The Friendly Skies Get Wheels

By John S. DeMott.

Hertz last week got someone new in its driver's seat. UAL Inc., the $6.9 billion parent of United Airlines, announced plans to buy the largest and oldest (founded 1918) U.S. car-rental company for $587.5 million in cash from RCA, which has owned it for 18 years. By combining Hertz (1984 sales: $1.4 billion) with America's largest airline and UAL's 54-unit luxury Westin Hotel subsidiary, the deal will create a travel and hotel complex to serve the business traveler from plane to car to bed. Said UAL Chairman Richard Ferris: "The sun, the moon and the stars have all come together."

The agreement was announced only two days after the end of a month-long strike by United's 5,000 unionized pilots. As of this week, the carrier plans to operate more than half of the 1,550 daily flights it logged before the strike, and hopes to return to nearly full service by July 1. One passenger lure: a 50% rebate on all fares during the first week in July. By midsummer, United expects to recapture its traditional 15% share of the business.

UAL has recently been making major deals at Mach 1 speed. In the past two months the company has bought the Pacific routes of Pan American for $750 million and paid $265 million for 30 jets owned by ailing Frontier Airlines. To raise cash for the deals and add to its $1.1 billion cash hoard, UAL worked out a way to sell half of its Westin hotels to investors while retaining management contracts and fees. The company could realize $800 million to $900 million because of increased property values.

With the Hertz purchase, United is saying that it is a glutton for cutthroat competition. The company is already ensnarled in the fierce, deregulated battle among U.S. airlines, in which it faces large established carriers like American as well as ambitious, new, no-frills outfits like People Express. The rental-car field is equally bruising. It is a four-front war involving Hertz, Avis, National and Budget. Just as with the airline industry, the major players in the $4 billion rental-car business must compete with smaller companies: Dollar, Thrifty and Alamo.

United sees Hertz as a natural extension of its airline business. About 80% of car rentals are made by airline passengers, and Hertz, with 400,000 cars and trucks parked in 120 countries, books more of them than any other company. United may attempt to link some of its services. Passengers, for example, could pick up boarding passes and drop off luggage at Hertz counters. The Hertz acquisition is part of United's corporate strategy of building a company that comprises several parts of the travel business. A side benefit is to make the company larger and thus less vulnerable to a takeover attempt. Says Ferris: "All the moves are part of a plan. Adding the country's biggest car- rental company to the country's biggest airline and a chain of luxury hotels opens up all kinds of marketing possibilities."

UAL expects the Hertz deal to meet with Justice Department approval, although that is not assured. In 1974 the company tried to buy Hertz's archrival Avis but pulled back when the Government said that the merger might be anticompetitive. "We will take a close look at any acquisition of this size," said a Justice Department official last week, "and we will want to see if it hurts competition." The Reagan Administration, though, has been generally favorable to mergers. The odds are that it will not scrub United's new flight plan.

With reporting by Lee Griggs/Chicago