America West
Kicks the Tires
Of Ailing ATA
By MELANIE TROTTMAN and SUSAN CAREY
Staff Reporters of THE WALL STREET JOURNAL
October 14, 2004; Page C1
Who would be crazy enough to buy an airline these days?
How about another airline?
America West Airlines' parent, America West Holdings Corp., is in talks to acquire all or part of ATA Holdings Corp., the parent of ATA Airlines, according to people familiar with the discussions.
It isn't clear how much America West would pay for the beleaguered Indianapolis-based carrier or some of its assets, or even if a deal will be completed.
ATA's market value is about $31 million, while America West's stands at about $175 million. People familiar with the matter noted that other airlines also have shown interest in ATA, which, as of June 30, had nearly $500 million of current and long-term debt and $3.8 billion in aircraft lease obligations. Notably, these people say, AirTran Airways has held preliminary talks with ATA.
Executives of America West and ATA declined to comment. AirTran said it doesn't comment on mergers and acquisitions.
In 4 p.m. composite trading on the New York Stock Exchange yesterday, America West fell six cents to $4.84. On the Nasdaq Stock Market, ATA ended at $2.64, up three cents.
The airline industry went through a spate of mergers in the 1980s as midsize carriers bought others to increase their market share. Now, with jet-fuel prices rising and the industry mired in its worst crisis ever following the Sept. 11, 2001, terrorist attacks, further consolidation seems almost inevitable.
The U.S. airline industry will rack up $1.2 billion in net losses for the third quarter, according to J.P. Morgan Chase & Co. analyst Jamie Baker, primarily because of soaring fuel bills. Had fuel prices remained at year-ago third-quarter levels, the industry would have posted nearly a $200 million profit, estimates Mr. Baker, who has an "overweight" rating on America West's stock. America West has been a client of J.P. Morgan.
The basic problem: There are simply too many traditional hub-and-spoke carriers offering too many domestic seats, at a time when low-cost carriers such as Southwest Airlines and JetBlue Airways have captured more than a quarter of domestic capacity and set the pricing agenda. Some analysts and industry executives expect that some of the large carriers will combine through mergers.
Others, such as Standard & Poor's equity analyst Jim Corridore, point to the industry's lack of cash and crushing debt levels, and say that asset sales are more likely. US Airways Group Inc., now in its second trip through bankruptcy court, is seen as the most vulnerable to liquidation, which would enable rivals to buy its planes and gates. Mr. Corridore has a "hold" rating on America West's stock. S&P doesn't do business with the companies.
There also is likely to be a shakeout among discounters, which increasingly are competing with each other. "If we're going to see a round of acquisitions and mergers, I think we're more likely to see that in the short run among the low-fare carriers that are trying to build the national scale that Southwest possesses," says Goldman Sachs Group Inc. analyst Glenn Engel, who has an "in-line" rating on shares of America West, a Goldman client.
While leading discounter Southwest and upstart JetBlue remain profitable, Frontier Airlines is losing money and AirTran recently warned of third-quarter losses, following nine quarters of profits. America West, of Tempe, Ariz., the second-largest discounter, also has been profitable recently, but now expects to lose money in the second half of this year.
ATA, the third-largest budget carrier, has been hurt by expensive aircraft leases it negotiated in 2000. In January, the discount carrier dodged a Chapter 11 bankruptcy filing after its bondholders agreed to exchange their unsecured notes for new ones with longer maturities. It also reached new terms with its three aircraft lessors that reduced its lease payments this year by nearly $70 million.
But now ATA expects to post a loss for all of 2004. The company warned in August that it faces "substantial additional liquidity concerns" as a result of the industry's woes and declining demand for its military charter flights. ATA has said it feared it would default at the end of the third quarter on the terms of a $168 million secured loan backed in large part by the federal government. Some observers think ATA will be forced to file for Chapter 11 soon if it doesn't sell itself or some of its assets, and might use a judicial restructuring to achieve either outcome.
For America West, the big prizes could be some of ATA's new planes, its 14 gates at Chicago's Midway Airport, where ATA is the leading operator, or the entire company. A purchase of ATA also would give America West more heft to defend against other discount airlines.
If the America West/ATA hookup occurs, it probably won't be the last. But whether consolidation will fix the industry is another matter. The track record of past combinations isn't great, and excess capacity didn't disappear. Mergers generally cause employee friction and ratchet up costs.
The last airline acquisition before the 2001 terrorist attacks -- the purchase of Trans World Airlines by AMR Corp.'s American Airlines -- was hardly a home run. As American rushed to stanch losses following the attacks, it laid off most of the TWA employees and scaled back the St. Louis hub.
For America West, an acquisition would give it access to ATA's newer fleet of 83 planes, including 61 Boeing 757s and 737s that fly to more than 40 scheduled business and leisure destinations in the U.S., Mexico and the Caribbean. America West, which serves 96 destinations in the U.S., Canada and Mexico, already has 737s and 757s in its fleet of 140 jets, though most of its 757s aren't over-water certified like ATA's. America West and ATA both have first-class cabins on their planes to appeal to business travelers.
America West and ATA also have the same unions representing their pilots and flight attendants -- a benefit if they combine the groups and negotiate contracts. ATA's pilots recently agreed to concessions to help the company out of its cash crisis, and flight attendants are voting on a concessionary pact.
Even with the synergies, an acquisition wouldn't come without risks, including management distraction, financial over-extension and potential labor strife. And it isn't clear an acquisition would yield any great cost savings, since both carriers already run lean operations. America West, which has long had low costs among its hub-and-spoke peers, started transforming itself into a low-fare carrier in March of 2002, when it slashed its highest business fares. For the 12 months ended in June, America West's expenses spread over each seat mile were 7.66 cents, compared with ATA's similarly low costs of 7.24 cents. That compares with costs in the range of 9.4 cents to 11.4 cents for the nation's largest carriers.
