America West, US Airways to Merge

WASHINGTON – America West Holdings Corp. (AWA) and a group of investors intend to buy bankrupt US Airways Group Inc. (search) in a bid to compete with low-cost rivals under a merger plan announced on Thursday.

Using approximately $1.5 billion in new capital, the deal would save No. 7 US Airways from possible failure and expand the reach of No. 8 America West in lucrative eastern markets for business travel like Washington and New York. The combined carrier would also fly internationally.

The airline would become the sixth-biggest domestic carrier based on a key measurement of passenger revenue and would use the US Airways name but be based in Tempe, Ariz., America West's home turf. The transaction would begin with a marketing alliance and unfold in stages -- taking up to three years to complete.

"A combined US Airways/America West places the new airline in a position of strength and future growth that neither of us could have achieved on our own," said Doug Parker, America West's chief executive.

Cost savings will come partly from staff reductions and reducing the fleet by 60 planes. Parker said in an interview he did not expect big layoffs during the transition. "It's largely dependent on attrition between now and then."

The companies currently employ 43,000 people and operate roughly 400 aircraft combined.

The carriers said the deal would create a carrier with $10 billion in annual revenues and about $2 billion in total cash. They hope to close the transaction this fall.

Parker said the new airline would be healthy enough to make money even with oil prices at $50 per barrel. Record fuel prices are blamed for staggering industry losses, including the $282 million first quarter loss posted by US Airways.

The deal is the first big airline combination since American Airlines (AMR) gobbled up TWA in 2001, and the most dramatic in a series of moves by big carriers to survive the industry's worst ever downturn.

Arlington, Va.-based US Airways and America West said they would initially operate separately and create an alliance to coordinate scheduling and frequent flier programs before fully combining operations.

Financially stable with $33 million in first-quarter profits, America West has been eager to grow and take on bigger carriers and low-cost rivals like Southwest Airlines that are healthier.

"They've bitten off a tremendous project in this case," said Stuart Klaskin of KKC Aviation Consulting in Miami. "If they fail, nobody will be surprised. But if they succeed they'll be the darlings of the industry."

Analysts do not expect the deal to trigger a wave of new mergers.

America West operates 924 daily departures systemwide, employs 13,000 people and has hubs in Phoenix and Las Vegas. US Airways operates operates 3,400 daily departures systemwide and employs 30,000 people. US Airways has big hubs in Charlotte and Philadelphia. It operates the East Coast shuttle between Washington, New York and Boston.

The deal must be approved by U.S. antitrust and transportation officials but industry experts did not foresee serious regulatory hurdles. Additionally, the federal board overseeing $1 billion in combined loan guarantees to both airlines must approve the deal as does the judge overseeing US Airways bankruptcy case.

America West would own 45 percent of the new airline, new equity partners would own 41 percent and 14 percent would go to US Airways, assuming a total private equity value of $850 million, the carriers said. That valuation implied a value of $6.12 a share for Americas West's stock, they said.

The new airline's 13-member board would have one member from each of three new equity investors, six members from the America West board, including Parker as chairman, and four members from the current US Airways board, including Bruce Lakefield, current US Airways chief executive, as vice-chairman.

Up to $650 million in new equity may be raised, the airlines said.

Key investors include ACE Aviation Holdings Inc. , Air Canada's parent, and Boston's PAR Capital Management. General Electric Co. (GE) will take back planes and Airbus will provide a $250 million loan in exchange for being the A350 launch customer.

America West stock rose to $5.40 a share in after hours trading following announcement of the US Airways deal. Its shares had closed up 38 cents, or 8.6 percent, to $4.81 on the New York Stock Exchange.