What's Next for U.S. Airways?

Ted Reed

05/03/10 - 06:09 AM EDT
TEMPE, Ariz. (TheStreet) -- Although it is a product of four major mergers, U.S. Airways (LCC) has yet to make the one final deal to become part of one of the world's leading carriers.
But that day will come, says CEO Doug Parker. And in the interim, it is important to ignore two prevalent misconceptions. One is that U.S. Airways' labor situation blocks any deal. The other is that U.S. Airways will struggle until it finds a merger partner.
In fact, U.S. Airways appears poised to benefit, as much as any carrier, from the ongoing recovery, and, eventually, to participate in a merger, quite possibly with the backing of its pilots union.
An April 12 meeting between Parker and leaders of the U.S. Airline Pilots Association apparently represented a turning point, because it led to a distinct thaw in a relationship that has been frosty for years. In the meeting, Parker indicated that a merger with United (UAUA) was possible, after months of talks.
Obviously, once Continental(CAL) stepped in, that possibility passed, but the receptiveness of USAPA executives Mike Cleary and Randy Mowrey belied the view that U.S. Airways unions would try to block a deal.
UAL's(UAUA) United Airlines and Continental announced Monday they plan to merge, creating the world's largest airline.
"We were encouraged by their understanding of the potential value of a transaction to our pilots and their apparent willingness to work with the company if a transaction was possible," Parker said, in an interview with TheStreet. "The attitude on both sides and the willingness to work together felt nice.
"I don't believe that any strategic opportunity that makes sense for the company and makes sense for our pilots would result in opposition from out pilots," Parker added.
Parker would not comment directly on whether he suggested that a merger would lead to a contract resembling what Delta(DAL) pilots have, but he said nothing to discourage the concept.
U.S. Airways maintains that because its hubs in Charlotte, Philadelphia and Phoenix serve smaller population centers than do larger hubs in Atlanta, Chicago, Dallas and Newark, it has a 10% revenue disadvantage to its peers.
"The only way to produce the same profitability of those carriers is to have a cost advantage," Parker said. "We do that today largely with the labor cost advantage. It's a rational assumption that if we got to the point where we didn't have a revenue disadvantage, through getting our revenues combined with those who have higher revenues than we do, that would provide an opportunity for employees to see improvements in pay."
Parker noted that the highest-paid pilots work for FedEx(FDX) and UPS(UPS). "They are certainly not more qualified than our pilots," he said. "They arguably have less responsibility -- they're not responsible for hundreds of people in the airplane -- and yet they get paid 30% to 40% than the highest-paid (passenger airline) pilots simply because that business model produces profits in good and bad times." Consolidation represents the best path to passenger airline profitability, he added.
Absent a merger, however, U.S. Airways is adequately situated. Its first-quarter earnings beat estimates, and Barclays Capital analyst Gary Chase wrote that it "is benefiting directly from industry improvement and could also be a material beneficiary if a CAL-UAUA merger develops" because of reduced capacity. "We're running a very good standalone airline," Parker has said. "We don't need to go do something." Obviously, the carrier is not remotely in the position that carriers like TWA once occupied, seeking salvation through merger.
At a media day session with reporters on Wednesday, Parker sought to clarify a remark he made the previous day during an earnings conference call, when he said that even after a United/Continental deal, "We don't believe the door will be closed on future consolidation involving U.S. Airways." Parker explained he was not seeking to imply that a merger is imminent, but rather that the airline industry seems headed inexorably toward having three major network carriers.
After their merger is completed, Continental and United will have about a quarter of the market, as will Delta(DAL), which merged with Northwest in 2008; American(AMR) will have about 18%, and U.S. Airways will have around 8%. "The next transaction that happens won't be between (two of) these three," Parker said. More likely, it would be with U.S. Airways, and it "could be with any of these three."
A deal with the new United would keep U.S. Airways in the Star Alliance. As for Delta, Parker tried to make a deal in 2006, although it remains difficult to see how combining the only two carriers with Southeast hubs could fail to be viewed as anticompetitive. In general, speculation tends to focus on the possibility of a U.S. Airways/American deal, although no evidence exists to support the conclusion that such a combination is likely in the near term.
However, a merger would provide American with a Southeast hub as well as more feed to its trans-Atlantic flights from New York, to its Latin American flights from Miami and to its trans-Pacific flights from Chicago. And now, because of what happened on April 12, it seems likely that U.S. Airways pilots would offer their support.
-- Written by Ted Reed in Charlotte, N.C. .