PoorJetDriver
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US Airways Talks
To America West
About a Merger
Combination Would Rival
Southwest in Size and Reach;
A New Consolidation Wave?
By SUSAN CAREY and MELANIE TROTTMAN
Staff Reporters of THE WALL STREET JOURNAL
April 20, 2005
US Airways and America West Airlines are in advanced merger talks to create a national low-cost airline rivaling discount king Southwest Airlines in size, say people familiar with the matter.
A deal hasn't been completed, and some obstacles remain, these people caution. With US Airways Group Inc. in Chapter 11 bankruptcy protection, there are extra complications. A deal would need approval from a host of parties, including the bankruptcy judge; US Airways creditors, including its largest, General Electric Co.; America West shareholders; unions; and the federal government.
But if a deal comes together, it could prove the first big step in a long-awaited consolidation of the embattled airline industry, in which companies are struggling with high oil prices, too many seats, pension costs and brutal ticket-price wars. Though most big airlines currently lack the cash to do deals and share prices are depressed, some industry analysts believe hedge funds and private equity firms eventually will jump in to force restructuring, especially if more big carriers file for Chapter 11.
Together, US Airways, the nation's seventh-largest carrier, and America West, which is No 8, would form an airline that would overtake Southwest as the sixth-largest, based on 2004 traffic statistics. With America West's hubs in Phoenix and Las Vegas and US Airways' in Philadelphia and Charlotte, N.C., the bulked-up discounter would have the distinction of offering low fares on an integrated hub-and-spoke network that would offer many more choices of routings.
That would contrast with other hub-and-spoke airlines, which have much higher costs -- both US Airways and America West have slashed expenses in recent years -- and could prod some airlines toward embracing a low-cost model. It also would contrast with the far more profitable Southwest, which is a point-to-point budget airline that serves heavily traveled routes.
US Airways, already cutting back on some routes, has been under assault by Southwest in Philadelphia and Pittsburgh and other discounters in Charlotte, Washington and Boston. A merger would allow it to expand its stunted route network and grow to the West, where it offers very few flights. For its part, America West is hemmed in by Southwest at its hubs in Phoenix and Las Vegas, and needs places outside its Western U.S. territory to grow and use new airplanes it has on order.
The US Airways-America West talks are known as "Project Barbell" because US Airways is big on the East Coast and America West on the West Coast, with a modest number of transcontinental flights between them, said people close to the matter.
One person familiar with the matter said US Airways has talked to several other airlines over the past two years about a potential merger. But the discussions with America West Holdings Corp., the airline's parent company, have gained momentum recently. In recent days, it had been expected that the two airlines could announce an agreement in principle to merge as soon as next week, but that timetable is in question.
If an agreement is reached, the initial plan would be to fly under the "US Airways" brand immediately but to keep the operations separate for a time, linking the network through code-sharing, while integration of fleet and personnel is phased in.
Talks could still break down, and there are some wild cards. If a deal is struck, America West and potential new equity backers would play a role in shaping the reorganization plan that would allow US Airways to emerge from bankruptcy this year, said one knowledgeable person. Another possibility is that the bankruptcy judge overseeing US Airways could require a bidding process to determine if better offers could be had, said another knowledgeable person.
In addition, the two airlines' unions would have to agree to rules for merging their members. The federal government, which has extended loan guarantees to both airlines, would have to agree to restructure that debt and specifically have to approve a merger by America West because of the conditions of its loan. The Air Transportation Stabilization Board, a federal panel created after the 2001 terrorist attacks to help the industry, has a secured loan to US Airways with a balance of $700 million, and an unsecured loan with America West with a current balance of $300 million.
Even if a deal doesn't happen, US Airways, Arlington, Va., is positioned to emerge from bankruptcy as a stand-alone company later this year. The company filed for bankruptcy last year for the second time in as many years. It has managed to avoid liquidation, a fate it widely was expected to meet, and used the time in court protection to further lower its costs and revamp its operations to become more like a discount airline. Its models in the transformation have been America West and JetBlue Airways.
Last year, US Airways posted a net loss of $611 million on revenue of $7.1 billion. But the carrier recently has confounded doomsayers by lining up $250 million in financing from two regional airlines, one an affiliate of closely held Air Wisconsin Airlines Corp., the other Republic Airways Holdings Inc.
A few months ago, according to one person familiar with the matter, US Airways' big creditors began to worry that the carrier would be on shaky financial ground when it emerged, and encouraged the company to seek a partner. Certain of US Airways' key creditors -- including GE's airline financing and leasing arm -- are actively involved in the merger talks, according to people familiar with the matter. A GE spokesman declined to comment.
The merger scenario currently being discussed would require US Airways to find between $350 million and $500 million in total new funding, and possibly to arrange an additional $250 million in loans. US Airways is approaching a number of sources, including private equity firms, other regional airlines and its existing creditors. If it succeeds, a holding company created by the merger would give stock in the new company to America West shareholders, US Airways creditors and new equity investors, said one person familiar with the deal.
