Put like that, the interest being shown by United and American in USAir sounds bizarre at best. But interested they are, and for very good reasons. While the likelihood of a deal going through may be small, the mere suggestion has caught the industry by surprise and will force many to change their thinking.
Any bid will pose a tough dilemma for the US administration, as regulators try to decide whether to permit it. Airline strategists are asking such questions as: Are airline mergers worth it? Is this the beginning of another wave of concentration? Should airlines place too much reliance on commercial alliances which can be snatched away?
First, the reasons. USAir may be financially troubled, but it has something which could be valued highly by potential suitors - market share. As airlines jockey for position in the global marketplace, they see three keys to future strategic positioning - market access, a strong global network and frequent flyer programme membership.
USAir offers help with all three. It has around 10 per cent of the US domestic market and a strong position in the northeast, where both United and American are relatively weak. And its frequent flyer programme has 16 million members, although many may be members of other programmes. Furthermore, USAir's share price is at a low ebb, buying USAir will stop anybody else purchasing it later, and a purchase will score important points against rival British Airways - either by turning it into an ally or by leaving it without a transatlantic partner.
These are the good points. The bad news is that USAir has the highest unit costs in the industry, a workforce which has adamantly opposed cost-cutting concessions, and $8 billion of long term debt and lease obligations.
Airline acquisitions can be worthwhile. United's purchase of Pan Am's Pacific routes was clearly a winner, as was American's acquisition of Eastern's Latin American route authorities. But other mergers have been much less successful. Indeed, many of USAir's problems stem back to the assimilation of Pied- mont and Pacific Southwest.
The potential acquisition of USAir could be the most difficult strategic trade-off ever contemplated by airline executives. A combination will be very difficult to implement, and the pain of swallowing 42,400 employees and all that debt will last years. A deal will push unit costs up and damage other strategic moves, particularly international alliances, because all attention will be focused on sorting out the acquisition.
Any bid for USAir will pose major antitrust concerns, both within the US and internationally, which could lead to either combination having its competitiveness stymied by conditions of the acquisition. If either United or American buy USAir, their US market share will jump to around 27 per cent, and further mergers will be inevitable, leading to a situation where three or four airlines corner the market.
But the international ramifications may be more difficult, given the lack of a supra-national antitrust authority. Suppose American buys USAir and cements an alliance with British Airways. Those two carriers will then control well over half of the US-UK market, itself representing one-third of the North Atlantic market. Surely one will have to give up its US-UK routes, as USAir had to do when it allied with BA.
If United is the purchaser, can it have alliances with both Lufthansa and BA? Even if such a strategy could work, surely it cannot be permitted by legislators? If not, will United dump Lufthansa or leave BA out in the cold?
If a USAir bid triggers further consolidation, other established alliances could be disrupted - KLM's with North- west, perhaps, or Delta's with its European trio. Moreover, alliances without equity links could be called into question. Evaluating the antitrust implications of such an acquisition will be a real challenge for legislators. The implications spread out way beyond the US Justice Department's remit.
Competition authorities in several European countries could claim a say, as could the European Commission.
The world's antitrust system is not ready for such deals, because there is no such thing. The possibility of a USAir deal underlines the fact that a global industry can only be regulated on a global basis. The airline business needs a regulatory system which considers the business as a whole, before the industry has become so concentrated that antitrust scrutiny will mean nothing anyway.
Source: Airline Business
