FLYING GIANT

	May 24, 2000
	The biggest airline gets bigger. First, some background.

GWEN IFILL: Today's announcement would combine the world's number one carrier, United, with the nation's sixth-biggest airline. Together, the new United Airlines would fly more than 6,000 routes every day, and take in $25 billion a year. One big reason officials gave for the reason: Geography. United, based in Chicago, is primarily an East-West carrier, its hubs in Washington, Denver, San Francisco, and Los Angeles. U.S. Airways, which operates out of Arlington, Virginia, flies mostly North to South, out of hubs in Charlotte, Philadelphia, and Pittsburgh. At a news conference today United Chairman James Goodwin said the marriage would be a good fit. JAMES GOODWIN: For the passengers and cargo customers of United, this fulfills a geographic gap in our network along the East Coast, and offers a new reach to the East and Southwest. Passengers will be linked to system that will carry them to commercial centers around the globe and will benefit from the convenience of one airline, one check- in, one frequent flyer plan. GWEN IFILL: The executives also pledged not to raise ticket prices for two years. United Airlines, founded in 1926, now flies to 135 destinations worldwide. It employs about 100,000 workers, and is 55% employee- owned. U.S. Airways, whose name would disappear in the deal, actually flies to more airports than United, 206. But many more of its flights cover shorter distances. It has 45,000 employees. The deal will be scrutinized by the Justice Department for antitrust violations. Anticipating those concerns, the new company would shed many of its flights out of Washington's Reagan National Airport. Robert Johnson, the chairman of Black Entertainment Television, would create a new carrier from those routes. GWEN IFILL: Joining me now to discuss what this merger means: Richard Golaszewski, executive vice president of GRA Incorporated, a transportation consulting firm specializing in aviation, and Mike Orwoll, managing editor of Travel and Leisure magazine. Can you give me some sort of idea about what all of this means? RICHARD GOLASZEWSKI, Transportation Consultant: I think it... You know, the first thing you have to understand is this is the beginning of this transaction. It's not the end. There are going to be a lot of people who weigh in. For the passenger in a U.S. Air city, it means a lot more destinations, a lot more flight opportunities. So there is definitely positive aspects for the consumer. I think the deal will be scrutinized heavily by the Justice Department, by the labor unions, and I don't think we've heard the last from the other carriers. GWEN IFILL: Let's take this one by one, Mr. Orwell... I apologize for mangling your name during the introduction. Does this mean less competition among the airlines? MARK ORWELL, Travel and Leisure Magazine: I think quite clearly, when one airline takes over another, it means less competition. Now that's going to shake out in the long term is a question because, when a large airline comes into an area where, say, like where U.S. Airways is so concentrated, it also presents an opportunity for upstart airlines to come into the picture and try and undermine that giant. That could happen. GWEN IFILL: So you're saying that regional airline like D.C. Air, the Robert Johnson airline, could spawn others? MARK ORWOLL: Well, I think... actually, I was a little surprised that the D.C. Air was announced so soon, but I'm not surprised that it was announced. I think something like this is expected. GWEN IFILL: Okay, Mr. Golaszewski, let's go back to you. What exactly does United have to gain from this, and what does U.S. Air have to gain? RICHARD GOLASZEWSKI: I think for U.S. Air shareholders, this is just an absolutely wonderful move. The airline hasn't been doing well financially, and they were bought out at a premium. So I think from that side of it, it's pretty much a win for the U.S. Air shareholders. For United, you know, it's becoming the battle of the large international networks, the big alliances. And United cements its position in the Eastern United States as the predominant carrier in the Northeast part of the United States with the acquisition of U.S. Air. GWEN IFILL: Mr. Orwoll, the readers of your magazine, Travel and Leisure want to know the real bottom line here. We've certified both executives say for at least two years, there wouldn't be ticket price increases. Is that something which will hold for the long run? MARK ORWOLL: I doubt it. They have promised that for two years, there won't be any increases in prices, apart from the increases in fuel, the Consumer Price Index. They've also said that they won't cut travel agent commissions at least for the first two years. After that, all bets are off. And I don't know of any other instance where there has been less competition, as well as lower prices, so I think it is going to ultimately turn out to be bigger prices for the traveler. GWEN IFILL: So you're saying this kind of consolidation just in the long run has got to cost more? MARK ORWOLL: Not only that, but I'm a little concerned about those travelers who live in the smaller areas, like Altoona, Pennsylvania; Utica, New York; Clarksburg, West Virginia who have depended on U.S. Airways and its rural airports much. Whether those airports