A United Airlines and US Airways Merger Could Get Stuck at the Gate

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US Airways and United Airlines are considering tying the knot. But will pilot contracts create turbulence? Will one less airline soon be flying the not-so-friendly skies? United Airlines's parent company, UAL Corporation (UAUA), is in merger talks with US Airways (LCC), according to a story by The New York Times's DealBook on Wednesday afternoon. If consumated, the tie-up would create an airline behemoth and signal further consolidation in the industry.

The two airlines are "deep" in discussions, but a deal isn't expected for at least several weeks and could still fall through, The Times reports. Cost savings are driving the talks, as the airline industry continues to grapple with flagging revenues, according to the story.

Investors Flying High

Investors apparently approve of the idea. US Airways shares rocketed up 27% in after-hours trading, and UAL shares jumped 6% on news of the deal talks.

But, as The Times points out, this isn't the first time the two airlines have tried to merge. In 2000, they announced a $4.3 billion deal that was then withdrawn amid union opposition, and another set of negotiations ended fruitlessly in 2008.

Robert Mann, an independent airline analyst at R.W. Mann & Co, is skeptical that the deal will go through. For one thing, peculiar and esoteric aspects of the US Airways pilot's union contracts, which have scuttled similar talks in the past, remain in place.

"Look, people talk all the time and consolidation happens," Mann tells DailyFinance. "The usual problem with these two are provisions in the pilot's contracts at US Airways that would be untenable to an acquirer."

Will Pilot Salaries Scuttle the Deal?

What is now US Airways is actually the result of a 2005 merger between America West and the old US Airways, which had gone bankrupt twice. As a result, US Airways currently has two separate sets of pilot's contracts, Mann says, one for the former America West pilots, most of whom are based out of Phoenix, and one for the old US Airways pilots, most of whom are based on the East Coast.

"There are two separate contracts and two separate wage rates," Mann says. "In this case, a merger would trigger provisions that would mean United would have to have all of its pilots fly at the 2003 US Airways rates that put that airline into bankruptcy twice."

The issue, he says, is insurmountable under the current leadership. "It's the poison pill."
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