The prospects for UAL Corp.’s purchase of US Airways fell further in doubt yesterday after a government report warned the merger could harm the airline industry.
The deal would reduce or eliminate competition on 290 airline routes and would force other airlines to consolidate, reducing competition even more, said the report by the General Accounting Office, Congress’ investigative arm.
The purchase would make the parent company of United Airlines, the world’s biggest airline, even larger, with a fleet of about 1,000 airplanes and control of one-fourth of the U.S. airline industry.
Members of Congress who oppose the merger called on the Justice Department to block it.
Justice officials said they are reviewing the deal but would not comment further. A decision is expected next month.
State attorneys general also have said they will challenge the merger.
If the deal fails, the chances dim as well for the District-based airline being created from the merger, DC Air, which would inherit most of the US Airways routes operating out of Ronald Reagan Washington National Airport.
United and US Airways are considering forming DC Air to overcome concerns by federal regulators that the merger would give United too much control over routes at Reagan National and Washington Dulles International Airport, where the airline operates a hub.
Maryland transportation officials, who oppose the merger, presented their concerns to the Justice Department last month.
They said United would eliminate much of the US Airways service at Baltimore-Washington International Airport, leaving many routes to a single airline. They estimate BWI would lose $7 million in annual revenue and said diminished competition would force fares up throughout the region.
Despite critics, the airlines continue with their plans for a merger and creation of DC Air. “I certainly have heard no indication to the contrary,” said Rick Weintraub, US Airways spokesman.
Robert Johnson, Black Entertainment Television’s chief executive officer, would be a primary shareholder and head of DC Air. After a regular meeting with Justice Department officials yesterday, Mr. Johnson said the GAO report would not be the main issue in any Justice Department decisions.
He said he also spoke with United and US Airways officials. “We’re in agreement that the GAO report is meaningless in terms of what we have presented to the Justice Department.”
United spokesman Andy Plews said, “We believe the merger will inject new competition into the marketplace. We see a lot of consumer benefits.”
The GAO acknowledged that benefits could result from the merger. “First, by combining the two airlines’ operations in markets where each airline previously had a relatively limited presence, the merger would create an additional effective competitor in those markets,” the GAO said. Other benefits would be expanded destinations for frequent-flier programs and a reduced need to switch airlines to make connections at airports to final destinations.
Some members of Congress said the problems outweighed the benefits.
At a Capitol Hill news conference yesterday, Rep. James L. Oberstar, Minnesota Democrat, and Rep. Louise M. Slaughter, New York Democrat, who requested the GAO study, said a United-US Airways merger would be anti-competitive.
“Fewer choices, higher fares and a deterioration in service is not what Congress contemplated in 1978 when it deregulated the airline industry,” said Mr. Oberstar.
Said Mrs. Slaughter: “All our work the past few years to stimulate competition within the industry would be obliterated.”
US Airways accused the members of Congress of distorting the facts.
“Congressman Oberstar has stretched the GAO report to serve his own agenda,” a US Airways statement said. “He has used it to make a statement that has no basis in that report or in reality.”
United, after the merger, would control 25 percent of the U.S. airline industry and earn $9 billion a year more than its nearest competitor, the GAO said. By removing US Airways as a competitor and possibly overwhelming the service of competitors on some routes, “The United-US Airways merger could reduce or eliminate competition in 290 of the top 5,000 markets in the United States,” the GAO said.
Unless the purchase is completed, DC Air’s chances of success would be minimal, DC Air officials acknowledged. The original plan called for DC Air to operate by leasing airplanes, equipment and personnel that had been owned by US Airways.
If the Justice Department blocks the deal, US Airways would retain control of its own property and personnel and continue to operate the routes DC Air would have assumed.
Even if the merger survives the Justice Department’s review, DC Air “would face significant competitive challenges from other airlines that already provide service in the Washington, D.C., area,” the GAO said.
DC Air’s business plan includes offering fares 17 percent below competitors. Instead of operating the 128-seat Boeing 737 airplanes used by US Airways, DC Air would use 50-seat regional jets. DC Air officials say they can offer lower fares because regional carriers typically have costs that run 20 percent less than major airlines, particularly in terms of labor.
Shares of UAL Corp. rose 88 cents to $36.25 on the New York Stock Exchange yesterday, while US Airways stock fell $8.75 to $38.94.