Debating future of US Airways

Now that United and Continental Airlines hope to tie the knot in a stock deal worth $3.2 billion, what lies ahead for US Airways?

Another attempt at consolidation, possibly with American Airlines?

An alliance with another carrier to sell seats on each other's planes to attract more passengers, especially business fliers?

The new United-Continental, with expected annual revenues of $29 billion, based in Chicago and serving 144 million passengers a year, will put pressure on American and US Airways - the last two remaining "legacy" network carriers - to seek alliances or a merger.

But many analysts do not see a logical, or easy fit, for US Airways, and expect Philadelphia's dominant airline, which shuttles two-thirds of passengers here, to remain a stand-alone carrier in the near term.

Clearly, the fate of US Airways has great relevance to this region's air travelers.

"I don't think there's going to be a rush to a deal," said transportation analyst Helane Becker with Jesup & Lamont. "There's no reason. Pragmatically, if US Airways rushes to a deal, they could get the wrong deal done. I don't think you'll see anything happen in the short term."

US Airways, after ending merger talks with United last month, said it was well-positioned to stand alone. US Airways CEO Doug Parker said, however, that the industry needed more consolidation.

Aviation consultant Vaughn Cordle said Monday that the industry can support only three large network airlines, and suggested that without more consolidation "at least one and perhaps two" large network airlines would fail, along with several low-cost carriers. American is vulnerable to bankruptcy, and US Airways to liquidation, without significant changes and "new strategic direction" in the industry.

The problem: Too many airlines to allow profitability, Cordle said. By 2014, the industry will be grappling with higher fuel prices and labor and airport passenger facility charges, and additional security costs.

The new United-Continental, which will bear the United brand but the Continental logo on planes, will have 17.7 percent of total U.S. airline seats and flights, followed by Delta with 16.1 percent. Low-fare carrier Southwest Airlines Co. would be third, at 14.6 percent; and American fourth, with 13.9 percent. US Airways would be a distant fifth with 7.9 percent.

An American-US Airways merger would be "the best option" and could eliminate 10 percent to 15 percent of "redundant and overlapping" domestic capacity, Cordle said.

Others disagree, saying US Airways and American are not an ideal fit.

Both carriers have difficult labor-relations problems. US Airways' pilots and flight attendants still don't have a single labor agreement since the 2005 merger with America West. American has "open" contracts with all its unions and "the tension has racheted up there," said Fitch Ratings bond analyst William Warlick.

American Airlines' labor cost structure is materially higher than US Airways' is, and a merger would put pressure "to converge labor rates at a higher level" and wipe out cost benefits of a merger, Warlick said.

US Airways' and American's hubs and routes would be scrutinized by the Department of Justice. In cities where American is focused - New York, Miami, Chicago, Dallas, Los Angeles and San Francisco - "US Airways wouldn't especially help American in those markets," said Hudson Securities airline analyst Dan McKenzie.

From American's perspective, US Airways' route system has fewer strengths and less overseas presence than either United or Continental, said Standard & Poor's credit analyst Philip Baggaley.

US Airways' hubs in Philadelphia and Phoenix have strong competition from low-fare carrier Southwest Airlines, "which tends to make it more difficult to raise fares," Baggaley said.

"In the near, and even the intermediate term, US Airways still has low costs. Its operating performance is improving," Baggaley said.

Longer term, US Airways' "strategic role in the overall U.S. airline industry is becoming unclear" because the other major "legacy" carriers are "a good deal larger."

US Airways will be "better off" as a result of a United-Continental merger because there will be more "rationalization" of capacity and, thus pricing, across the industry, McKenzie said. "While I say that US Airways-American would be a poor merger combination, on the other hand that would not preclude them from building an alliance relationship which could be very beneficial to US Airways."

"The fate of US Airways is not so much levered to the United-Continental merger, as it is to what Southwest Airlines is doing in its markets," McKenzie said. "To the extent that Southwest is shrinking where it competes head to head with US Airways, US Airways has a much better fundamental outlook. The competitive dynamic with Southwest is a much bigger factor for the earnings health of US Airways than simply the merger of United and Continental."

Monday's deal to combine United Airlines and Continental Airlines would create the world's largest air carrier.

Combined airline name: United Airlines

Parent company name: United Continental Holdings Inc.

Slogan: Let's Fly Together

Deal price: $3.2 billion in stock

CEO: Jeffrey Smisek (current Continental CEO)

Chairman: Glenn Tilton (current United CEO)

Full-time employees: 86,000

Revenue: $29 billion

Headquarters: Chicago

Current combined flights per day: 6,100

Hubs: 10

Destinations: 370

Yearly passengers: 144 million

Expected deal closing: 4th quarter

SOURCES: United, ContinentalEndText