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Senate hearing has implications for possible United Airlines, U.S. Airways deal

by Jason M. Breslow
May 06, 2008


Officials from UAL Corp., parent of United Airlines, and U.S. Airways Group Inc. will be watching closely Wednesday as a Senate subcommittee holds hearings on the potential impact of a merger between Delta Air Lines Inc. and Northwest Airlines Corp.

The extent to which executives of Delta and Northwest can convince Congress of the urgent need for consolidation in the industry could determine just how much support lawmakers give their merger and others in the works.

United, the nation’s second largest carrier by traffic, and U.S. Airways, No. 7, have been in merger talks for several weeks, and according to a report published Monday in the Wall Street Journal, could announce an agreement as early as next week.

Airlines face a particular skeptic of airline consolidation in John D. Rockefeller IV (D-W.Va.), chairman of the subcommittee on Aviation Operations, Safety and Security.

Rockefeller has called the proposed merger between Delta and Northwest a “watershed moment for the aviation industry,” one with significant implications for access and affordability. “Any final agreement,” he has said, “must meet the needs of the American people.”

Among the senator’s biggest concerns is the impact the airline merger may have on rural communities, especially given service cutbacks many small airports have seen over the past five years.

Rockefeller’s stance could pose a significant hurdle for any deal between United and U.S. Airways, as the two carriers have a market overlap of approximately 12 percent, according to Rick Seaney, chief executive officer of Farecompare.com, a consumer airline ticket research site.

Delta and Northwest have an overlap of less than 1 percent, said Seaney. Travelers in smaller, more rural areas would catch the brunt of any capacity cutbacks that would result from a merger, Seaney said.

Cutbacks would be all but a foregone conclusion if United and US Airways were to combine forces. Seaney said it is not uncommon for airlines to trim between 8 percent and 15 percent of routes when they merge. When US Airways and American West Holding Corp. merged in 2005, he noted, the combined airline sliced approximately 11 percent of all routes.  

Such capacity cuts are all but certain to lead to higher fares across the board, “and Congress won’t like that,” said Aaron Gellman, a professor of transportation economics and policy at Northwestern University. “I think there are probably some worthy mergers out there,” Gellman added, “but I don’t think [the United/U.S.Airways merger] is one of them.”

And since United and U.S. Airways each have hubs at two of the Washington area’s three major airports, Congress is also likely to take issue with the number of routes a merger would eliminate from the nation’s capital.

“I wouldn’t want to be the two airlines with the most service in Washington, D.C. going to Washington D.C. for my antitrust approval,” Seaney said.

Nevertheless, given the pressure that the rising cost of oil -- which traded as high as $122 a barrel Tuesday -- airlines are all but certain to continue exploring the benefits of consolidation.

United lost $537 million in the first quarter due in large part to fuel costs of $1.57 billion, which surged 51 percent from the year-ago period.  U.S. Airways lost $236 million in the first quarter, with its aircraft fuel and related expenses rising to $823 million, up 50 percent from a year ago.