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WSJ Report Merger in Advanced Talks With USAir--The Skinny

WSJ Report Merger in Advanced Talks With USAir--The Skinny

Old Apr 19, 2005, 6:24 pm
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WSJ Report Merger in Advanced Talks With USAir--The Skinny

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.
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Old Apr 19, 2005, 8:49 pm
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So if this happens the America West name would disappear? That would make me really sad Mostly because I HATE US Airways for what they did to PSA. It's been nearly 20 years and yea I should probably get over it, but I still have a bitter taste in my mouth over that.

I'd rather see a completely new name come about than to have it all become US Airways.
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Old Apr 19, 2005, 9:56 pm
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Originally Posted by olympicnut
So if this happens the America West name would disappear? That would make me really sad Mostly because I HATE US Airways for what they did to PSA. It's been nearly 20 years and yea I should probably get over it, but I still have a bitter taste in my mouth over that.

I'd rather see a completely new name come about than to have it all become US Airways.

I agree with you regarding the PSA deal 20 years ago. US swallowed up PSA and never looked back. But, as people on the US board have pointed out, we have Doug Parker on the West Coast and he would never let something like the US/PSA deal ever happen again.

Although I too would be disappointed to see the HP brand disappear, I still am in favor of seeing US as the remaining brand only because to me, US Airways is a larger, more international-sounding name. America West creates images of a more regional-type airline.

Here are links to the pure facts that we should all be concerned about:

US Airways
http://usair.com/about/corporate/pro...eets/index.htm
http://usair.com/travel/maps/route/
http://usair.com/about/corporate/pro...ny_history.htm
http://usair.com/about/aircraft/index.htm

America West
http://www.americawest.com/aboutawa/..._factsheet.htm
http://www.americawest.com/aboutawa/...a_routemap.htm
http://www.americawest.com/aboutawa/...background.htm
http://www.americawest.com/aboutawa/...e/aa_fleet.htm

Also compare:
http://www.americawest.com/flightfun...iteprogram.htm
http://usair.com/dividendmiles/preferredlevels/
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Old Apr 19, 2005, 10:19 pm
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The US Airways moniker is damaged goods and needs to go. Plus HP has far better livery.
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Old Apr 19, 2005, 10:31 pm
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Originally Posted by hp_fa
The US Airways moniker is damaged goods and needs to go. Plus HP has far better livery.

LOL!!! I agree!!! "Our planes are prettier" - lol.
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Old Apr 20, 2005, 2:46 am
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Originally Posted by hp_fa
The US Airways moniker is damaged goods and needs to go. Plus HP has far better livery.
All of those black airplanes sitting simultaneously at T4 would absorb so much heat that Phoenix would become considerably cooler!
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Old Apr 20, 2005, 3:02 am
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Certainly HP management is far smarter than me, but the way I see it, the two airlines would have to be run separately for a few years so a good chunk of the senior US employees could retire or be bought out.

That would also seemingly entail all growth being under the America West name -- with a full-on codeshare, it wouldn't matter -- at least until it the senior, beaten-down US workforce had been sufficiently shrunken to allow a merger without large displacement of HP workers.
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Old Apr 20, 2005, 5:50 am
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OK a few observations from an almost outsider. I have flown US a few times and HP not at all but am very familiar with their reputation. I also must add that the reason I have not flown HP is that I am on the right coast, not that I am indifferent.

I agree whole heartedly with those that prefer HP's name over US. As previously stated US is damaged goods and their F product sucks. US F is just wide seat Y. HP F product on the other hand is quite nice from what I have heard.

IMO, HP will be partnering with a sinking ship. At best a merger of these two will result in a cheapening of the HP product. Or what is more likely the merged entity will eventually be down the tubes.

This is being orchestrated by GE under the drug dealer concept of keeping your clients hooked so they can continue to pay you - at all costs. GE is out for GE, not HP or US.

Things would be better for HP if it waited for US to go belly up and HP could pick the assets it wanted at the BK fire sale and did not have to take on all of US baggage (literally). Under this scenario US' Baggage handlers, other employee contracts, and other liabilities would not have to be absorbed by HP. This proposed merger is a really lose-lose situation for HP.

My guess is that GE will underwrite this (give the junkies another fix to keep them coming back). One can only hope the BK judge sees what is going on and disallows the merger, or that the HP stockholders are smart enough to vote it down. This is bad for ALL airlines with the exception of US, and then only delays the inevitable. It is good for GE in the short to medium term.
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Old Apr 20, 2005, 10:23 am
  #9  
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Originally Posted by aaupgrade
......I agree whole heartedly with those that prefer HP's name over US. As previously stated US is damaged goods and their F product sucks. US F is just wide seat Y. HP F product on the other hand is quite nice from what I have heard.
I also agree that US Airways has a much broader appeal than America West Airlines as a brand. However, as many have pointed out, US Airways is damaged goods, thus not sure how much more appealing it really is.

IMO, HP will be partnering with a sinking ship. At best a merger of these two will result in a cheapening of the HP product. Or what is more likely the merged entity will eventually be down the tubes......
I am not as pessimistic on this merger. I think the combined entity has a good chance at least to survive (making small profits), if not prosper, if run properly. I think the variation of low cost model HP now employs works fairly well. If applied to the new entity, it may prosper now that it is no longer geographically limited as HP currently is.

