- The Washington Times - Monday, May 29, 2000

Washington is losing yet another of its biggest companies to the rising tide of mega-mergers and acquisitions.

The surprise purchase of Arlington-based US Airways by the parent of United Airlines last week still must be approved by the Justice Department and shareholders of both companies.

And the deal's architects must counter criticism that the consolidation may well result in higher air fares and diminished service.

But even as the familiar US Airways signs start to vanish from the landscape, airline industry experts say UAL Corp.'s $11.6 billion acquisition will benefit local consumers and businesses.

Supporters say the deal could help consumers by clearing up problems that have plagued US Airways in the past. US Airways has been saddled with protracted labor disputes with a number of its unions, creating a drain on earnings.

The airline in March settled with its 9,000 flight attendants and in October agreed on a new contract with its 7,000 machinists, but not before both unions threatened to strike. The strike threats sent travelers to other carriers and dragged the company's stock down.

Stephen Fuller, an economist with George Mason University, said that with United taking US Airways under its wing, the labor problems will vanish and consumers will feel confident that planes will arrive on time.

"And for people normally flying United, it's going to be great. It's hard to fly United to Orlando but it won't be after this," Mr. Fuller said.

Leo Schefer, president of the nonprofit Washington Airports Task Force, said, "Whenever you get a major change, sure, there is going to be some disturbance."

"But I don't think there … [will be] any negatives to the local economy, because look at the rate things are growing."

United officials said that at least for the next two years US Airways customers and employees will experience no changes. No difference in flights and no jobs lost to the region, for now.

"People could find themselves moving across the street … but whatever streamlining may occur, the people who fall out of that will find themselves re-employed by the growth."

Many wonder if recent mega-mergers involving local powerhouses AOL-Time Warner, Exxon-Mobil, MCI-WorldCom mean the region will ever breakaway from its apparent role as a branch-office town.

But local economists said these deals, including the US Airways purchase, are merely one more symptom of the booming local economy. The region's fast growth rate, and the close location to three large airports has attracted thousands of start-up technology companies to the area, and the area's population is increasing for the first time in a decade.

"People are looking to merge and buy Washington companies because they want to be here, not because they want to leave," said Mr. Fuller, adding that the deal would have been bad only if it resulted in shutting down the local carrier.

No. 1 United's buyout of No. 6 US Airways would create the first truly nationwide airline carrying nearly 400,000 travelers on 4,400 flights daily. United has agreed to freeze fares for two years on routes in the US Airways network and continue to serve all the cities the local carrier now serves. It has also said it will keep all 45,000 US Airways workers employed.

"So everyone is guaranteed a job," US Airways spokesman Richard Weintraub said.

Many consumers and industry experts also are curious about the regional impact of United's decision to spin off most of US Airways' routes departing from Ronald Reagan Washington National Airport into a new company. Robert L. Johnson, founder of Black Entertainment Television and a member of the US Airways board, will run the new D.C.-based airline to be called DC Air.

The spinoff is likely to draw close antitrust scrutiny from the Justice Department, just as was the case two years ago when Northwest Airlines Corp. bought a large chunk of Continental Airlines Inc.

Consumers

Some air travel watchdog groups fear that the US Airways acquisition will prompt further consolidation in an industry that already has a handful of dominant players. The thinking is that with United growing even larger than it already is, other airlines may combine simply to keep pace. That would mean even fewer big airlines and fewer executives determining what travelers pay for tickets.

"If approved … the big six will quickly become the big three and airline passengers will be the major losers," said Paul Hudson, executive president of Aviation Consumer Action Project, which is part of consumer watchdog Public Citizen.

Additional mergers would create three airlines with control over 80 or 90 percent of all airplane seats, he said. And "no airline should control more than 20 or 30 percent of the … seats," Mr. Hudson added.

United's network goes mostly East and West, although the carrier also has operations in the Pacific and Latin America. US Airways flies mostly North and South along the East Coast, and in Europe. By adding US Airways to its operations, United spreads its wings across the country.

"There is always the chance of decreased competition," Mr. Fuller acknowledged. "But American, Delta, Northwest and Continental and other carriers can offer alternatives to United. So I think there is still enough competition to keep fares low."

DC Air

If the Justice Department signs off on the United-US Airways deal, another plus for consumers will be DC Air.

The new local airline would serve 44 cities with 122 daily departures from Reagan Airport. DC Air would take control of two-thirds of US Airways' existing routes. United would keep only the carrier's shuttle flights to New York, Boston, Charlotte, Philadelphia, and Pittsburgh.

To make the airline work, Mr. Johnson plans to buy departure and landing slots, equipment and other assets from the airline. He will lease planes, pilots, flight attendants and crew members from United, giving DC Air about 1,000 employees.

"In terms of impact on D.C., the focus is a lot on the development of DC Air as a new entity," said Mr. Weintraub of US Airways. "They will choose where they will fly. They will develop their own end."

The new airline means potential jobs to the area, particularly to the District, and Richard Monteilh, executive vice president of the D.C. Chamber of Commerce, likes that.

