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Mergers Ahead For US Airlines?


WALL STREET takeover activity has moved to the airline sector - focusing on some of the nation's best-known carriers. Intense speculation about a number of possible mergers or consolidations within the industry was well under way in financial circles throughout the early part of last week, before the midweek crash of United Flight 232.

Occurrences such as the United accident ``do not typically'' have a serious impact on the underlying prospects of a company or the airline industry itself, according to Rose Ann Tortora, an analyst with Drexel Burnham Lambert Inc.

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``That was a tragic and sad event,'' says Ms. Tortora. ``There may be some short-term side effects for UAL Inc., the parent company of United, in the way of passenger demands regarding insurance or other compensation. But the accident should not have a long-term impact on United.''

In the meantime, according to airline specialists, federal investigators will pursue their inquiry into the reasons for the United crash. But the United States airline industry, for all its problems, is considered one of the finest in the world in terms of training and safety.

The current merger momentum within the airline industry began earlier this year, with the bidding war that took place for NWA Inc., the parent company of Northwest Airlines, according to Paul Giovacchini, an associate with John Hancock Capital Growth Management Inc. in Boston. An investor group is seeking to gain government approval to acquire Northwest at a cost of $3.6 billion.

During the past month or so, merger-attention has shifted to several other important US carriers: UAL Inc. (United); AMR Corporation, the parent of American Airlines; USAir Group Inc. (USAir and Piedmont, both of which will be internally merged Aug. 5); and Delta. In addition, a number of regional airlines, including Alaska Airlines and Midway of Chicago, are viewed as takeover candidates.

The stocks of several of the carriers are now considered undervalued relative to their overall assets, according to analysts. As a group, airline stocks have been good performers recently, reflecting sizable travel numbers during the summer holiday period.

Indeed, the Dow Jones transportation average has posted new highs. The transportation average climbed to a high of 1,229.30 early last week, up 18.76 points last Monday.

That climb was largely attributed to takeover speculation regarding United. But other airline stocks also rose, including American and Delta. By the middle of last week the transportation average had reached 1,232.05.

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Many analysts expect UAL Inc. to be the next takeover candidate. United owns most of its planes, rather than leasing them. That is attractive to a takeover candidate, who could sell or lease back to the airline the same planes to help defray acquisition expenses. United also has profitable routes in Asia - a factor that helped spur takeover interest in Northwest.

Regarding Delta and American: Both have been considered among the most profitable and best-managed airlines in the US during the past decade. American has now surpassed United as the nation's largest airline, in market share. Delta is third behind United. Delta has very little debt - which can cut two ways regarding a takeover. The company, according to analysts, could take on added debt to help thwart a hostile bid. At the same time, Delta is potentially attractive precisely because it has little debt. One potential impediment to a Delta takeover is that the company has now put some of its stock in an employee stock ownership plan, while selling some stock overseas to Swissair.

The carriers are not the only companies gaining from the strong seasonal travel patterns and the expected new takeover/bidding efforts. Boeing Company, in Seattle, which makes the lion's share of the aircraft used by the major carriers, continues to set strong sales records. A study prepared for Prudential-Bache Securities in mid-June, concluded in part that Boeing stock ``could soar another 40 percent in the November-February time frame as massive airliner deliveries start and fourth-quarter cash flow and earning surge.''

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