decision made with the best intention for our airline. Being 'played' makes for good industry gossip and I guess that explains why reporters are picking up on this mysterious informed-but-not-close-to-nor-involved-in-the-transaction source.


"At the end of the day, this was a decision made without emotion, and our view remains the same: Any consolidation in this industry is a positive for all," Eberwein said. "And that makes us happy, not hurt or angry."


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