United with Capital

Just as it was about to go down for the third time, ailing, debt-ridden Capital Airlines last week found a healthy and willing rescuer. After five weeks of carefully examining Capital's plight--and sizing up its own chances of emerging unhurt--United Air Lines, the second largest U.S. airline (after American), offered to take over Capital's fleet, facilities, routes and debts in a "merger" that amounted to outright acquisition. The rescue ends Capital's financial troubles, but it also ends Capital, the first major U.S. airline to succumb to the crushing new pressures of the jet age. With its own 14,000-mile system, stretching from coast to coast, along the West Coast, and into Hawaii, and Capital's 6,516-mile system in the East, United will become the biggest U.S. airline and the first transcontinental carrier with routes along both coasts.

Under the terms hammered out by United Air Lines President William A. ("Pat") Patterson with Capital Chairman Thomas D. Neelands Jr., Capital stockholders will receive one share of United common stock for every seven shares of Capital common, plus an option to purchase an additional i^ shares of United common at $40 per share within the next five years. All in all, since Capital seemed to be jet-propelled towards bankruptcy over its $33.8 million debt to Britain's Vickers-Armstrong Ltd. (TIME, April 25), the terms seemed generous. Said Pat Patterson: "I suppose we could have done better, but I didn't want to leave a trail of blood behind."

More to Munch On. What intrigued the aviation industry was why the nation's healthiest airline (United is one of the most efficient in the business) was willing to take over the sickest. Patterson inherits from Capital the two problems that brought it low: the debt to Vickers, and an inefficient route structure. Patter son intends to clear up both problems. He has already got Vickers' agreement to take back 15 turboprop Viscounts bought on credit by Capital, and to accept United common stock as full payment on Capital's debt. Vickers may lose as much as $9,000,000 on the deal. Shrewdly, Patterson has also made the merger dependent on permission from the Civil Aeronautics Board to drop 20 cities on Capital routes, thus getting the line out of local service. He is also happy to be free from Capital's competition on the New York-Chicago route. Says Patterson: "Four of us (TWA, Northwest, American and United) will be eating on a piece of cheese that five were chewing on before. This should give everybody more to munch on." Patterson will also be able to munch on a hefty tax writeoff on Capital's losses.

Patterson and Neelands--a former Capital board member who returned to duty last May only to shore up the failing line and make it attractive enough to invite a buyer--have already put their plans before the CAB. Stockholders in both companies, and the CAB itself, must approve the merger before it can go into effect. The CAB is partly to blame for Capital's troubles for allowing it to overextend itself. Hitherto, the CAB has followed a resolute policy of encouraging competition, discouraging mergers. If it reverses its position and okays the United-Capital plan--as most industry experts believe it will--it could start a flurry of mergers throughout the U.S. airline industry.

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