United Airlines, already the world's largest airline, has agreed to acquire US Airways in a spectacular $11.6 billion sale.
The largest airline deal ever was approved Tuesday by the boards of directors of both airlines and will be announced today, said sources familiar with the transaction. It requires Justice Department approval, which experts consider far from certain but which the airlines anticipate could occur by year's end.
American Airlines and Delta Airlines, the second and third largest carriers, could also mount a response, perhaps by seeking acquisitions to keep pace with United, experts say. Such consolidation, creating a handful of giant carriers, could further limit fare competition and raise ticket prices.
United would pay $60 each for US Airways shares, which closed Tuesday at $25.94. Besides $4.3 billion in cash, United would assume $7.3 billion in debt and leases.
For Charlotte/Douglas International Airport, approval of the deal would mean continued growth as US Airways links up with United's sprawling, worldwide system that includes Asia, Europe, South America and the West, the sources said.
US Airways carries more than 90 percent of the passengers at Charlotte/Douglas, its busiest passenger hub. In the past two months it has added flights to Paris and Frankfurt, Germany, to complement its London service.
All three flights would continue, and Charlotte would get new nonstop flights to Austin, Texas; Portland, Ore.; San Antonio, Texas; Aruba and Barbados, as well as additional roundtrips to Denver, San Francisco and Seattle, the sources said.
Charlotte passengers would connect through Miami to United destinations in South America, and through Chicago, San Francisco and Seattle to Asian flights.
No announcement on the airlines' frequent flier programs was made, but precedent indicates US Airways' miles will be folded into United's.
Future expansion planned for the airport will continue, the source said. "We are delighted," said Aviation Director Jerry Orr.
The continued Charlotte buildup is just one piece of a carefully crafted effort to encourage approval by the Justice Department, which will study the deal for anti-trust implications. "It will face very tough scrutiny," said Ray Neidl, aviation analyst for ING Barings Furman Selz.
The deal also includes these concessions to anti-trust concerns:
* Assurances that US Airways' 42,275 employees, including 8,000 in Charlotte, will retain their jobs and that its operations will remain largely intact.
* A freeze on fares for two years, except for fuel costs and consumer price index adjustments. Long-term, however, a deal would eliminate the country's sixth-largest airline, ostensibly reducing fare competition. * A freeze on travel agent commissions for two years, at least slowing the trend to reduced commissions.
* Creation of a new minority-owned airline called DC Air to serve Washington's Reagan National Airport. United would spin off most of US Airways operations at National and sell them to Robert Johnson, a US Airways director and chairman and chief executive of BET Holding Inc.
DC Air would operate a fleet of Dormier turboprop planes, regional jets and 10 Boeing 737-200 jets leased from United and flown by its crews. "This is a very creative, proactive way to ensure competition in Washington," a source said.
United would retain routes to US Airways' hubs in Charlotte, Pittsburgh and Philadelphia, as well as Northeast shuttle flights.
Aviation experts said the deal makes strategic sense because the two airlines serve different markets. "There is very little overlap between the two systems," said Julius Maldutis, aviation analyst for CIBC World Markets.
United is primarily an East-West airline with hubs in Chicago, San Francisco, and Denver, an effort underway to build a hub at Dulles International Airport in Washington and a vast international route system.
US Airways has the industry's biggest market share in the highly populated East, where United's service is limited. Unlike United, it has a major presence in the Southeast from its Charlotte hub. It also has a deal, negotiated by Chairman Stephen Wolf, for up to 400 new Airbus jets at what experts consider to be extremely favorable rates.
The US Airways name would go away in the deal, however, and its three top executives - Wolf, President and CEO Rakesh Gangwal and Corporate Counsel Lawrence Nagin would leave the company.
The deal seems to cap the career of Wolf, a 34-year-veteran of the airline industry who will have overseen the mergers of Republic with Northwest, and Tiger International with Fed Ex. Wolf was chairman and CEO of United from 1987 to 1994, but left after overseeing an employee buyout of the airline.
Wolf joined the airline, then called USAir, in 1996, with the stock at $12.625 a share. Since then, he and Gangwal have signed contracts with every major airline union, started to build an international route system, created the low-fare MetroJet division and placed the Airbus order that will eventually eliminate US Airways' mish-mash fleet.
United attempted a takeover of the airline in 1995, but it was overruled by their pilots, whose contract gave them the ability to determine the method of integration with the USAir pilots.
This time, the board of employee-owned United, which includes pilots, has approved the deal. However, the Justice Department's interest in assuring airline competition remains a formidable obstacle. The department is already suing Continental and Northwest, the fourth and fifth largest airlines, over a deal in which Northwest bought 14 percent of Continental.
Golden, Colo.-based aviation consultant Michael Boyd said the department's decision in the United/US Airways sale should be an easy one.
"Can you say bad deal?" Boyd asked. "Whenever you put two airlines together, you end up with less - less jobs, less competition, and less options for the consumer. When the dust settles, everybody will be worse off except for some top stockholders."
Experts say the remaining big carriers, particularly American and Delta, will have to respond. They could even seek to bid for US Airways.
Said Maldutis: "This is going to result in a fundamental realignment of the U.S. airline industry."
THE DEAL: Air fares frozen for two years, except for fuel and cost-of-living increases. Charlotte hub seems secure because United lacks a presence in the Southeast. US Airways frequent flier miles likely folded into United's program. US Airways shares go for $60 each, and US Airways Chairman Stephen Wolf and President Rakesh Gangwal will leave the airline. All 42,275 US Airways employees, including 8,000 in Charlotte, will be retained.
Caption:
1. Observer file photo: Approval of a deal between United Airlines and US Airways would mean continued growth for the combined airline as US Airways links up with United's worldwide system. 2. Johnson 3. Staff Photo by JEFF SINER: A US Airways attendant helps Roy Cummings and Katriz Taylor of Charlotte Tuesday night at Charlotte/Douglas International Airport. Approval of a deal between United Airlines and US Airways would mean continued growth for the combined airline as US Airways links up with United's worldwide system. 4. Staff Photo by JEFF SINER: A US Airways jet sits on the tarmac at Charlotte/Douglas International Airport on Tuesday night. United Airlines and US Airways are expected to formally announce a merger today. 5. Greenwald 6. Wolf 7. Staff Graphic: "GOING THE DISTANCE" 8. Map: US Airways hub & United Airlines hub"