"Bob is a pioneer," he said about the "very-much D.C.-oriented" Mr. Johnson. "This is a gain for the city."

Mr. Fuller, however, was more skeptical about the new airline. "There is enough history to show that these new airlines usually don't survive," he said. "Airlines are not easily profitable … there are very high operating costs … and my guess is that [United] will choose to keep the more profitable routes, it would be silly not to."

He added: "So it leaves a selection of routes that may not be very attractive, and hard to make a profit."

Arlington County

Although the dust has not settled, executives at the Arlington Department of Economic Development are not worried about loosing jobs or tax revenue.

"There is a lot of approvals that need to happen before this deal" is complete, said Adam Wasserman, director of the department. "We are working hard … to keep as much corporate presence here as possible. We have always had a good relationship with US Airways, so we would hope that it reflects well on what happens to this community."

About 2,800 US Airways employees work at Reagan Airport. Although the headquarters will now be in Chicago, where United is based, all the local workers will remain at their current location, said Tara Hamilton, spokeswoman for the Washington Metropolitan Airports Authority, which manages Reagan Airport and Washington Dulles International.

Reagan Airport was built by the federal government and opened in mid-1941. At 830 acres, it is one-tenth the size of Dulles. Reagan Airport has many restrictions as to the number of takeoffs and landings, and because it is in the middle of a residential area, it has time restrictions as well.

Reagan Airport has been operating at full throttle for over 10 years now, averaging at about 15.5 million passengers a year.

"It's going to remain a very strong airport," said Mr. Schefer. "It's always been cast as a domestic airport, and it's the quickest trip to downtown Washington."

As a local company, US Airways has been one of the biggest employers in Arlington County. That raises concerns about the prospect of loosing some of those jobs, but by trying to draw a parallel of what has happened with other large Northern Virginia companies that have merged with out-of-town corporations, Mr. Wasserman says there is nothing to worry about.

Other big mergers

In September 1998 WorldCom Inc. bought locally based MCI, and similar concerns rose. But since the deal took place, the now Jackson, Miss.-based company has actually created 30,000 jobs in Loundon County, estimated Mr. Fuller, the economist.

Likewise, Fairfax-based Mobil was swallowed up by industry giant Exxon in November, and only good things came out of it.

"It's very interesting, because what we have noticed is that it all worked out for the best," said Alan Fogg, spokesman for the Fairfax Economic Development Authority.

With the Exxon-Mobil deal, "we all thought it would be bad to loose the company's headquarters, but in the long run, after the deal was done, they announced that they would move 1,200 people here," said Mr. Fogg. "So we not only lost, but gained people."

The prestige of having headquarters in the area is nice, he added, "but economic development is about jobs, and in the long run that's what really counts."

In January, after America Online bought media giant Time Warner, Fairfax County also gained jobs, said Mr. Fogg. AOL's headquarters remains in Sterling, but the operational axis has shifted to New York, where Time Warner is based.

Yet "they are building two new buildings out here right now," said Mr. Fogg. "The prospect of losing them is not a serious concern. We may not have the headquarters … but we are going to keep our jobs and add to them."

Another big deal is coming up, too: The long expected MCI WorldCom merger with Sprint Corp., which regulatory bodies are in the process of approving. The proposed $129 billion merger will affect thousands of workers in Northern Virginia.

At Dulles and BWI

As the United-US Airways deal unfolds, "it begins to emerge that we can expect this to significantly expand Dulles as an international gateway, and that is very positive for the economy," said Mr. Schefer of the Washington Airports Task Force. "New businesses locate where they have access to the world market, close to major international airports, and that's what you have in Dulles."

Mr. Fuller agreed. "When you think of where the major connections are, you think of Atlanta, Chicago, Los Angeles. Washington hasn't really been a major player partly because of those three airports," he said.

But 38-year-old Dulles been developing very quickly. Last year it was the fastest growing airport in the world, with a 25 percent growth from 1998. This has brought significant hubbing to the area, and United alone "has made a major commitment to this area by increasing its operations in Dulles," Mr. Fuller said.

In 1990, a little over 2.6 million passengers went through Dulles. Last year, that number had skyrocketed to almost 20 million.

"One of the weaknesses of United is that it doesn't have strong connections to the Southeast their network goes East to West," said Mr. Fuller. So buying US Airways "increases air access to the Washington area, and that's good for business."

From Dulles, United has 102 daily flights, and another 200 through its regional carrier, Atlantic Coast. US Airways has 122 daily flights from Dulles.

At Maryland's Baltimore-Washington International Airport, United has 14 daily flights, most of which go to the West and Midwest. US Airways, on the other hand, has about an average of 80 flights a day, including the operations of MetroJet, which the carrier started two years ago to compete with Southwest Airlines, a low-cost airline that is now BWI's dominant airline.

Last week, United announced it would do away with MetroJet, eliminating nonstop services to several Florida destinations, Cleveland, New Orleans, Providence, R.I., and Manchester, N.H.

It also said it's adding a new route from BWI to Seattle, and a flight each to Chicago, San Francisco and Los Angeles.

But "they can't do anything until this thing is finalized," said John White, spokesman for BWI.

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