Proposed US Airways-United merger pushes shares up

Proposed US Airways-United merger pushes shares up

The oft discussed merger between United Airlines and US Airways was back on the agenda this morning, with both airlines seeing a surge in share prices as a result.

The merger – which has been under discussion in one guise or another for over a decade – has come into sharper focus following a modest recovery in the international aviation sector.

With fuel prices falling over the mid-term and demand for travel slowly returning, a renewed optimism has returned to the market.

Just this week, for example, British Airways and Iberia suggest their proposed merger could be completed by the end of the year, following the signing of a memorandum of understanding between the two European flag-carriers.

Transatlantic

This optimism has also been apparent on the other side of the Atlantic, with a number of favourable factors now encouraging a merger between the two American giants.

Firstly, international credit markets have reopened, smoothing the path to integration for the airlines in a post-merger environment. Both airlines also have similar fleets, while their wage rates are closely aligned and are among the lowest in the industry.

Both also belong to Star Alliance, the global marketing group.

The two carriers argue the proposed merger would allow the combined airline cut capacity in the US market – by as much as three per cent, according to analysts – and consequently force prices higher.

ADVERTISEMENT

Both airlines have thus far refused to comment on the unfolding situation.

Stormy Weather

However, there are problems, not least an involved attitude from the Obama administration. Any deal is likely to come under close scrutiny from a government seeking to ensure passengers’ interests are not harmed.

A proposed deal in 2000 fell apart under pressure from the US Justice Department. 

Pilots at US Airways could also prove troublesome.

The airline went into administration in 2005, with pilots forced to take a pay cut at this time. However, a clause in current contracts states pilots will see their pay restored to pre-bankruptcy-court levels if US Airways is involved in a change-of-control merger.

Moreover, United’s pilot’s union leader, Wendy Morse, also argued news of the talks “has caused a great deal of consternation among the pilots I represent”.

She added a merger with US Airways “will only serve to distract United’s management team from solving its own pressing issues”.

Commentators also argue the logistical integration between the two airlines would be time-consuming and costly because of the close proximity of the airlines’ operations.

United has West Coast hubs at San Francisco and Los Angeles, while US Airways has a hub in Phoenix and operates frequent daily flights out of Las Vegas (though it recently reduced service). On the East Coast, there are similar overlaps at the Washington Dulles and Reagan airports and US Airways’ Philadelphia operations.

Therefore, any combined entity is likely to have to make significant alterations to its network in order to deliver the synergies necessary to justify this merger.

However, the attraction between the two airlines is obvious.

A proposed merger could create a rival to America’s largest carrier Delta Air Lines. But with so much history between the two, a quick resolution to this situation seems unlikely.