American may have to become predator

Published: Friday, May 26, 2000


American officials remained mum Thursday about the announcement Wednesday that UAL Corp., the parent of United, plans to buy US Airways for $4.3 billion. But some analysts say a likely target is Northwest Airlines, which owns a controlling interest of the voting stock in Continental Airlines.

United is the world's largest airline and US Airways ranks 10th in the world and sixth in the nation. Northwest is fifth in the world and No. 4 in the United States, while Continental is sixth worldwide and fifth in the U.S.

Before American acts, analysts say, it will try to handicap United's chances for gaining antitrust clearance for a US Airways takeover.

''I think the chances are a little better than 50-50 that this (United-US Airways merger) will go through, and if it does, American will have to do something,'' said Ray Neidl, an analyst with ING Barings.

Neidl said American would be unlikely to make a counteroffer for US Airways, given that United is bidding $60 a share.

While some other analysts were not as quick to dismiss a counteroffer, they said United's 130 percent premium was a pre-emptive strike at American, which considered bidding for US Airways five years ago.

American, a part of AMR Corp., also could bid for US Airways routes that the Justice Department might require United to sell.

But the likeliest option, Neidl said, would be American buying another carrier to keep pace with or even leapfrog over United.

''The most logical (target), with the route system it has, is Northwest,'' Neidl said. ''American is being squeezed out of Chicago by United, and Northwest would give them two more hubs in the Midwest,'' in Detroit and Minneapolis.

Northwest's service to Asia, where American is weak, could also complement American's strength serving Latin America and Europe, Neidl said.

Brian Harris, an analyst with Salomon Smith Barney, downgraded American's stock after United's announcement, saying American had the most to lose from the merger and faces growing competition in Chicago and for high-fare business travelers in Dallas.

Harris said the United deal, if unanswered, would cause American to hemorrhage revenue in Chicago, Boston and New York. He said further consolidations American and Northwest; and No. 3 Delta Air Lines and Continental were logical responses to United.

Another theory is that American will feign interest in buying Northwest in hopes of stirring up enough protests to sink United's bid for US Airways.

''They'd throw (a merger with Northwest) at the Justice Department, and the Justice Department wouldn't approve either one,'' said Helane Becker, an analyst with Buckingham Research Group.

Some analysts speculated that Northwest may itself become an acquirer, targeting Continental, in which it already owns a 14 percent interest and 51 percent of the voting rights. However, Northwest is already being sued by the Justice Department over its Continental stake.

But other analysts said it was unlikely that American would bid for Continental because the two overlap in many markets in Texas and the East Coast, making regulatory approval difficult.

Other takeover targets, including Alaska Airlines and America West, would be much less desirable to American because their smaller size wouldn't help the carrier trump United.

United, in acquiring US Airways, would add strong East Coast routes to United's strength on the West Coast and its Chicago hub.

In the short term, American also faces the likely dissolution of its marketing partnership including a shared frequent-flyer program with US Airways, which helped American increase sales in the East.

''That will probably go bye-bye real quick,'' said Tom Parsons, editor of, a discount online travel agency. A US Airways spokesman said the mileage exchange will remain until the airline is acquired by United.