deelmakur

America West had negative earnings at the end of its most recent full year, and that trend continued into Q1 of 2005 (they had a profit, but it came from fuel hedges). It's stock appears to trade at a 70 percent discount to book value, and its long term debt looks to be around three quarters of a billion dollars. Cash on hand at the end of last year (4 months ago) was down from around $400 millon, to just over $150 million, which looks to be quite a drop. I am not a CPA, but it would seem that without the ATSB guarantee, there might be a liquidity problem. In short, they'd have trouble using a pay toilet with a 25 cent headstart. For them to have bought ATA, would have been like merging Haiti and Rwanda. As effectively their largest creditor, ATSB would have to sign off on such a deal, especially since they are in the same position with both carriers. It is interesting that ATA ended up at SWA, and that the collateral benefit of that, more gates at Midway for WN, was seemingly ignored by Justice, even though it bascially solidified near monopoly status for Southwest, at that very important airport.

TomBascom

Naw, the real 3-way will be HP + US + NW.

You heard it here first

CPRich

While I enjoy all the fun about deal making, speculation, M&A intrigue, etc, I still wonder about how this will improve the fundamentals of the airline industry. Isn't the problem overcapacity? Slamming two networks together may allow for some operating efficiencies and cost cutting, what will this do to the fundamentals of the industry.

This may stengthen the two companies, but I still think there will be chunks of capacity taken out through liquidation. This could make US marginally stronger, and hopefully get smarter heads at the helm to navigate the still-dangerous waters, but it also adds the costs and complexity of integration - survival is still a big question in my mind.

TomBascom

If any capacity gets taken out by way of liquidation it won't help the legacy carriers one bit. Any slack will be immediately taken up by the LCCs and the legacy arline death spiral will accelerate.

kdinino

And is that a bad thing? I dont find it to be bad at all....Id rather see these bankrupt legacy carriers stop milking covernment loans and hiding under the cloak of ch 11 for years and just die already! I agree there is overcapacity and this deal while its "looks" nice and makes sense on a route map, will do nothing but speed up the demise of the combined company...

19103_aa

I am no airline expert, but I know a thing or two about mergers. In my industry (healthcare), the late 90s were loaded with mergers. Most of these were promoted by CEOs to 1) create 'synergies'; 2) improve market share; and 3) increase purchasing power resulting in lower costs.

In healthcare, 1 and 3 were never realized. Costs actually went up, and duplication of services continued. In the US-HP example, I also see no ability to achieve 1 and 3; and frankly #2 is just that: They are both big enough carriers already. I agree with what has been said. This leak is far too open to have happened accidentally. I'm waiting for the shell game to continue. This proposed merger does not address the primary problems: reducing operating costs and preventing the spending of cash.

TomBascom

They aren't milking government loans. The ATSB has gauranteed the loans and has a firm grip on substantial assets that back that gaurantee.

You should want this to succeed -- this is about transforming the business model of the legacy airline rather than turning everyone into clones of SWA.

FWAAA

Immediately? Really?

If you had said "eventually," then I'd agree with you.

But if the combined fleets of UAL and USAir were grounded, there's no way the LCCs would replace those 700+ mainline jets and over 200 billion available seat miles "immediately." Within several years, yes. Immediately? Hardly.

Although everyone likes to pretend that reducing costs and trying to increase fares without any reduction of capacity is the only way out of this desert, there is another way: Sharp reduction of capacity among the legacy airlines, either voluntarily or thru Ch 7.

If either of the big bankrupt airlines liquidated, their valuable parts would be auctioned to other legacy airlines (NRT, LHR, Slots at DCA/LGA, key gate space, etc). The rest of it their networks? WN and B6 and the others aren't stupid. They would just ignore it.

With WN and B6 (and to some extent, other LCCs) still growing, the industry's excess capacity has to be reduced somewhere, and thinking it won't happen is fantasy. Maybe it will be AA. Or NW, CO or DL. But it's more likely to be USAir and UAL.

ClueByFour

In US' case, yes, the ATSB has assets for collateral (gates/slots/etc).

In HP's case, they don't. The loan is like the one Chrysler got way back when--it's secured by $3/share warrants for about a third of HP's stock.

So, if the merger happens and it tanks HP in the process, the feds are on the hook for real money.

TomBascom

While there are some people who would gleefully hope for that I'm not one of them. Nor do I find the possibility at all believable.

Maybe, just barely it might happen to US -- but even that seems really, really unlikely. The pieces are worth more to everyone while it is still a going concern.

None the less and just for the sake of argument... just how long do you think it would be before GE et al got those planes into the next iteration of National or Hooters or any of dozens of similar ideas? I think it would be weeks or months. Certainly not years.

And it's not like the legacies would behave themselves either -- they'd go after market share on every route in the only way that they know -- a bare knuckle price war.

It won't happen and that's no fantasy.

Excess capacity is a myth. Dependence on high prices is the problem. Until the legacy airlines fix their business model and learn to flourish on permanently lower and rationalized fares they will continue to deteriorate into oblivion.

kdinino

I actually might be the minority then--I feel valued on LCC's..never flown SWA, but if B6 and Song, Frontier, Airtrain etc are all thats left, thats fine by me...Id be pumped actually. The legacy carriers are whats wrong with the industry ...not right...

LAX

The legacies and LCCs actually employ different business models to provide different products to the consumers. While one can be easily fed at an inexpensive local restaurant just as well as a fancy internationally renowned restaurant, the end result will be the same--a stuffed stomach. Personally, I don't think the legacy carriers are the problem of the airline industry. Neither are the LCCs at fault. I think the root of the problem is us, the consumers. While we all merrily welcome the low fares consistently offered by the LCCs, we all have come to expect the legacies to do the same despite of them offering a different product than what the LCCs offer. I do realize that over the last couple of years, LCCs have increase their level of service while the legacies have been doing the complete opposite in an attempt to compete with each other. However, there are other things that the legacies offer that LCCs don't have--international destinations (not including the few Carribean and Mexican destinations that some LCCs serve), airport lounges, large international alliances, etc. These all add up to a value that I believe rightly justify higher fares. Unfortunately, most consumers don't take that into consideration and demand the legacies to be competitive with their lower cost LCCs counterparts. Wake up people, you can't expect to pay a few dollars for a filet mignon!

While many people feel comfortable with all legacies going down the tubes, but unless you only travel domestically, be careful of what you wish for. If you think you can manage to travel internationally on foreign carriers, don't cry for help when you miss your connection during your travel from your home airport to the international gateway!

LAX

Dynastar

When I'm a non-elite flying a trans con why do I care about lounges and international connections, and why would I pay more for them? (Other then perhaps the increased value of the legacy's FF-miles.)

EnvoyBoy

Depending on where you'd like to vacation, the value of those miles is huge. You can save all the money you want on a LCC but that's never going to get you a free J tkt to Italy for vacation.

zeke320

I would agree that the value of FF miles are usually underestimated. When flying this is a primary factor in my selecting a carrier. I routinely use these miles to upgrade and at least once a year cash in on a first class international ticket somewhere far away. Never mind the value of the upgrades but when I go to price the first class ticket I get for free with miles, it usually is anywhere from $8,000 to $10,000. I would never receive such a benefit for flying a LCC because they do not afford such opportunities.