February 23, 1999
ALPA, Intl
Committees
Then
there’s money, the often unspoken reason for a split. In the end, the proposed sale
of America West landed where many speculated it would after merger frenzy began a month
ago: nowhere. In announcing an end to merger talks Monday, America West Chairman William
A. Franke said the much-discussed but never confirmed offers to buy America
West—which he again wouldn’t discuss—had a number of conditions attached to
them.
“We viewed those as difficult and unlikely,” he said. Franke wouldn’t
elaborate on the conditions, but several hurdles to a deal have been mentioned from the
start.
In the case of United Airlines, the only company to confirm talks with America West,
labor approval was a major condition. The airline, the nation’s largest, is 55
percent employee-owned, with 25 percent of that stake held by its influential pilot group.
When United considered a buyout of USAirways a few years ago, one of the criteria set by
the company for any transaction was that the employees support the deal and its terms.
Approval was by no means assured, especially given American Airlines’ recent
fiasco following a buyout of Reno Air. American’s pilots staged a major sickout two
weeks ago over the integration of Reno’s pilots into the American system, forcing
cancellation of thousands of flights. The pilots’ concern was that American would
shift too many flights to Reno’s short-hop, low-cost routes, which wouldn’t
advance their seniority. “The same concerns that the American pilots would have, the
United pilots would have in spades because America West is that much bigger,” one
rival airline executive said.
America West and United also have very different cost structures, with America
West’s costs among the lowest in the industry and its chief competitive advantage.
America West’s cost per available seat mile was 7.27 cents for 1998, compared with
nearly 9 cents for United. Franke has previously said that America West’s profits
would evaporate if it was acquired by another airline, as costs tend to gravitate to the
highest level in a merger.
In a 1998 interview, he summed up the obstacles to airline mergers this way: “This
is a much more complicated option than combining Bank A with Bank B. You have different
airplanes, maintenance and investor issues. You have different work rules because most of
the airline industry is unionized. You have a different theory on who your market is and
what your customer looks like.”
Not mentioned then, but a big factor in America West’s decision this week not to
proceed on the merger front, is antitrust concerns. Analysts and America West’s
competitors have repeatedly said regulators would take a tough look at an America
West-United combination because the merged company would control about 42 percent of
airline seats in the Western United States. The concern is that a deal would reduce
competition.
United is already No. 1 in terms of passengers in Los Angeles, San Francisco and Denver
while America West is No. 1 in Phoenix and No. 2 in Las Vegas.
“It’s obvious that if there are interconnections between carriers in certain
regions, there are antitrust issues that are going to be raised,” Franke said Monday.
“That is exactly one of the conditions and concerns that the board has had.”
Continental Airlines’ right to match any bid for the controlling stake in America
West held by Texas financier David Bonderman might also have been an obstacle to any
proposed deals, though Franke said Bonderman didn’t play a role in America
West’s decision to end talks. Franke didn’t talk numbers Monday, and United
hasn’t disclosed the size of its offer, but money no doubt also was a factor in
America West’s decision to fly solo.
Franke couldn’t emphasize enough that America West’s duty is to its
shareholders, and his track record is one of getting the most bang for the buck for them.
If United’s price was right, regardless of the conditions, it’s a good bet
America West’s board members would still be studying the offer.
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