A merger could allow the two airlines to eliminate redundant equipment, gates and possibly personnel at their airport locations. They could rationalize some of their transcontinental flights. And because US Airways in bankruptcy can reject airplane leases, it effectively could "right-size" the combined airline's fleet by getting rid of more planes because it knows it will be able to take new planes on order to America West. But it isn't thought that the two would shrink by the same degree that an outright liquidation would take capacity out of the industry.
US Airways, which has been flying since the 1940s, would carry more built-in costs into a combination, in part because its work force is more senior than that of America West, which began flying in 1983. But its unions have made big sacrifices in the carrier's two visits to bankruptcy court, and all have lost their defined-benefit pension plans.
Being a big airplane lessor at both companies, GE probably would reduce its exposure by taking more planes back from US Airway under this scenario than it would if US Airways pursued a stand-alone strategy.
America West, based in Tempe, Ariz., dodged a bankruptcy court filing in late 2001 by winning a $429 million commercial loan backed by $380 million in federal guarantees. That unlocked more than $600 million in other financing and concessions from manufacturers, vendors, leasing firms and others. But the carrier could still be at risk.
It posted a net loss last year of $89.9 million on revenue of $2.34 billion, and some analysts believe that with fuel at current high prices, America West will face a liquidity squeeze later this year. It ended 2004 with $419 million of cash and in March made a $42.9 million semiannual payment on its own ATSB loan. The carrier owes another similar payment in September.
America West, which long has had low costs among traditional airlines, began to transition into a low-fare carrier in early 2002, when it slashed its highest business fares. The move boosted its market share and revenue, restoring profitability. But worsening industry conditions began taking a toll even on discounters. Recently, the company has begun marketing itself as a discount airline with amenities such as first class, assigned seats, airport clubs, in-flight entertainment and code-share relationships that allow its frequent fliers to redeem points on other airlines flying overseas.
These are some of the same amenities US Airways has retained even as it has slashed its expenses, cut its unionized workers' wages and benefits, and shrunk its operations. Southwest and JetBlue don't offer first class.
Doug Parker, America West's chief executive, has been extremely vocal about the need for industry consolidation and his interest in participating. Late last year, America West studied an offer to buy all of ATA Airlines, a discounter that had filed for bankruptcy-court protection, but in the end backed away because ATA's airplane leases were too costly. Southwest ultimately did a smaller deal with ATA, buying some of its gates at Chicago's Midway Airport and entering into a code-sharing relationship.
To America West
About a Merger
Combination Would Rival
Southwest in Size and Reach;
A New Consolidation Wave?
By SUSAN CAREY and MELANIE TROTTMAN
Staff Reporters of THE WALL STREET JOURNAL
April 20, 2005
US Airways and America West Airlines are in advanced merger talks to create a national low-cost airline rivaling discount king Southwest Airlines in size, say people familiar with the matter.
A deal hasn't been completed, and some obstacles remain, these people caution. With US Airways Group Inc. in Chapter 11 bankruptcy protection, there are extra complications. A deal would need approval from a host of parties, including the bankruptcy judge; US Airways creditors, including its largest, General Electric Co.; America West shareholders; unions; and the federal government.
But if a deal comes together, it could prove the first big step in a long-awaited consolidation of the embattled airline industry, in which companies are struggling with high oil prices, too many seats, pension costs and brutal ticket-price wars. Though most big airlines currently lack the cash to do deals and share prices are depressed, some industry analysts believe hedge funds and private equity firms eventually will jump in to force restructuring, especially if more big carriers file for Chapter 11.
Together, US Airways, the nation's seventh-largest carrier, and America West, which is No 8, would form an airline that would overtake Southwest as the sixth-largest, based on 2004 traffic statistics. With America West's hubs in Phoenix and Las Vegas and US Airways' in Philadelphia and Charlotte, N.C., the bulked-up discounter would have the distinction of offering low fares on an integrated hub-and-spoke network that would offer many more choices of routings.
That would contrast with other hub-and-spoke airlines, which have much higher costs -- both US Airways and America West have slashed expenses in recent years -- and could prod some airlines toward embracing a low-cost model. It also would contrast with the far more profitable Southwest, which is a point-to-point budget airline that serves heavily traveled routes.
US Airways, already cutting back on some routes, has been under assault by Southwest in Philadelphia and Pittsburgh and other discounters in Charlotte, Washington and Boston. A merger would allow it to expand its stunted route network and grow to the West, where it offers very few flights. For its part, America West is hemmed in by Southwest at its hubs in Phoenix and Las Vegas, and needs places outside its Western U.S. territory to grow and use new airplanes it has on order.
The US Airways-America West talks are known as "Project Barbell" because US Airways is big on the East Coast and America West on the West Coast, with a modest number of transcontinental flights between them, said people close to the matter.
