AWA, US Airways Detail Merger Plans
Parent companies of America West Airlines and bankrupt US Airways last night formally announced plans to merge, conditional on obtaining various approvals. If finalized, the combined entity would operate under the US Airways brand, led by current AWA chairman and CEO Doug Parker. The carriers said the new company would operate the fifth-largest airline in terms of domestic capacity as "the first national low-cost hub-and-spoke network carrier."
"Through this combination, we are seizing the opportunity to strengthen our business rather than waiting for the industry environment to improve," Parker said.
The deal potentially brings a stronger competitor into the corporate travel space by creating an airline that can meet more companies' needs. However, it remains to be seen how the two airlines would integrate sales activities and approach the corporate market, as both largely have moved to a simplified pricing strategy that de-emphasizes the value of negotiated corporate agreements. At the same time, both carriers already offer first class cabins, assigned seating and other passenger benefits not available on some other low-cost competitors.
Meanwhile, the overall prospects for the industry could improve should the two airlines cement the deal and remove a sizable amount of capacity. At the same time, new battle lines could be drawn as a merged AWA/US Airways bumps up against competitors familiar to each legacy airline and healthier players assess their own growth opportunities.
"As AWA/US Airways enters origin and destination markets where neither carrier previously had meaningful presence, market share will initially shift in its favor, but this represents lost business to an incumbent," said J.P. Morgan Securities analyst Jamie Baker in a research note this morning. "The incumbent will attempt to recapture declining share through optimizations in aircraft gauge, frequency or price."
The AWA-US Airways route network would stretch from coast to coast, with primary hubs in Charlotte, Philadelphia and Phoenix; secondary hubs in Las Vegas and Pittsburgh; and focus cities of Boston, Fort Lauderdale, New York LaGuardia and Washington, D.C. It also would include the carriers' existing services to Canada, Mexico, the Caribbean and Europe. Executives said the merged operation would generate $10 billion in annual revenues, which would rank fourth in the domestic market behind American, United and Delta, based on 2004 numbers.
The combined mainline fleet would be 361, down from 419, in addition to 239 regional jets and 57 turboprops. It also would transition its long-haul fleet to an all-Airbus operation and serve as the launch customer for the Airbus A350 in 2011.
"Fifty-eight fewer aircraft represent a 1 percent decline in domestic capacity, clearly a step, not a leap, in the right direction," Baker said.
The carriers plan to coordinate schedules and marketing efforts "as soon as possible." They also are preparing to fully integrate frequent flyer programs and other customer perk programs, such as upgrades and airport clubs.
To close by this autumn as currently targeted, the transaction needs approvals from the bankruptcy court overseeing US Airways' restructuring, AWA shareholders, U.S. Departments of Justice and Transportation, the Securities and Exchange Commission and the Air Transportation Stabilization Board, which provided federal guarantees on loans for both carriers. The renewed US Airways would be based in AWA's current Tempe, Ariz., headquarters.
AWA/US Airways pieced together financing from various sources, including Airbus, ACE Aviation Holdings--parent of US Airways' Star Alliance partner Air Canada, which could become a codeshare partner--and several investments firms. Baker said AWA/US Airways "has assembled an impressive equity roster" and that total funding, including $1.1 billion in new cash, "provides ample room for error."
Baker also said "one less pricing department is a positive" in the industry, which now should benefit from modestly positive revenue trends.
The carriers charted a transitional plan of two to three years and for now would fly under separate operating certificates. They estimated annual net synergies at $600 million--driven in part by an overhauled route system enabled by US Airways' bankruptcy restructuring--and cited complementary route networks, fleet similarities and "closely aligned labor contracts." Even so, AWA's Parker acknowledged "seniority integration will be a challenge for us and our employees."