Money Talks.

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Author: Anselmo, Joseph C.1Mecham, Michael2

Section: AIR TRANSPORT

Money Talks

If America West and US Airways merge, somebody else will have to foot the bill

America West President/CEO Douglas Parker is one of the most outspoken advocates of the urgent need for consolidation in the U.S. airline industry. Last week, he had to button his lip about whether his carrier might play a leading role in that process.

Parker refused to comment on widespread reports that America West was in advanced discussions about a merger with US Airways, which is seeking investors to help it exit from Chapter 11 bankruptcy protection this summer. But he stated that America West would not commit any of its precious cash reserves to a merger or acquisition тА" meaning that a big investment from a third party would be needed for any combination of the two airlines. America West, the nation's eighth-largest airline, is concentrated in the western part of the country. US Airways, which is nearly twice as big, flies mainly on the East Coast.

TO BE SURE, steep hurdles would stand in the way of pulling off such a merger. Some Wall Street analysts question why America West, which has been hit by high fuel prices and stiff competition, would want to join forces with a carrier whose long-term survivability has been in doubt for months (AW&STJan. 24, p. 39).

"Near-profitable airlines don't typically pursue larger, money-losing airlines," noted JP Morgan analyst Jamie Baker. America West had a net loss of $90 million in 2004; US Airways lost $611 million.

A deal would also have to win approval from the U.S. bankruptcy court that is overseeing US Airways' reorganization. And it would require a buy-in from airline employees, raising sticky questions about how to handle issues such as pilot seniority. "We see challenges to integrating the two operations, as well as earnings risk to America West from adding any material portion of the US Airways network to its operations," wrote Lehman Brothers analyst Gary Chase.

Southwest Airlines CEO Gary Kelly said he did not think a combined America West-US Airways could become a force in the low-fare marketplace, citing the two carriers' high cost structures. In an address to Aviation Week's Maintenance, Repair and Overhaul Conference in Dallas, Kelly noted that US Airways charges a $600-walkup fare between Pittsburgh and Philadelphia. Southwest, which plans to inaugurate service in Pittsburgh on May 4, plans to counter with a $29 advanced-purchase fare.

But Parker, in a conference call with financial analysts and journalists, said a changing industry landscape has made it easier for airlines to combine operations. Labor costs are lower, thanks to employee concessions. Aircraft leasing companies such as GE Capital Aviation Services are more willing to take back planes, meaning a combined operation could be "right-sized." And, he said, regulators in Washington appear more receptive to allowing airline consolidation.

"We are in and out of talks with other carriers on a fairly regular basis," Parker said.

A US Airways spokeswoman declined to comment on the merger discussions, hut the talks were confirmed to The Associated Press by the airline's chairman, David Bronner. Bruce R. Lakcfield, the carrier's president and CEO, told employees in a "special bulletin" Apr. 20 that the airline has been in discussions with "a number of interested parties" in recent months as it seeks equity investment.

UBS Investment Research analyst Robert N. Ashcroft estimates that to survive through next winter, US Airways will need to attract an additional $300 million and America West will need another $100 million.

But Parker disputed predictions by some analysts that his airline could face a liquidity crisis in the second half of 2005. He maintained that even if the industry remains saddled with overcapacity and fuel prices stay high, America West would end the year with "ample" cash.

For the first quarter, ended Mar. 31, America West reported net income of $33.6 million, compared with a net loss of $1.6 million during the same period a year earlier, significantly beating Wall Street expectations.

The airline would have lost $10.8 million in the quarter had it not been for a special gain associated with its fuel hedging transactions.

America West ended the quarter with $345 million in cash and investments, down from $419 million three months earlier. Passenger revenue per available seat mile increased 7.8% from a year earlier, but operating cost per available seat mile grew 9.1%, driven by fuel prices and a failure to cut costs as fast as capacity.

On Apr. 21, Standard & Poor's placed America West and its parent company, America West Holdings Corp., on a negative credit watch because of the potential merger. S&P, like Aviation Week, is a unit of The McGraw-Hill Companies. S&P analyst Betsy Snyder noted that previous airline combinations have been plagued by labor-related issues which actually caused workforce costs to rise. She also noted that both America West and US Airways have "weak financial profiles" and are reliant on government-backed loans. However, Snyder said America West's western routes combined with US Airways' eastern routes could spur "enhanced revenue opportunities."

Last year, America West considered purchasing ATA Airlines, which had filed for bankruptcy protection. But Parker said his carrier ultimately decided not to bid after determining that prices for ATA's aircraft were too high because of competing demand for them from other parts of the world.

Southwest ultimately negotiated a deal to acquire some of ATA's gates at Chicago's Midway Airport.

PHOTO (COLOR): Douglas Parker America West President/CEO

By Joseph C. Anselmo

CONTRIBUTED BY Michael Mecham

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