One person familiar with the matter said US Airways has talked to several other airlines over the past two years about a potential merger. But the discussions with America West Holdings Corp., the airline's parent company, have gained momentum recently. In recent days, it had been expected that the two airlines could announce an agreement in principle to merge as soon as next week, but that timetable is in question.
If an agreement is reached, the initial plan would be to fly under the "US Airways" brand immediately but to keep the operations separate for a time, linking the network through code-sharing, while integration of fleet and personnel is phased in.
Talks could still break down, and there are some wild cards. If a deal is struck, America West and potential new equity backers would play a role in shaping the reorganization plan that would allow US Airways to emerge from bankruptcy this year, said one knowledgeable person. Another possibility is that the bankruptcy judge overseeing US Airways could require a bidding process to determine if better offers could be had, said another knowledgeable person.
In addition, the two airlines' unions would have to agree to rules for merging their members. The federal government, which has extended loan guarantees to both airlines, would have to agree to restructure that debt and specifically have to approve a merger by America West because of the conditions of its loan. The Air Transportation Stabilization Board, a federal panel created after the 2001 terrorist attacks to help the industry, has a secured loan to US Airways with a balance of $700 million, and an unsecured loan with America West with a current balance of $300 million.
Even if a deal doesn't happen, US Airways, Arlington, Va., is positioned to emerge from bankruptcy as a stand-alone company later this year. The company filed for bankruptcy last year for the second time in as many years. It has managed to avoid liquidation, a fate it widely was expected to meet, and used the time in court protection to further lower its costs and revamp its operations to become more like a discount airline. Its models in the transformation have been America West and JetBlue Airways.
Last year, US Airways posted a net loss of $611 million on revenue of $7.1 billion. But the carrier recently has confounded doomsayers by lining up $250 million in financing from two regional airlines, one an affiliate of closely held Air Wisconsin Airlines Corp., the other Republic Airways Holdings Inc.
A few months ago, according to one person familiar with the matter, US Airways' big creditors began to worry that the carrier would be on shaky financial ground when it emerged, and encouraged the company to seek a partner. Certain of US Airways' key creditors -- including GE's airline financing and leasing arm -- are actively involved in the merger talks, according to people familiar with the matter. A GE spokesman declined to comment.
The merger scenario currently being discussed would require US Airways to find between $350 million and $500 million in total new funding, and possibly to arrange an additional $250 million in loans. US Airways is approaching a number of sources, including private equity firms, other regional airlines and its existing creditors. If it succeeds, a holding company created by the merger would give stock in the new company to America West shareholders, US Airways creditors and new equity investors, said one person familiar with the deal.
A merger could allow the two airlines to eliminate redundant equipment, gates and possibly personnel at their airport locations. They could rationalize some of their transcontinental flights. And because US Airways in bankruptcy can reject airplane leases, it effectively could "right-size" the combined airline's fleet by getting rid of more planes because it knows it will be able to take new planes on order to America West. But it isn't thought that the two would shrink by the same degree that an outright liquidation would take capacity out of the industry.
US Airways, which has been flying since the 1940s, would carry more built-in costs into a combination, in part because its work force is more senior than that of America West, which began flying in 1983. But its unions have made big sacrifices in the carrier's two visits to bankruptcy court, and all have lost their defined-benefit pension plans.
Being a big airplane lessor at both companies, GE probably would reduce its exposure by taking more planes back from US Airway under this scenario than it would if US Airways pursued a stand-alone strategy.
America West, based in Tempe, Ariz., dodged a bankruptcy court filing in late 2001 by winning a $429 million commercial loan backed by $380 million in federal guarantees. That unlocked more than $600 million in other financing and concessions from manufacturers, vendors, leasing firms and others. But the carrier could still be at risk.
It posted a net loss last year of $89.9 million on revenue of $2.34 billion, and some analysts believe that with fuel at current high prices, America West will face a liquidity squeeze later this year. It ended 2004 with $419 million of cash and in March made a $42.9 million semiannual payment on its own ATSB loan. The carrier owes another similar payment in September.
America West, which long has had low costs among traditional airlines, began to transition into a low-fare carrier in early 2002, when it slashed its highest business fares. The move boosted its market share and revenue, restoring profitability. But worsening industry conditions began taking a toll even on discounters. Recently, the company has begun marketing itself as a discount airline with amenities such as first class, assigned seats, airport clubs, in-flight entertainment and code-share relationships that allow its frequent fliers to redeem points on other airlines flying overseas.
These are some of the same amenities US Airways has retained even as it has slashed its expenses, cut its unionized workers' wages and benefits, and shrunk its operations. Southwest and JetBlue don't offer first class.
Doug Parker, America West's chief executive, has been extremely vocal about the need for industry consolidation and his interest in participating. Late last year, America West studied an offer to buy all of ATA Airlines, a discounter that had filed for bankruptcy-court protection, but in the end backed away because ATA's airplane leases were too costly. Southwest ultimately did a smaller deal with ATA, buying some of its gates at Chicago's Midway Airport and entering into a code-sharing relationship.
