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US Airways Cuts May Have Cleared Way For a Merger

By Keith L. Alexander
Washington Post Staff Writer
Friday, April 22, 2005; Page E01

America West Holdings Corp. began its talks with US Airways Group Inc. about a possible merger more than a year ago but was reluctant to move forward aggressively until US Airways reduced its labor costs significantly, a former US Airways executive said yesterday.

"A deal never made sense until US Airways addressed its cost issue, which was the remaining labor concessions it needed," said the executive, who spoke on condition of anonymity because of the sensitivity of the talks.

America West may buy Arlington's troubled US Airways if it can find an outside investor to help. (Richard Sheinwald -- Bloomberg News)

Since filing for Chapter 11 bankruptcy protection in September, Arlington-based US Airways has slashed employees' pay and benefits by more than $1 billion.

America West is seeking an outside investor to help fund a US Airways acquisition. Without a cash infusion, America West does not plan to move forward with a deal because it does not want to negatively impact its own financial condition, said another source familiar with the negotiations.

The airlines have held talks with Mesa Air Group Inc. and Retirement Systems of Alabama on possible investments, the former US Airways executive said. Retirement Systems became US Airways' controlling shareholder when it pumped in $240 million during the airline's first stint under bankruptcy protection in 2002. RSA is also US Airways' largest creditor.

Mesa and Retirement Systems both declined to comment.

The executive said America West is seen as a stronger airline than US Airways because it is profitable and has a stronger management team, although it is smaller than US Airways.

Meanwhile, America West chairman and chief executive W. Douglas Parker yesterday told members of the National Chamber of Commerce that consolidation is the key to addressing the problems of the airline industry. The fewer airlines, he said, the greater the ability of the remaining airlines to raise fares.

"Our industry needs consolidation to fix itself, and the government needs to let it happen," Parker said.

Parker refused to address the US Airways deal specifically. He spoke of Justice Department officials' unwillingness to allow United Airlines parent UAL Corp. to acquire US Airways in 2001. At the time, the department said the deal was anti-competitive. Today, United, also operating under Chapter 11 protection, and US Airways are "the most troubled airlines in the U.S.," Parker said.

The industry needs to eliminate 6 to 7 percent of its seats, Parker said. A reduction of that size could boost revenue by 10 percent as airlines would have more pricing power, he added.

"If we can just get someone else to go away, we'll all be fine," Parker said.

But airline observers said the disappearance of an airline or two would not necessarily rid the industry of its financial woes. Darryl Jenkins, visiting professor at Embry-Riddle Aeronautical University, said that when Eastern Air Lines and Pan American World Airways went out of business in the early 1990s, other airlines increased their flights to avoid upsetting politicians. As a result, competition remained and prices did not go up enough to boost revenue substantially.

"In whose congressional district are you going to cut back flights?" Jenkins asked.

He said he does not believe the government would object to some mergers today, because the nation's airlines are losing so much money. The industry was expected to lose about $2 billion in the first quarter, about $500 million more than in the same period a year ago. The carriers are reeling under high fuel costs and low ticket prices.

Jenkins said a combined America West-US Airways could face increased financial challenges, as costs could increase.

If America West does acquire US Airways, the biggest hurdle may be combining the airlines' labor groups and seniority lists. CJ Szmal, chairman of America West's pilots union, issued a statement late Wednesday saying the group would "vigorously protect the careers" of America West pilots.

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