Great Expectations.

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Author: Fiorino, Frances1

America West and US Airways, whose proposed merger would launch a long-awaited consolidation among U.S. major airlines, envision a combined low-fare operation that offers powerful domestic and international networks. Consummation of the deal, however, will turn on near-term factors having little to do with the overall plan.

In the 2-3 years it will take to finalize the deal, both carriers will continue business as usual, under separate operating certificates, while following a timetable for merger. Through the remainder of 2005, they will seek approvals without which the proposed deal cannot advance: from shareholder groups, the US Airways creditors' committee, and U.S. Bankruptcy Court for US Air's plan of reorganization and emergence from Chapter 11.

Operational, systems and labor integration begin next year. The airlines will right-size the combined fleet, and adjust routes in the effort to build what they describe as "the first national hub-and-spoke, full-service, low-cost airline, the fifth largest in the U.S."

The new entity, dubbed US Airways (a more recognizable global brand name than America West), plans to operate a 361-aircraft fleet, bolstered by 239 regional jets and 57 turboprops. It will shed 58 aircraft, or 15% of the combined fleet, mainly Boeing 737s and Airbus A319s/320s. Through America West's partnership agreements and US Airways' Star Alliance code-shares, the two currently serve destinations in the Caribbean, Latin America, Europe and the Asia-Pacific region. And merger plans call for continued growth internationally through Star and domestically through the US Airways-United Airlines code-share.

Capacity will be reduced 3.9%, with the largest reduction in east-west routes. U.S. Airways' route system will be reduced to half of its summer 2004 size, according to America West CEO Doug Parker, who will become CEO of the new entity. The emphasis is on right-sizing the coast-to-coast markets mainly for local traffic. America West will get out of the transcontinental market services between Los Angeles and New York JFK and Boston.

The integration of cultures, air services, frequent-flier programs, ticketing and airport counter space, gates and livery will be transparent to the customer, say airline executives. Both carriers anticipate annual cost synergies of $600 million from the deal.

THE "NEW" US Airways will have a combined $10 million in revenues and $3 million liquidity. It expects $675 million in additional cash flow from partners and suppliers, plus a business plan with an expectation of fuel costs at $50 per barrel â€" and high hopes for success.

Both America West and US Airways anticipate repayment of loans guaranteed by the U.S. government under rescue legislation passed weeks after Sept. 11, 2001. US Airways' loan totaled $1 billion, $900 million of it guaranteed. This loan provided the working capital that got US Airways out of its first bankruptcy in March 2003. Its current one began Sept. 12, 2004. At the end of this March, the balance of the guaranteed loan was $712 million.

America West's loan of $429 million, $380 million of which was guaranteed, was approved in January 2002. The balance at the end of March was $300.3 million.

The new airline has also attracted investment partnerships that offer mutual growth benefits. Airbus provided a $250-million investment loan to the new entity, which in turn is to become a launch customer for the A350. The program launch for the new Airbus aircraft is expected to be announced at the Paris air show next month. However, Parker said there was no plan in the works to move toward an all-Airbus fleet. About 130 737s in the fleet will eventually have to be replaced, but that is years off, he added.

ACE Aviation Holdings. parent company to Air Canada, intends to invest $75 million or about 1% of current equity, in the new entity. It has committed to a five-year agreement for maintenance services, ground handling, regional jet flying and training, through Air Canada Technical Services, ACE's full-service maintenance arm. ACTS would expect to earn C$1.5 billion ($1.2 billion) in revenues.

ACE President and CEO Robert Milton called the investment a "win-win" situation. As Air Canada is also a member of the Star Alliance, code-share opportunities are possible for both carriers. America West and US Airways currently serve Canada, including Toronto, Air Canada's main hub. The Canadian carrier, which transformed from legacy to low-cost national carrier, is expanding its international services, particularly to Asia and Latin America.

IN TURN, AIR CANADA would gain access to gates and facilities in the U.S., particularly at New York LaGuardia. It also sees "significant" benefits in transborder markets, such as Mexico and Hawaii, and in "particularly enhanced access'" to north-south markets, especially on the West Coast.