and those routes are still going to be profitable for United is a real question mark. GWEN IFILL: Well, Mr. Golaszewski, let's address that. Is this going to provide greater options for flying for people, either in small towns or in big towns? Or is it going to limit them? RICHARD GOLASZEWSKI: I think what you'll see is... I don't really see a massive exodus of United or U.S. Airways from those cities that are profitable. And clearly they're making money in Altoona, they're making money in Clarksburg, West Virginia. So as long as there's a market for their service, they're going to be there. Now, the question on prices really depends on the level of competition that results. And again, this is really the first step in this merger. The Justice Department hasn't weighed in. There'll probably be more divest tours of parts of the system that United will be asked to do to get the merger clearance. GWEN IFILL: Will there be divestitures of employees? Is it too good to believe that these two companies are combine and still end up with the same number of employees? RICHARD GOLASZEWSKI: Right now they've said that they're going to keep both work forces intact, so... GWEN IFILL: What do you think about that, Mr. Orwoll? MARK ORWOLL: Well, I would find it very surprising if they did keep both work forces intact, at least beyond an initial honeymoon period. There's going to be with a lot of duplication of manpower, of equipment, that ultimately is going to prove unprofitable for United, if this merger goes through. The only way to please their shareholders would be to get rid of that unprofitability, and that could lead to loss of jobs. That's just a conjecture, but it seems likely. GWEN IFILL: Well, and there's the union problem, which there is history. The last time they tried to combine these two airlines in this way, there was a seniority issue, right? MARK ORWOLL: Well, there still is a seniority issue. In fact, going on right now the pilots association for United is having a job action, where they're not wanting to fly overtime in the same way that they have. The contract negotiations are going on right now. This is a very dicey time in the union relationships with United Airlines, and the unions, don't forget, the employees are major owners of United Airlines, so they have to make sure that the unions are happy. GWEN IFILL: Mr. Golaszewski, also, the Justice Department has to weigh in on this. Do you expect that the Justice Department, which is in the middle of scrutinizing a similar combination of efforts between Continental and Northwest, do you expect that they're going to cast a funny eye on this one? RICHARD GOLASZEWSKI: I think you can take it as pretty well certain that they'll scrutinize this one heavily. If they found competitive problems in Continental-Northwest, I think there are going to be a lot of areas, not particularly with the entire concept of these two carriers coming together, but there are going to be a lot of specific problem areas, not only due to United, but United's in this alliance with Lufthansa, SAS, Singapore Airlines. So if you look at a market like Philadelphia to Frankfurt, Germany, right now the two carriers in this market are U.S. Airways and Lufthansa. Well, Lufthansa's part of the star network, as U.S. Airways will be. And in the past, justice has forced a carve out of certain markets and said those two carriers still have to compete in those markets. GWEN IFILL: Do you agree with that, Mr. Orwoll? MARK ORWOLL: Actually, that's a very long and complex question of the. I'm not sure about that. I do think that, if this merger is approved, that it's going to open the door to a lot more mergers. Don't forget, we haven't seen a whole lot of airline mergers in the past ten years. Back in '87, '88, there were a number, including U.S. Air, which bought out piedmont airways, but Justice has been focusing on anti-trust issues among airlines very, very tough in the last four or five years. American was... they filed suit against American for trying to stymie competition at that Dallas hub. The Northwest-Continental alliance is in a lawsuit right now. Five airlines are trying to come together to form a Web site where they can sell tickets together to their passengers. Justice is looking at that very, very carefully. So Justice has been focused really, really hard on these airlines. Whether this is going to make a break from that past five years is going to be a very telling decision because it could open the door to a lot more mergers. GWEN IFILL: Mr. Golaszewski, a final word. Other airlines between now and the time that this is approved could also step in and throw this deal off track, couldn't they, by making their own bids? RICHARD GOLASZEWSKI: There's no restriction on another carrier making an offer. There's probably some agreement that United and U.S. Airways have reached that there's a penalty if one walks away, but the shareholders of U.S. Airways still have a fiduciary responsibility to take the best deal that's offered. If American Airlines comes in and offers a lot more money, then they have an obligation to their shareholders to weigh that offer and give it full consideration. GWEN IFILL: Well, we'll be watching. Mark Orwoll and Richard Golaszewski, thank you very much. RICHARD GOLASZEWSKI: Thank you.

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