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 The Brancatelli File

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ABOUT THIS COLUMN
As the regulatory process for the United-US Airways merger plan dragged on, bright-light "experts" concluded that the outgoing Clinton Administration was just waiting for the relatively quiet Christmas-New Year's period to announce its approval. But I kept hearing differently, as I had from the very first days after the scheme was announced in May, 2000. My sources at the Justice Department kept insisting there was no way the deal would be approved. So when 2001 dawned and no approval was forthcoming, I thought that business travelers were winning the war of nerves. I also thought it was time to draw up a blue-sky sheet of conditions for a merger approval. Little did I know--little did any outsider know--that the cabals running United and US Airways had been running a bluff. They were being bluntly told that the merger was impossible. Rather than give up, however, and try to fix their sinking carriers, they were cooking up another bizarre twist. The terms were being negotiated even as this column posted on January 4. The driving force in what was to come were the Wolfmen at US Airways. The contracts of about a dozen top managers, including Wolf and Gangwal, were written with egregiously lucrative "change of control" clauses. They were intent on selling US Airways, no matter the form or the consequences, so they could cash in and get out. And United allowed itself to play the pawn. -- J.B.

MAKING TERMS FOR A
UNITED-US AIRWAYS MERGER


BY JOE BRANCATELLI

January 4, 2001 -- So here we are, at the metaphorical departure gate of 2001, and, thankfully, there still is no approval for United Airlines to buy US Airways. This is no small victory, my frequent-flying friends.

From the moment last May that United announced its intention to swallow up US Airways, the carriers' management corps have been trying to ram this combination down our collective throat. The airlines' lobbyists, their unpaid media apologists and their bought-and-paid-for Congressional minions have been spreading the gospel that this was a done deal. All the legal, operational and regulatory issues had been addressed, they rumbled.

There was no reason why this shouldn't be completed before the end of 2000, they insisted. Hurry up. Do it now. Don't think. Just approve.

Say what you will about the outgoing Clinton Administration and its Justice Department, but say this: They won't approve this hateful combination of the nation's largest and sixth-largest carriers on their watch. Meanwhile, the relevant regulators of the European Union haven't signed off, either. A largely negative report on the merger issued just before Christmas by the General Accounting Office suggests a myriad of reasons why this combination would be operationally and competitively disastrous.

United's management is reeling from these delays. And isn't that poetic justice. After all the delays to which they've subjected passengers in recent months, it's just delicious to see them cooling their heels for once. And they know they've got a long wait now.

President-elect George W. Bush's most controversial cabinet appointee is Attorney General-designate John Ashcroft. His Congressional approval hearings are sure to be lengthy and contentious. It'll be months before any real work gets done at the Bush Justice Department and an unpopular, anti-competitive merger may not be something a chastened Ashcroft would be quick to approve. Over the holidays, United announced it agreed with the Justice Department's decision to extend its regulatory-review period until April 2. Don't hold your breath, boys.

Over at US Airways, meanwhile, Chairman Steve Wolf and his cadre of hired guns have taken to hinting darkly that US Airways is in deep financial trouble and needs to sell. The "status quo is not an option for US Airways," general counsel Lawrence Nagin wrote last week to The Washington Post. Well, gee, Larry, whose fault is that? You and the other Wolfmen arrived at USAir several years ago with much fanfare--and with very lucrative contracts--promising to turn the airline around. Maybe you should have done something besides change the airline's name and repaint its fleet.

But, you know, I like to think I'm a fair guy, a reasonable businessperson and an enlightened frequent flyer. I'm against the merger, but I'm willing to make terms. You guys want to merge? Allow me to talk for all business travelers and suggest some concessions.

GOODWIN MUST GO   James Goodwin's tenure as United chief executive has been nothing short of disastrous for United passengers, for employees, for investors and for the traveling public at large. He and United president Rono Dutta cannot be allowed to preside over a merged United-US Airways. They've got to go if this merger is allowed.

SCRAP THE UNITED ESOP   United's dreadful financial and operational performance under Goodwin and Dutta would have gotten them fired by any other board of directors on the planet. But United's board is hobbled by a flawed Employee Stock Ownership Plan (ESOP) that makes it a captive to past performance and previous mistakes. If a merger is allowed, the new United Airlines must be run as a traditional business, answerable to an independent board of directors.

WOLF GETS NOTHING   One of the reason this merger smells is that the Wolfmen who came in to "save" USAir in 1996 get a diamond-studded golden parachute if US Airways is sold off. Wolf himself would receive $71 million while his hand-picked chief executive, Rakesh Gangwal, would walk with $49 million. If US Airways is in such perilous shape that it can't survive without this merger, then Wolf and Gangwal shouldn't be rewarded for their inability to do their jobs. Wolf and Gangwal should get nothing if the merger is approved.

ROLL BACK FARES 30 PERCENT   When Goodwin went before Congress last June to pitch the merger, he offered a meaningless pledge not to raise "structural" fares for two years. If this merger is approved, business travelers must receive real fare relief. My suggestion: an across-the-board, 30 percent rollback of domestic walk-up coach fares. And no tricks: the rolled-back fares must continue to be totally unrestricted, free of all surcharges and frozen for two years. By the way, a 30 percent rollback is hardly draconian since it only brings us back to the walk-up fare levels of mid-1999.

SELL THE US AIRWAYS SHUTTLE   A combined United-US Airways would be a fearsome competitor along the East Coast, with hubs in New York/LaGuardia, New York/Kennedy, Philadelphia, Baltimore/Washington, Washington/Dulles and Charlotte. It can't be allowed to control one of the two East Coast shuttle services in the Boston-Washington Corridor, too. The solution: Sell the US Airways Shuttle to the highest bidder or spin it off as a truly independent carrier.

SELL POTOMAC AIR TO THE HIGH BIDDER   US Airways has quietly created a subsidiary called Potomac Air; it now controls the Washington/National-based assets that are supposed to be spun off to BET founder Robert Johnson and transformed into DCAir. Let's forget for the moment that some critics contend DCAir would be a sham carrier. The fact is that other airlines may be willing to buy Potomac Air's assets for more than Johnson is supposedly paying. The solution: Put Potomac Air on the market. High bidder gets it.

AGREE TO PERFORMANCE GUARANTEES   United is currently the worst airline in the country, according to the Transportation Department's monthly statistics covering on-time arrivals, mishandled baggage, flight cancellations and passenger complaints. US Airways is nearly as bad. The combined carrier must be held to some measurable performance standards and the DOT statistics are a good place to start. If the merger is to be permitted, the new management must pledge that the combined carrier will reach the industry average in all four categories for at least two years. Being average isn't asking too much, is it? Any month the combined carrier didn't hit the industry averages, however, it would be required to pay a penalty: a 500-mile bonus for each flight a traveler took that month.

This column originally ran at biztravel.com. This annotation originally appeared at JoeSentMe.com in December, 2002.

Copyright 1993-2004 by Joe Brancatelli. All rights reserved.