The potential benefits of uniting America West and US Airways — wedding a carrier from the West with one from the East and reducing...
WASHINGTON — The potential benefits of uniting America West and US Airways — wedding a carrier from the West with one from the East and reducing capacity in both markets — may be dwarfed, analysts said yesterday, by the myriad costs and complications that stand in the way of any deal.
“Up to a point, we believe the idea has merit,” UBS airline analyst Robert Ashcroft said. He and other analysts said that gaining the necessary support of shareholders, employees and some deep-pocketed investors could prove difficult, however.
An outright merger would be the toughest deal to accomplish, analysts said, so the companies could decide to form a holding company and operate under a code-share agreement. That option would expand each carrier’s reach and revenue, while leaving the knottier details of cost-cutting off the table, at least temporarily.
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Daniel Kasper, who runs the transportation practice for the consulting firm LECG in Cambridge, Mass., said there would be benefits for both airlines if they could pull off some kind of partnership. “It’s not like sitting still is a viable option for very long,” he said.
The chairman of US Airways confirmed Tuesday that the carrier, which plans to emerge from bankruptcy court later this year, is in advanced discussions with America West to create an airline with nationwide reach. David Bronner cautioned in an interview that no deal is imminent, though he said that a combined US Airways-America West would be better positioned to compete with discount rivals, such as Southwest Airlines, AirTran Airways and JetBlue Airways.
America West Chief Executive Douglas Parker refused to comment specifically on discussions with US Airways. But in a conference call with analysts yesterday after the company announced a $33.6 million first-quarter profit, Parker said airline consolidation is “inevitable” and that the company would consider a merger. He also said the regulatory environment is favorable given the industry’s precarious financial condition.
“One way for airlines to help themselves is to come together,” Parker said.
America West considered buying ATA Airlines late last year after the Indianapolis-based airline filed for Chapter 11, but it eventually backed away as the cost of the transaction escalated.
Analysts said a merger between US Airways and America West might be approved by regulators and by a federal agency that has loaned them money, but the remaining financial and logistical challenges would be significant.
With soaring jet-fuel prices and low fares sapping the industry’s limited cash reserves, these carriers may need an investment of $500 million or more to keep them in business long enough to consummate a deal.
The federal government, General Electric Capital and regional airlines are already funneling huge sums to US Airways and, to a lesser extent, America West. As a result, both companies are extremely leveraged, leaving them few unencumbered assets, so that “any entity contributing cash is clearly taking equity risk,” Ashcroft said.
Assuming the deal could be financed, the next hurdle, analysts said, would be integrating the companies’ fleets, management and, most of all, its rank and file employees.
“Airline mergers tend to be messy and expensive as the two cultures integrate,” Calyon Securities analyst Ray Neidl said.
What could prove tricky on the labor front is that the pilots at bankrupt US Airways have considerable seniority and would likely be targeted for cuts after any merger took place.
“Based on past precedent, labor routinely has to be bought off in order to endorse a marriage of nonequals,” said J.P. Morgan Securities airline analyst Jamie Baker. “Such is the costly case we envision here.”
A spokeswoman for the Air Line Pilots Association declined to comment.
America West is the healthier of the two airlines and therefore has more to lose, several analysts said. US Airways has been in Chapter 11 bankruptcy since September 2004, its second trip to bankruptcy court in two years.
Baker said he expects America West’s stock price to suffer as long as the talks between the two companies persist and, for that reason, he anticipates resistance to any merger from the Phoenix-based carrier’s shareholders.
“I’m sure it’s way up there on the US Airways wish list, as Bronner’s gushing comments suggest, but I can’t understand why America West would be interested,” said Robert Mann, an airline consultant in Port Washington, N.Y.
There are some factors that make America West and US Airways logical partners, analysts said.
“If they could pull it off, what you would end up with is a large, low-cost carrier with a network that would be highly competitive,” Kasper said. And because there is little overlap in their operations, federal regulators are unlikely to stand in the way, as they did a few years back when US Airways sought to merge with United Airlines.
Associated Press reporters Ananda Shorey in Phoenix and Sheila Flynn in Montgomery, Ala., contributed to this report.