Things would be better for HP if it waited for US to go belly up and HP could pick the assets it wanted at the BK fire sale and did not have to take on all of US baggage (literally). Under this scenario US' Baggage handlers, other employee contracts, and other liabilities would not have to be absorbed by HP. This proposed merger is a really lose-lose situation for HP.
While this may very well be true, but BK fire sale is open to all bidders. I am not sure if HP can outbid others, especially the lucrative pieces that everyone wants. Just look at the TZ deal. I agree US as it currently stands has quite a few baggages, but with BK court's help, I wonder if it's possible for HP to negotiate a deal that would minimize its acquiring liabilities.

Just out of curiosity with regards to employee contracts. Is it possible for US to void all employee contracts using BK's power and then have the newly merged entity rehire most, if not all, employees under new contract terms? If that's possible, I think it would be wise for the unions to start negotiating some clauses that would allow its member to retain some (not all) form of seniority in the new airline rather than risk everything.

LAX

Last edited by LAX; Apr 22, 2005 at 12:13 pm
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Old Apr 21, 2005, 12:11 pm
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I hope Doug is using the merger talks as a chance to get an inside look at what is really occuring in US and the value of the US assets.

Then he can pull out, US can go bankrupt and take down the whole rotted mess of US management and unions and customer-serviceless east coast employees, while HP can bid on the assets it knows more about and can value more effectively in the firesale.
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Old Apr 22, 2005, 10:53 am
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Originally Posted by Wilbur
I hope Doug is using the merger talks as a chance to get an inside look at what is really occuring in US and the value of the US assets.

Then he can pull out, US can go bankrupt and take down the whole rotted mess of US management and unions and customer-serviceless east coast employees, while HP can bid on the assets it knows more about and can value more effectively in the firesale.
I agree. I would rather that HP buy selected assets at a fire sale and hire new employees for HP (US employees can apply for jobs there.)

That being said, Doug Parker is not a dummy, nor are the people who work for him (Scott Kirby, etc.). They know what they are potentially getting into. It's too bad that HP didn't get ATA because I think that would have been a positive force with a mid-continent hub at MDW/IND. HP CAN compete with WN -- they have effectively positioned themselves as a full service, low cost carrier.
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Old Apr 22, 2005, 12:21 pm
  #12  
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Originally Posted by Wilbur
I hope Doug is using the merger talks as a chance to get an inside look at what is really occuring in US and the value of the US assets.

Then he can pull out, US can go bankrupt and take down the whole rotted mess of US management and unions and customer-serviceless east coast employees, while HP can bid on the assets it knows more about and can value more effectively in the firesale.
HP will be outbid by others (namely WN) in a BK firesale just like the TZ deal. Although those airline CEOs currently in charge may not be the smartest bunch, everyone of them have their eyes on the lucrative pieces of US should there is a BK firesale. I know not everyone has a strong balance sheet to bid, but HP is not exactly flushed with cash either. It will not be the first time that HP gets outbid.

LAX
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Old Apr 22, 2005, 1:17 pm
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Originally Posted by LAX
HP will be outbid by others (namely WN) in a BK firesale just like the TZ deal. Although those airline CEOs currently in charge may not be the smartest bunch, everyone of them have their eyes on the lucrative pieces of US should there is a BK firesale. I know not everyone has a strong balance sheet to bid, but HP is not exactly flushed with cash either. It will not be the first time that HP gets outbid.

LAX
I guess I would be OK with HP being outbid if the HP executive team has better insight into the real value of the assets in a BK sale because of the merger talks. Losing a slot or a plane to somebody else who pays 2X the real asset value is no big loss.

Winning just a few bids at the right price is better than winning a lot of bids at excessive valuations in my opinion, and I would hope that HP finds themselves in that situation after merger talks break down.
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Old Apr 22, 2005, 3:53 pm
  #14  
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http://biz.yahoo.com/prnews/050422/laf046.html?.v=7

PHOENIX, April 22 /PRNewswire-FirstCall/ -- In response to various inquiries and numerous speculative articles by the press, America West Airlines (NYSE: AWA - News) today confirmed that it is currently in discussions with US Airways regarding a potential merger. The Company emphasized that there is no assurance that the discussions will lead to a definitive agreement. America West does not intend to make any further announcements until a definitive agreement is reached or discussions are terminated.
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Old Apr 22, 2005, 6:11 pm
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[QUOTE=Wilbur] customer-serviceless east coast employees [QUOTE]


EXCUSE ME?! As a customer, east coast that is, of USAIRWAYS, I find this comment insulting. I have been flying USAIR/USAIRWAYS since 1987. And I have been flying WEEKLY, yes WEEKLY since 1997. And in all those years I can say I have only had to deal with 2, count them 2, poor service related issues from "serviceless east coast employees" as you so eloquently called them.

Tell me how long you have been flying and how many times you've had poor customer service with HP or any other airline?? I've had more serviceless dealings with midwest and west coast employees on other airlines than I care to remember but I don't go spouting off nonsense.

But I do recall my most recent HP flight were the FC F/A ignored us after he served us drinks so he could go back to reading his nursing school book in the galley. HHHMM? Does this count as a serviceless west coast employee?
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