A Whale of a Deal in the Air

With a fleet of 55 modern planes, modest debt and a depressed stock price, Miami-based National Airlines, the U.S.'s eleventh largest carrier, has long been ripe for takeover. Even so, the industry was startled in July when it became known that Houston's scrappy little Texas International Airlines had quietly bought more than 9% of National's stock; later it won Civil Aeronautics Board permission to pick up as much as 25%. As one Wall Street analyst put it, Texas International was a "sardine chasing a shark." Last week the swivel chairs in airline board rooms were spinning again as a whale declared its interest in National. Pan American World Airways, the fifth biggest U.S. airline, said it wanted to buy all of National's shares and was ready to spend $300 million to do so.

There has not been a comparable airline merger since 1961, when United acquired Capitol. If Pan Am's bid for National succeeds, it will become the second largest U.S. line in terms of revenue (about $2.5 billion a year), trailing only United ($3 billion). Pan Am would get the domestic routes it has long sought, ones that neatly dovetail with its international runs. National's routes, mainly in the East and along the country's southern rim, would feed Pan Am's foreign hops from New York, San Francisco and Miami. In turn, National could draw on Pan Am's big fleet of 747s for its growing transatlantic business, which now includes service between Miami, Tampa, New Orleans and four European cities. Indeed, a prime reason why Pan Am is interested in National is that it wanted to react to the competition posed by the U.S. newcomers to the transatlantic trade, including Braniff and Delta as well as National.

National Chairman Lewis B. ("Bud") Maytag would say only that Pan Am's offer would be carefully studied. But he has fought Texas International's bid from the start. National executives dislike the idea of being swallowed by a relatively small regional airline, and in fact they had been talking merger with Pan Am since January. Pan Am is stronger than it has been in years. Not long ago, there were fears that it might go bankrupt because of the pressures of rising fuel prices and unprofitable overseas routes, especially after the company lost $107 million in 1974. But under Chairman William Seawell, who curbed costs and restored staff morale, Pan Am's fortunes have improved sharply. Profits reached $45 million last year on revenues of nearly $2 billion, and are piling up at a faster pace so far in 1978. As one sign of its recovery, the company announced last week that it would call in a third of a $75 million bond issue it floated two years ago; this will make it easier to finance a purchase of National, partly because it will trim Pan Am's existing interest obligations.

The CAB and the White House must both approve any merger. Pan Am will argue that with National under its wing, it will be able to compete more effectively against foreign flag carriers. Most of them are government owned or heavily subsidized; in their own countries they have the access to domestic routes that Pan Am has long sought but never been able to grasp in the U.S.

Whether the CAB will approve the deal is unclear. The board's new theology is deregulation, giving carriers more freedom to set fares and fly where they please. But Chairman Alfred Kahn, a free-market advocate, is worried about one of its side effects: pressure on smaller carriers to seek mergers with bigger ones. Besides the Pan Am-National deal, at least two other mergers are in the talking stages, Continental with Western and North Central with Southern. In interviews with TIME Correspondent Jerry Hannifin, Kahn said he would take a dim view of mergers that seem to amount to a search for "a security blanket." Potential merger partners, he added, would bear a "heavy burden" of proof that their union would not reduce competition.

Seawell and most industry analysts believe a Pan Am-National merger would not be anticompetitive because it would be an "end-to-end" deal, enhancing Pan Am domestically and National overseas but not significantly reducing overall competition between the merged company and any other airline. Says Seawell: "I think we have a good chance of discharging our burden of proof. Our proposal clearly is not anticompetitive."

Texas International, which is run by a group of savvy young business school graduates headed by President Francisco Lorenzo, 38, may or may not choose to fight a Pan Am-National deal. It paid about $18 a share for most of its National stock and stands to clear more than $13 million if Pan Am's $35-per-share bid is accepted. Lorenzo and Texas International, says Seawell, stand to become "extravagantly wealthy."

What could upset a merger is potential incompatibility between Seawell, 60, a tough former Air Force general, and combative Bud Maytag, 52, a grandson of the Maytag appliance company's founder. The two strong leaders might have trouble working together. But that may not turn into a problem, for Maytag seems ready to get out of the airline business and return to Colorado Springs, where he grew up. National's ups and downs over the years, its labor problems (six strikes since 1964) and the trend toward deregulation and merger all have taken their toll of Maytag's enthusiasm. As he told a friend: "It's no fun running an airline any more." If he does leave National and sell his stock after a Pan Am deal, Maytag would get some consolation: his 317,000 shares would be worth about $11 million.

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