America West, US Air to Combine

By James F. Peltz

May 20, 2005 12 AM PT

Times Staff Writer

US Airways and America West Airlines agreed Thursday to a merger that would form the nation’s sixth-largest airline, the first union of two major carriers since the 2001 terrorist attacks sparked an industry crisis that endures today.

If completed, the proposed deal would join the airlines’ parent companies, US Airways Group Inc. and America West Holdings Corp., and help bring US Airways out of Chapter 11 bankruptcy protection, where it has been operating since September.

The new airline would be called US Airways, but the existing US Airways headquarters in Arlington, Va., would be consolidated at America West’s home offices in Tempe, Ariz. America West Chief Executive W. Douglas Parker would be chairman and CEO of the carrier. US Airways Chief Executive Bruce Lakefield would be vice chairman.

US Airways and America West disclosed last month that they were in merger talks, so the deal was not unexpected. The airlines said their goal was to create a lower-cost, full-service national airline that can offer discount fares and still turn a profit.

The merger agreement was reached after the companies secured $1.5 billion in new financing from, among other sources, private institutional investors and the airlines’ suppliers, including airplane maker Airbus.

US Airways currently is the nation’s seventh-largest airline in terms of passenger traffic, with routes concentrated in the Northeast and along the Eastern Seaboard. Its hubs include Charlotte, N.C.; Pittsburgh; Philadelphia; and Washington. The airline employs 30,100 people.

The routes of eighth-ranked America West consist of mostly east-west flights between its hubs in Phoenix and Las Vegas. It has 14,000 employees. Founded in 1983, America West also has been through a bankruptcy reorganization.

“Both airlines suffer in that neither of us have truly national scale,” Parker said at a news conference. The merger would solve that problem and provide a “consumer-friendly pricing structure across the United States on one airline,” he said.

If nothing else, US Airways’ fares generally should move down closer to those of America West, which already considers itself a discount airline, said Terry Trippler, chief executive of FareFacts.com, a travel website. “Air travelers all win” with the merger, he said.

But some analysts suggested that fares in some markets could rise, as the merger removes a rival from an industry that’s already suffering from excess capacity, high jet-fuel prices and widespread fare-cutting.

“There’s less competition whenever there’s one less carrier, so they might be able to inch up fares, especially in markets where they dominate,” said Matthew Bennett, who runs FirstClassFlyer.com, a travel website.

The airlines’ frequent-flier programs are expected to be rolled over into a new program.

Executives said the combined airline would prune service on unprofitable routes, which weren’t immediately identified. The airlines also didn’t name any cities for possible expansion.

Even if the combined carrier flies with lower costs and a stronger balance sheet, analysts said, it still must compete with the likes of discount king Southwest Airlines Co. and JetBlue Airways Corp., which have remained profitable. In particular, Southwest has invaded important US Airways destinations in the East in recent years, sparking fare wars that the struggling airline could ill afford.

In Southern California, US Airways serves Los Angeles International Airport, where it’s the 15th busiest carrier with a 1.6% market share. But its merger with America West would make it No. 6 at LAX.

America West, which is the eighth-busiest airline at LAX with a 3.2% market share, also serves airports in Burbank, Orange County, Ontario and Long Beach. At the smaller airports, America West is a distant competitor to Southwest.

The airlines said that they hoped to complete their merger this fall and that consumers would see the conversion of America West to US Airways “very, very quickly ... some of that immediately, but certainly over the course of a few months,” Parker said.

But first the deal must clear several hurdles. It’s subject to approval by US Airways’ Bankruptcy Court judge, America West’s stockholders and the Air Transportation Stabilization Board. The ATSB, founded after the Sept. 11, 2001, terrorist attacks to help the battered airline industry secure new financing, guaranteed loans for US Airways and America West that currently total about $1 billion.

Some analysts have suggested the US Airways-America West deal could be the start of an industry shakeout that would mean more mergers.

The carriers collectively have lost $32 billion since the 9/11 attacks, and they’re expected to lose $5 billion this year.

Several other big airlines are in dire trouble. United Airlines, a unit of UAL Corp., also is struggling to get out of bankruptcy, and fears are mounting that Delta Air Lines Inc. also could seek Chapter 11 protection in the coming months.

But airline mergers have had a troubled past. Many haven’t worked well in part because it’s difficult to combine unionized employee groups, each with different wages, work rules and seniority arrangements.

If the merger is completed, the airlines’ new equity investors -- who are scheduled to provide a $350-million cash infusion -- would own 41% of the new airline. Current America West shareholders would own 45% and US Airways investors would own 14%, the companies said.

Those stakes could be reduced if the new carrier, as planned, sells additional shares to the public.

The companies said the $350-million private equity infusion would value all of the new company’s equity at $850 million, implying a value of $6.12 for each existing America West share.

Those shares rose 38 cents, or 8.6%, to $4.81 Thursday on the New York Stock Exchange in anticipation of the merger announcement, which came after the market closed. The shares rose an additional 54 cents, or 11%, to $5.35 after hours.

(BEGIN TEXT OF INFOBOX)

New partners

The companies at a glance:

US Airways

Began service: 1939

Headquarters: Arlington, Va.

Airport hubs: Charlotte, N.C., Philadelphia

Daily departures: 3,432

Destinations: 179

Southland destinations: Los Angeles, San Diego

Employees: 30,100

Aircraft: 276