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America West, US Air in merger deal
Combined airline could mean stiffer competition for Southwest in the discount carrier market.
May 20, 2005: 8:23 AM EDT

NEW YORK (CNN/Money) - America West Holdings Corp. and bankrupt US Airways Group announced the two have reached a merger agreement Thursday.

The combination of US Air (Research), the nation's No. 7 carrier, and America West (Research), the No. 8 airline, would create a major low-cost airline and stronger competitor to Southwest Airlines, the leading discount carrier. But the combined company will still have a higher cost structure than Southwest.

Shares in America West jumped 12 percent after the bell to $5.40 while U.S. Air stock saw little trade.

The combination would create a carrier reaching far more markets across the country than either carrier could reach on its own.

America West's main hub is Phoenix, where Southwest is the other major player. It has become a major player in transcontinental flights but still doesn't offer north-south routes in the East.

US Air's main strength is still up and down the eastern United States; its shuttles between Washington, New York and Boston are among its key assets. But along with all its other problems, it has been hammered by increased competition from Southwest, particularly in its Philadelphia hub.

Although the new entity will operate as US Airways, all eyes will be on America West Chief Executive Doug Parker, who will head the new company, which will be based at America West's current headquarters in Tempe, Ariz.

Parker is the longest-serving CEO of the major airlines, which have seen executive upheaval in the deep losses of the last five years. He assumed the top post at America West on Sept. 1, 2001, less than two weeks before terrorist attacks sharply curtailed the demand for air travel.

Parker thinks he can buck history and make a success out of merging his more successful airline with one in bankruptcy.

"Building upon two complementary networks with similar fleets, closely-aligned labor contracts and two outstanding teams of people, this merger creates the first nationwide full service low-cost airline," the companies' joint release said.

In their announcement, they said the deal will be financed by $1.5 billion in new capital, including $675 million from partners and suppliers, $350 million in new private equity, $250 million in aircraft financing or sales and $200-$300 million from cash reserves.

The private investors are ACE Aviation Holdings Inc., a Canadian holding company that owns Air Canada, the Boston investment firm PAR Investment Partners, L.P., Virginia investment firm Peninsula Investment Partners, L.P. and Eastshore Holdings LLC, which is owned by Air Wisconsin Airlines Corporation and its shareholders.

The company expects annual cost savings and revenue synergies of $600 million, $10 billion in annual revenues and says it can be profitable even if oil stays at $50 per barrel.

"That we have secured such an impressive slate of equity investors and partner support in a period of such industry uncertainty is a strong indication of the prospects and enthusiasm for this transaction," US Air CEO Bruce Lakefield said in the statement. "We believe that the airline created from the merger of US Airways and America West will bring more choices for customers, as we expand the low-fare pricing structure of America West to dozens of new cities, while also offering passenger-service amenities, such as an attractive frequent flyer program, assigned seating and a First Class cabin."

America West had been breaking with its traditional hub-and-spoke flight system and using more of the point-to-point structure popular with discount airlines such as Southwest and JetBlue.

Thursday's press release says the merged airline will stick with the hub-and-spoke system, with primary hubs in Charlotte, Phoenix and Philadelphia, and secondary hubs in Las Vegas and Pittsburgh. It also plans to have focus cities in Boston, New York/LaGuardia, Washington, D.C., and Fort Lauderdale, Fla.

Regulations will force the airlines to operate under separate licenses for the next few years and keep flight crews and maintenance operations distinct.

But the company plans on integrating marketing, frequent flyer programs and schedules as soon as possible.

US Airways was the first major to file for bankruptcy court protection in the wake of the Sept. 11 attacks, but its problems predate the downturn in air travel that began earlier that year.

The airline had agreed in 2000 to be purchased by United Airlines parent UAL Corp., for $4.3 billion in cash. But when U.S. antitrust regulators blocked that deal, it started to look for ways to drastically cut costs.

It emerged from bankruptcy in 2003, but high fuel costs and continued weak fares across the industry forced it back to bankruptcy court in September 2004. It has used bankruptcy court to shed its pensions as well as force its unions to accept new lower cost contracts.

America West was once a much more typical hub-and-spoke carrier that catered to business travelers, but its competition with Southwest made it start cost-cutting efforts earlier than some of its larger competitors.

It was able to eliminate enough costs that it reported an operating profit for five consecutive quarters starting in the second quarter of 2003, while most of its larger competitors continued to lose money.

But rising jet fuel prices returned America West to the red starting in the fall of 2004. Still, it is in far better shape than US Air, allowing it to be the buyer of an airline with nearly twice as much traffic.

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