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UAL puts the driver, the flyer, and the lodger under one roof

Fly-drive-sleep. UAL Inc.'s acquisition of Hertz Corporation, the car-rental firm, seems so logical. After all, UAL (parent company of United Airlines) already owns the swiftly expanding Westin hotel chain. Only last week United settled a 29-day pilots' strike.

``We think the Hertz purchase fits with our long-range strategy,'' says UAL spokesman Charles Novak.

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Conversely, Hertz's current owner, RCA Corporation, is selling the company because it no longer fits RCA's strategy. ``Our major emphasis is on electronics, communications, and entertainment,'' says spokesman Howard Enders. Revenues from the $587.7 million sale, announced Monday, ``will be reinvested in our core businesses -- or will finance acquisitions in those areas.''

It's as if everyone involved is remembering the ``Stick to the Knitting'' chapter of ``In Search of Excellence.''

But the deal, still subject to government and regulatory filings and the execution of a definite agreement, has opened to mixed reviews on Wall Street.

``In some respects it's hard to see the advantage,'' says John V. Pincavage, airline industry analyst with PaineWebber Inc. ``The same forces that drive the airlines also drive hotel occupancy rates and the car rental market. If the businessman isn't going to fly, he's not going to rent the car or book the hotel room. This move will add to earnings volatility, not reduce it.''

One big question is how tax reform could change the depreciation schedule that is so important in the rental-car industry. ``Historically car rentals have not been a high-return business,'' says Mr. Pincavage, although they generate a lot of cash.

UAL last month announced its intention to relinquish equity positions in the hotels it owns, wholly or in part, and set up ownership trusts to own the ``bricks and mortar.'' The move is expected to free up $2 billion in cash.

``Real estate, including hotels, is an appreciating asset, and rental cars a depreciating asset,'' says Pincavage. UAL would seem to be opting for cash flow over long-term appreciation.

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Another concern about the Hertz deal is how it affects United's ability to modernize its fleet sufficiently to fend off American Airlines, which United's Mr. Novak cheerfully admits is United's No. 1 competitor. (United and American are, respectively, No. 1 and No. 2 in revenue passenger miles among US carriers.)

``American is two years ahead of United,'' says Pincavage. In 1983, American was able to negotiate a two-tier wage structure to help it compete against new, low-wage carriers such as People Express. American has also moved ahead in modernizing its fleet, purchasing McDonnell Douglas DC-9 Super 80s, which are fuel-efficient and require only a two-member cockpit crew.

To speak of United's lag is ``not to say United can't catch up. . . . There's no way United is not going to be a major factor'' in the airline industry.

``We said we would order new aircraft as soon as we won a two-tier wage system,'' says United's Novak. And with last week's strike settlement, it now has one -- although management didn't get everything it wanted.

Novak also points out that United has been acquiring new aircraft all along -- 25 Boeing 737s from Frontier Airlines, for example, and is to pick up 18 wide-bodies from Pan Am, as part of its acquisition of Pan Am's Pacific operations. United also has a firm order for 20 new aircraft from Boeing; it must decide in October whether these will be 767s or some smaller Boeing craft.

Mr. Novak notes that United has $1.1 billion in cash on hand, plus $750 million in credit lines, with which to finance its shopping trips -- and this is not counting the $2 billion expected from sale of the hotels or the $962 million in excess pension funds UAL plans to recapture.

Indeed, Robert Joedicke, airline analyst at Shearson Lehman Brothers, notes that ``United has an excellent cash flow and may have enough money'' to go ahead with both the Hertz deal and fleet modernization. He also says, though, ``I don't get real excited about synergism and all that stuff.'' And he wonders whether ``Hertz's relationships with other airlines will suffer.''

Novak says that, irrespective of discussions about ``synergism,'' Hertz will continue to be run as it has been, with separate reservation systems. And United's reservation agents will continue to book Avis and other rental cars, just as they continue to book passengers into Sheratons, as well as Westin hotels.

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