Merger talks between United Airlines and US Airways Group could run into strong headwinds from unhappy pilots and tougher antitrust enforcement, industry experts said.
The prospect of a deal to create the world's second biggest airline sent their shares higher, although neither US Airways nor United, a unit of UAL Corp., would confirm the discussions.
Two sources with knowledge of the situation told Reuters on Wednesday night that the negotiations began weeks ago. One of them said the parties are currently focused on general themes and are mindful of the hurdles, including competition concerns, that would have to be cleared to consummate a deal.
"Everybody is aware of the problems," said one source.
Experts generally agree that consolidation would help the airline industry overall.
Airlines are recovering from a painful downturn that forced massive downsizing in the last two years. A merger could accelerate fleet reductions and labor cost savings, helping to improve balance sheets.
UAL shares were up 9 percent to $20.65 in early Thursday afternoon trading on Nasdaq. US Airways shares were up 12.3 percent at $7.66 on the New York Stock Exchange.
But industry analysts also acknowledged that finalizing a deal may be easier said than done.
"Clearly these potential talks are a massive positive for US Airways and United, but I think it speaks volumes to the changing landscape in the airline industry," said Morningstar Equity analyst Basili Alukos.
He said a potential major airline merger, combined with the capacity cuts of 2008 and 2009 hint that the industry "could be en route to earning its cost of capital."
"History is not on the side of the airlines, but maybe the horrible losses encountered recently have scared newcomers enough to reconsider starting an airline," Alukos said.
US Airways and UAL have courted for a decade — interrupted only by their turns in bankruptcy between 2002 and 2005. A proposed merger, when both carriers were much bigger, crumbled in 2001 over competition concerns.
Talks revived in 2008 but fizzled amid recession.
The chief executives at both companies, Doug Parker at US Airways and Glenn Tilton at United, were, and continue to be, vocal proponents of further consolidation in an industry that has long suffered from competitive pressures and overcapacity.
The last merger of two major U.S. airlines was between Delta Air Lines and Northwest Airlines, which concluded in 2008 and analysts consider successful.
Since 2008, rising jet fuel prices have moderated and big airlines are better able to raise fares and generate additional revenue.
"From the standpoint of both carriers and how they view each other, their financial position is substantially better today then it was. Industry fundamentals are substantially better today," said industry consultant Robert Mann.
Alukos and other experts said the biggest challenge would be integrating unionized labor groups.
US Airways, formed in 2005 from a merger with America West Airlines, still has two pilot unions.
Airline labor groups — especially pilots — are notoriously hard to merge because pay and work rules are closely tied to seniority. A pilot could easily lose seniority in a merger and end up flying less desirable routes and planes.
The Air Line Pilots Association (ALPA), which represents pilots at US Airways and United, so far has declined to comment on the merger talks. The US Airline Pilots Association, which represents a second group of pilots at US Airways, did not return calls seeking comment.
ALPA President Capt. John Prater told Reuters in February the union would back a merger between Continental Airlines <CAL.N> and United, which he indicated made more sense than one between United and US Airways.
Bill Swelbar, an airline researcher at MIT, said union troubles could be a fatal impediment.
"It is my opinion that the labor issues will significantly undermine the synergies. I'm just not convinced there is an attraction. There is nothing about this that has me going 'this just seems like a great deal'," Swelbar said.
Prospects of a US Airways-United marriage have for years raised questions about market concentration in the eastern portion of the United States, particularly at Washington D.C. airports.
Any proposal would have to satisfy Justice Department antitrust officials under the Obama administration. They have already recommended steep concessions from carriers seeking waivers from antitrust law to strengthen their alliances.
The Delta-Northwest merger was approved by the Bush administration, which was considered more business friendly.
"Now you've got a more aggressive enforcement regime. It seems to me the antitrust hurdles are no lower than they were in 2001 and maybe higher," said John Briggs, an antitrust expert with Axinn Veltrop Harkrider LLP.
US Airways is trying to beef up its already strong presence at Washington Reagan airport and held 11 percent of the regional Washington market overall in 2009. United is big at Dulles airport in Virginia and commanded 22 percent of Washington air travel last year, according to Transportation Department data.
US Airways biggest hub is Charlotte, North Carolina, followed by Phoenix and Philadelphia. United spreads out the rest of its operations at Chicago, Denver, San Francisco and Los Angeles.
"There are still some significant overlaps between United and US Airways, and I think the government would take a close look at that. I'm not necessarily saying to block it, but to decide what may need to be taken away in certain markets," said Edward Faberman, an aviation attorney with Wiley Rein LLP.
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