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Gaming Guru

Richard N. Velotta

Airlines' Merger Talk Could Spark Industry Consolidation

20 April 2005

For months, America West Airlines Chief Executive Doug Parker has been saying that the nation's airlines are offering too many seats to too few passengers and that a consolidation would benefit the entire industry.

But today, Parker wouldn't confirm in an earnings conference call whether his company is making an attempt to bring about some of that consolidation.

"We've gotten a good bit of press in the past 24 hours," Parker said in reference to published reports that America West is in talks to acquire US Airways Group, Arlington, Va.

"America West's policy is not to talk about market rumors unless there is something to talk about," he said. "So we're not going to be talking about that today."

While Parker and his colleagues discussed the airline's first-quarter profit -- a rarity in the industry -- his counterpart at US Airways confirmed that the two carriers are talking about a merger.

US Airways Chairman David Bronner said in an interview with the Associated Press on Tuesday that his company has discussed a merger with several rivals, but negotiations with America West have progress the furthest.

In an interview in Montgomery, Ala., Bronner said talks "probably started in earnest a few months ago," but no deal is imminent. Bronner also serves as CEO of the Retirement Systems of Alabama, which invested $240 million in the company.

Analysts say such a merger would have a negligible impact on Las Vegas, although a successful joining of the companies could give Tempe, Ariz.-based America West a greater customer base in the Northeast and Southeast, where most of US Airways' routes are.

Airlines bring nearly half the tourists who gamble in Las Vegas casinos and patronize the city's resorts.

America West, the No. 2 commercial passenger carrier at McCarran International Airport, uses Las Vegas and Phoenix as its hubs and offers nonstop flights to more markets than any other airline here. Between America West and its commuter partner, Mesa Air, which flies as America West Express, the carrier flies nonstop to 72 destinations with four more on the horizon later this year.

America West has 101 daily flights and America West Express, 34, according to McCarran statistics. Jointly, the partners have about a 23 percent market share of seats coming into the Las Vegas market.

The combining of America West and US Airways would produce the nation's sixth largest airline, vaulting ahead of Dallas-based discounter Southwest Airlines. But if the companies merged, America West wouldn't pull ahead of Southwest in Las Vegas, since US Airways has such a small presence at McCarran.

US Airways currently is ranked No. 10 among 36 carriers at McCarran, offering 10 nonstop flights a day between Las Vegas and its eastern strongholds of Charlotte, N.C.; and Philadelphia and a former hub, Pittsburgh. The airline has a 2.5 percent market share of seats coming into the Las Vegas market.

America West's Parker has long said that the airline industry needs to consolidate in order for his company and others to achieve consistent profitability.

"Any capacity going out of the system would have a profound impact on the problem (of turning the airline industry around)," Parker told In Business Las Vegas, a sister publication of the Sun, when asked how a US Airways shutdown could affect America West.

In the March interview, Parker said losing the capacity of an airline the size of US Airways would help all carriers, since it represents between 5 and 6 percent of the entire U.S. air industry.

He said America West would more likely be a buyer than a seller "because we think we've done a really nice job of getting our airline in a position where we're doing better than most of them. We have a fantastic group of employees who could do more."

But at least one analyst is skeptical about a merger.

"I can't understand why America West would want to do it," said Robert Mann of R.W. Mann & Co., Port Washington, N.Y.

He said he could understand why US Airways would want the deal.

"Their hope is to use America West to average down their costs and average up the overall quality," Mann said. "But there's nothing in it for AWA, with the possibility of growth offset by some major implementation risks."

He said while the route overlay of the two companies is favorable -- America West's routes use Las Vegas and Phoenix as hubs while US Airways operates along the East Coast from Charlotte and Philadelphia -- US Airways is operating under Chapter 11 bankruptcy protection.

"They're struggling to find $100 million to exit bankruptcy," Mann said. "It's such a high multiple of money that they haven't been able to find already."

The blending of the companies would also be a challenge, he said, because US Airways is "nowhere close to being a low-cost carrier and has a demoralized workforce." US Airways is in its second bankruptcy in two years and employees already have seen their pay cut three times to help make financial ends meet.

He said the deal also would have to be satisfactory to a high-profile creditor -- the U.S. government. Both airlines have received Air Transportation Stabilization Board loans, with America West owing about $300 million and US Airways, $700 million, he said.

Mann said he feels a code-share agreement that would allow each airline to sell tickets on each other's routes might be a more favorable arrangement. A similar deal between Southwest and bankrupt ATA Airlines has helped revenue streams of both of those companies.

The merger talks between US Airways and America West could herald the start of consolidation for U.S. airlines, although Bronner conceded that such a combination faces numerous hurdles.

"A lot of things will happen in the U.S. airline industry in the next 12 to 18 months," Bronner said. "We'll do whatever is necessary to survive; we'll examine a number of different alternatives."

A combined US Airways-America West would be better able to compete with discount rivals and complement each other geographically, Bronner said.

US Airways Group Inc. is planning to emerge from court protection later this year, but its reorganization has been complicated by high fuel prices that have decimated the industry's already-battered finances. As a result, US Airways has approached several rivals about a combination, but the discussions with America West have moved along the most, Bronner said.

US Airways, based in Arlington, Va., has been in Chapter 11 bankruptcy protection since September 2004.

America West was a good potential merger partner because of its West Coast focus and low-cost carrier status -- factors Bronner noted also could give any merger proposal a better chance of navigating federal antitrust review.

"If we picked a different airline that we compete with on a daily basis ... that would be a much harder sell" (to regulators), Bronner said.

Any merger would be subject to the approval not only of the companies' boards, but also US Airways creditors, regulators, and the U.S. Bankruptcy Court, which also would review any other proposals "that happen to show up," Bronner said.

The Wall Street Journal reported that the US Airways-America West talks are dubbed "Project Barbell" in reference to the fact that US Airways' routes are concentrated on the East Coast and America West serves mostly the West. Each offers transcontinental flights, but not many compared with their larger competitors.

Bronner said the leadership at America West was another important factor propelling negotiations.

US Airways executives "are more than happy to go back to playing golf as opposed to running an airline that is extremely difficult," Bronner said, calling America West managers "extremely capable people ... that are well-respected in the industry."

America West got more than $400 million in commercial loans backed by $380 million in federal guarantees shortly after the 2001 terror attacks. The airline also received concessions from employees, but has found it difficult to return to profitability, because of high jet fuel costs.

Bronner said the carriers would continue discussions in coming weeks to determine the best deal for both companies and employees.

"It will continue on as a process," Bronner said. "There's a lot of things to be hammered out, a lot of meetings to be had, a lot of things that need to be improved ... then it will go to both boards and they'll see if they really want to do it or not."