But not everything is win-win when it comes to mergers.

Speaking with analysts about possible job cuts, Parker said the leading question is "Will I have a job?"

The answer is painful. About 5,000 positions would be eliminated under the proposed merger â€" although Parker strongly emphasized the cuts would come mainly through attrition. "We look at it as saving 37,000 jobs, not losing 5,000," he said. Parker said the carriers would strive to seek reductions through voluntary furloughs, company convenience leaves, and early-out programs.

"We are estimating the need to pull down capacity on the order of 10%, and aircraft 15%," says Parker. "Certainly, we are not going to fly an airline that has 15% fewer airplanes with the same number of employees, so there will be some reduction in force that will occur over the next 12 months."

In a joint statement to employees. America West and US Airways addressed employment issues, particularly those regarding seniority integration, a subject of importance to pilots.

Both America West's and US Airways' units of the Air Line Pilots Assn. (ALPA) stated intentions to protect their assets. America West ALPA Chairman JR Baker said the merger policy provides for a time frame, hut does not dictate seniority lists. The pilots oppose "a date-of-hire type of integration as an unworkable solution.'"

AND THERE ARE more senior pilots at US Airways, founded in 1939. compared with America West, founded in 1983.

US Airways ALPA Chairman Bill Pollock reminded management and the public that US Airways pilots claim responsibility for the airline's progress in restructuring because they provided $7 billion in savings to the airline. The pilots also believe the merger will help US Air out of bankruptcy.

Airline management is advocating integrated seniority, a plan that melds lists of both carriers in order of seniority. The carriers told employees "a solution such as straight seniority integration that simply staples employees of one airline to the bottom of another's list is unacceptable and unconscionable."

Lehman brothers says the integration risks, including those of labor groups and systems infrastructure, are high.

Analyst Byron Callan of Merrill Lynch views the implications for commercial aerospace as mixed. He notes that while removal of capacity from the U.S. may improve the health of the market, there is not a lot of new incremental capacity being eliminated. For example, 25 of the 58 aircraft that are to he removed were part of US Airways' previously planned fleet reduction. Those aircraft will be returned to GE Commercial Aviation Services when leases expire and are likely to be released to Asian airlines.

The proposed merger, the first step in industry makeover. is a long way from being a done deal.

Legend for Chart:
A-
B-US Airways
C-America West
D-New Entity: US Airways
A                               B
C                               D
Hubs                            Charlotte, N.C. Philadelphia
Phoenix, Las Vegas              Same 4
Destinations[(1)]               179
96                              200+
Overlapping Markets             38
38                              -
Passengers '04                  41.3 million
21 million                      -
Operating Revenues              $7.1 billion
$2.25 billion                   $10 billion
Jet Fleet (Mainline)            280
139                             361
Average Fleet Age               11.2 years
10.7 years                      -
Aircraft Types
Airbus                          A319/320/321 A330-300
A319/320                        A350 Added
Boeing                          737-300/-400 757-200 767-200ER
737-300 757-200                 Overall 15% fleet reduction
Future Firm Orders (Mainline)   29
22
Total Employees                 30,100[(2)]
14,000                          Approx. 39,100
Alliances                       -
Star Alliance                   TBD
(1) Includes international
(2) Includes Express

                            US Airways             America West
                         No.        Status      No.       Status
Air Line Pilots Assn.   2,957      Dec. 2009   1.888   3-year contract,
                                                       amendable 2006
Assn. Flight Attendants 5,332      Dec. 2011   2,862   In negotiation
Mechanics               3,848[(3)] Dec. 2009  845[(4)] In negotiation
(3) Int'l Assn. of Machinists
(4) Int'l. Brotherhood of Teamsters
Sources: America West, US Airways

MAP: The new entity-named US Airways â€" will maintain primary hubs at Charlotte, N.C, and Philadelphia and minor hubs at Las Vegas and Phoenix. Both carriers anticipate growth in international services through Star Alliance code-shares.

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By Frances Fiorino, WASHINGTON and David Bond, WASHINGTON