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US Airways in Talks With America West

Preliminary Discussions Include Infusion of Cash, Possible Merger

By Keith L. Alexander
Washington Post Staff Writer
Wednesday, April 20, 2005; Page E01

US Airways Group Inc. is in exploratory talks over a possible $100 million investment from Phoenix-based America West Holdings Corp., and the discussions have also touched on a possible merger between the two carriers to create a large low-cost airline, sources familiar with the talks said last night.

The talks were focusing more on the two carriers striking an agreement under which America West would infuse millions of dollars into Arlington-based US Airways in exchange for an equity stake, according to the sources, who spoke on condition of anonymity because of the sensitivity of the negotiations.

America West is strong in Phoenix and Las Vegas and could benefit by securing US Airways' passenger feeds from the East. (Paul Connors -- AP)

"We're exploring various options," said a source familiar with the discussions, which were characterized as "preliminary." The talks were reported last night on the Web site of the Wall Street Journal.

Rumors of merger talks between the two carriers have swirled on Wall Street for weeks. Sources familiar with the talks said it was unlikely that America West, the nation's eighth-largest airline, would acquire US Airways outright, because an acquisition could pose a major financial burden.

US Airways, the seventh-largest airline, has been operating in bankruptcy protection since September. Any possible merger before US Airways left Chapter 11 proceedings would require extensive approval from the government, its creditors and bankruptcy court. The airline hopes to emerge by the end of the summer.

Spokesmen for the two carriers declined to comment last night. America West will release its first-quarter financial results today, and executives are expected to address the talks with US Airways during a teleconference with Wall Street analysts.

"I could see America West making an investment, but a merger would bring that airline down," said Michael Boyd, an aviation expert at the Boyd Group. Boyd said the industry's high fuel costs and financial difficulties, along with US Airways' higher labor costs and complex route system, could make an acquisition costly.

US Airways has been struggling to transform itself into a hybrid carrier with budget airline costs while still offering traditional airline amenities such as first-class cabins and international routes. US Airways, which has 28,000 workers, has slashed more than $1 billion in labor costs under bankruptcy protection, but its costs are still higher than other airlines, including America West, Southwest Airlines Co. and JetBlue Airways Corp.

"Airline mergers tend to be messy. They're time-consuming and bring together two extremely different cultures, aircraft fleet types, computer systems and flight crews. That entails time and expense, which neither airline can afford," said Raymond Neidl, an analyst at Calyon Securities Inc.

An investment partnership could result in increased feeder traffic between the two airlines. America West is strong in Phoenix and Las Vegas and could benefit by securing passenger feeds from the East, where US Airways is strongest and has hub airports in Philadelphia and Charlotte.

Founded in 1983, America West, which has 13,000 employees, primarily serves destinations in the western United States. During the past three years, the airline has transformed itself into a low-cost carrier, and it was one of the first airlines to implement buy-on-board meal service.

An investment unit of Texas Pacific Group holds a 55 percent stake in America West that includes 100 percent of the company's Class A stock, according to its most recent proxy statement. During US Airways' first round in bankruptcy protection in 2002, Texas Pacific Group, led by financier David Bonderman, lost a bid to buy a majority stake in US Airways to the current majority shareholders, Retirement Systems of Alabama, the state's pension fund.

US Airways needs $100 million in additional financing to emerge from bankruptcy by the end of summer. The airline already received $250 million in financing from two small regional airlines, Air Wisconsin Airline Corp.'s financing arm Eastern Aviation LLC and Indianapolis-based Republic Airways Holdings Inc. Republic's investment was contingent on US Airways obtaining another $100 million in financing, which the airline has been scrambling to find for nearly a month. In exchange for a stake in US Airways, Air Wisconsin and Republic sought the ability to operate more of US Airways' regional jets.

If merger talks advance between the two carriers, sources said, it could trigger other airlines to consider bidding for US Airways, although most large airlines are grappling with their own high costs and lack the cash to make such a financial investment.

US Airways had tried in 2000 to merge with UAL Corp., parent company of United Airlines, but that deal fell apart after federal regulators ruled the combined airline would be anti-competitive.

Since then, several larger airlines, including United and US Airways, have struggled with high fuel prices, excess capacity and high labor costs and have cut thousands of jobs, pension plans and routes to survive.

Many airline insiders said the industry would benefit through consolidation and expressed hope that federal regulators would now be more willing to allow such a merger to take place.

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