Unready for Takeoff.

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Author: Tatge, MarkReam, Michael

AIRLINES

Combining the ailing America West with the dying US Airways is a great deal--for creditors. The injection of $1.5 billion in new capital will keep this sickly hybrid airborne for a while, long enough for some debt holders to get most of their money back.

US Airways began its death spiral not long after the usually astute investor Warren Buffett sank $358 million into it. Bankrupted twice in the last four years, the carrier has dumped half its employees, cut $2 billion in expenses, unloaded its pension plans--and still managed to lose $611 million last year. Its cost per seat-mile remains high (10.8 cents, ahead of only industry laggard Northwest), and its most experienced pilots earn $200,000, which is $62,000 more than those of America West. Not much room for trimming: Union seniority rules require that the first workers to go are the lowest-paid. Together, the carriers face a debt load of $6 billion (including leases), 90% of capitalization.

W. Douglas Parker, the 43-year-old boss of America West, who would run the merged company, is optimistic to a fault. By his estimates the two airlines can generate up to $300 million in new revenue. Hard to see how. The new US Airways will be the first national low-cost hub-and-spoke network with simplified pricing, international service, frequent-flier programs, assigned seating and first-class cabins--which sounds a lot like the old US Airways with the same overstretched, grumpy employees. The combined route system will keep most of its traffic near the East and the West coasts, ceding the midsection to UAL and AMR, which, for all their woes, have been killing both US Airways and America West. Radical shifts in strategy (as in changing to a point-to-point system) are not on the table.

So who wins? US Airways' largest creditors. GE Commercial Aviation Services, owed a combined $3.6 billion from the two carriers, had agreed to defer some debt and lease payments from US Airways last November. Now it has the chance to recover at least $1 billion by restarting lease payments and repossessing 36 Boeing 737s and Airbus A320s, which GE can re-lease overseas. The Air Transportation Stabilization Board, on the hook for $1 billion, stands to lose it all if the new carrier is liquidated but should see most of that should the merger go through.

New investors may not be so lucky. Private-equity groups, Airbus Industrie, vendors and banks whose affinity cards support frequent-flier programs all have a stake in seeing the deal succeed. Before chipping in, though, they might recall what happened to Retirement Systems of Alabama. When US Airways tumbled into Chapter 11 again last September, the pension fund lost its entire $240 million equity investment.

$700 million The combined 2004 losses of US Airways and America West.

• 11.2% The postmerger domestic market share of US Airways.
• 19 years The length of service of US Airways most junior captain.
• 251% The annual increase in mishandled bags at US Airways.

Sources: Forbes; Bear Stearns; J.P. Morgan Chase; ALPA.

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By Mark Tatge

with Michael Ream