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Will US Airways' fifth trip down the merger runway be successful?

Over the years, US Airways has eyed marriage with United (twice) and American (twice), only to be spurned. But observers believe its latest trip to the altar, with America West, may prove successful

Sunday, June 12, 2005
By Dan Fitzpatrick, Pittsburgh Post-Gazette

United and US Airways planes are seen at Chicago's O'Hare International Airport in 2001. The two discussed merger plans that eventually fell through.
Click photo for larger image.

Year after year, crisis after crisis, each new US Airways boss arrives at the same conclusion: The airline is too small, costly and inefficient to survive on its own and needs a partner.

The latest convert is US Airways Chief Executive Officer Bruce Lakefield, who sought a union with America West Airlines this year because he did not believe the East Coast carrier could survive its second bankruptcy without help from a rival.

The same thinking drove US Airways' management to make unsuccessful runs at linking up with American Airlines (twice) and United Airlines (twice) in the 1990s, and to acquire Piedmont Aviation and Pacific Southwest Airlines in the 1980s -- expensive deals that made matters worse by saddling US Airways with higher costs, greater inefficiency, more debt and an array of culture clashes.

The last two decades show how difficult it is to pull off a merger and how challenging it can be to make the union work. In the case of US Airways and America West, which announced their intention to merge last month, the two airlines need to win a slew of regulatory and bankruptcy court approvals to join operations. Then they must bring about the smooth integration of two disparate employee groups if the new company has any chance of withstanding high oil prices, low fares and widespread industry turmoil.

They face the very same obstacles the killed off US Airways' attempts to merge with other carriers in the 1990s and the same integrational issues that made US Airways less competitive after its mergers of the 1980s.

But many experts believe it will be easier this time around.

Given the problems of the airline industry, with more than $30 billion lost since 2001, Washington, D.C., regulators are probably less likely to shoot down the merger on anti-competitive grounds, as it did with US Airways and United in 2001. If anything, regulators may view this as a much-needed consolidation of an industry that has too many seats chasing too few passengers.

The larger concern is labor.

How will the airlines address the worries of younger America West employees who fear losing jobs to older, more experienced US Airways workers? Can they merge the cultures of the East and West coasts?

"I have a lot of faith we can do it," said America West Chief Executive Officer Doug Parker, in a recent interview with the Post-Gazette.

Parker is approaching the situation with the appropriate amount of optimism. But a quick look at history of other airline executives shows it will not be easy.

Ed Colodny
The only US Airways boss of the last three decades to successfully merge with another carrier was Ed Colodny, who ran the airline from 1975 to 1991, in the years before and after Congress deregulated the airline industry and stripped out government involvement in setting of fares and routes.

Before deregulation, merging was a way for airlines to grow without asking the federal government for more routes and new cities. US Airways -- then Allegheny Airlines -- did that several times, purchasing carriers such as Mohawk Airlines.

Post-deregulation, as competition increased, merging became "a matter of competitive strategy and survival," said Colodny, who described the purchases of Piedmont and Pacific Southwest as "clearly an expansion strategy," giving US Airways toeholds in the Southwest and West and making it a national airline.

It was also a way for US Airways to protect itself against corporate raiders -- especially then-Trans World Airlines boss Carl Icahn, who launched a surprise bid for the airline just weeks after US Airways announced the Piedmont deal. In a defensive maneuver, US Airways abandoned its planned half-stock and half-cash offer for Piedmont and instead paid all cash, which added $800 million in additional debt to the company.

Fearing a strike, Colodny, known as "Uncle Ed" to his employees, did not push for labor costs to come down as a result of the new acquisition. Instead, Colodny raised wages at Piedmont and PSA in an attempt to maintain labor peace.

In hindsight, that made US Airways less competitive, and US Airways emerged from the 1980s in a mess financially -- with high costs, conflicting schedules and an array of different fleet types, making the whole operation less efficient and less profitable.


Seth Schofield
Seth Schofield, who succeeded Colodny in 1991, tried several things to pull US Airways out of its tailspin.

He first turned to an alliance with British Airways -- selling it 24 percent of US Airways for $300 million in 1993. That did not go far, however. British Airways eventually sold its stake.

Next Schofield tried to get labor costs down, but he could not get unions to approve a five-year, $2.5 billion package of concessions.

US Airways' long-term chances as an independent carrier were at risk, he told employees, and in 1995 he decided to seek a partner. Without such help, he predicted, US Airways would eventually be killed off by larger competitors and low-fare upstarts. Schofield approached both American Airlines and United.

United's unions, worried about combining their roster with more senior US Airways workers, campaigned against the deal, and United's board vetoed the idea.

Discussions with American also went nowhere.

When the talks with United ended, Schofield predicted that some sort of future partnership with another airline was still likely.


Stephen Wolf
Some believe Stephen Wolf, who arrived in 1996, was recruited for the sole purpose of selling US Airways.

Early on, he fed that perception by telling union members that the company would probably not survive as an independent carrier.

But Wolf also focused his attention elsewhere, changing the name of the company from USAir to US Airways to give the airline a name he felt embodied more global cachet. He also initiated a huge order for new Airbus jets with a goal of eliminating other plane types to try and simplify the hodge-podge fleet of roughly a dozen plane types.

Meanwhile, the health of the industry improved, and US Airways recorded several straight years of profits. Slowly, though, Wolf came to the conclusion that a merger would be necessary.

There was not one factor that led to this decision, according to a former US Airways executive who was in a high level-position during Wolf's tenure. But company costs were rising, the result of awarding pilots a lucrative contract giving them pay parity with other major carriers, plus 1 percent.

"That is when things started going wrong," the former executive said.

Wolf eventually got down to merger talks with American, which did not go anywhere -- and United.

In 2000, US Airways and United announced their intent to join operations.

Federal antitrust regulators eventually nixed the deal, but months before that, US Airways noticed that United was "starting to cool off a little bit," according to the former US Airways executive, perhaps making it easier for the deal to be turned down in Washington, D.C.

United, he said, had raised some wages to appease the unions and smooth the way for a merger with US Airways. "But United started realizing this deal is not worth it anymore," he said. "Better to walk, even if aggressively pursuing it still would have been a hurdle, but surmountable."


David Siegel
David Siegel took US Airways through its first bankruptcy. After reemerging in 2003, he soon realized that costs had not been cut enough and the carrier faced heightened competition from Southwest and other low-cost carriers on the East Coast.

He began an aggressive search for new partners. He approached United again -- part of an initiative code-named "Project Minnow," with US Airways as the small fish swallowing the bigger one. There were talks with Virgin Atlantic. Siegel also approached America West, with the first face-to-face meeting occurring in the fall of 2003, over dinner at a Four Seasons in Washington, D.C.

Siegel left in April 2004 but not before arriving at the conclusion shared by his predecessors and his successor, Lakefield: US Airways, which declared bankruptcy again last September, would not survive long-term as stand-alone carrier. It needed a partner.