America West Holding Corp. president and chief executive W. Douglas Parker said yesterday that the airline industry is ripe for consolidation after a period of sharp cuts in labor costs and that bankrupt carriers in particular make enticing merger targets.
His comments come a day after reports that America West was in talks with US Airways Group Inc. over a possible merger or major equity stake.
"Consolidation of the airline industry is inevitable," Parker said in a conference call with Wall Street analysts. "America West may eventually play a role in that consolidation. We will look aggressively at potential transactions if and when they arrive."
Parker said federal government regulators are likely becoming more willing to approve airline mergers. "Regulators are tired of hearing airlines say they need more help," he said. "One way for airlines to help themselves is to be able to consolidate."
Parker would not comment specifically on the talks with US Airways. But in the conference call, he said labor costs had often presented major financial hurdles in previous airline merger attempts. He added that airlines under bankruptcy court protection were attractive takeover candidates because the leases on excess aircraft could be jettisoned, easing the financial burden of the acquiring airline.
US Airways, which has been in bankruptcy protection since September, has cut more than $1 billion in its labor costs and has already rejected several of its older aircraft leases.
During the investor call, Parker said that if America West entered into a merger with or made any type of equity investment in US Airways, it would not use its own capital. America West has about $345 million in cash, and Parker said the airline planned to increase its capital during the next three months.
"Anything that America West is involved in would not involve using America West cash on hand for any kind of transaction," Parker said.
Benchmark Capital analyst Helane Becker said Parker would not risk his reputation of having successfully transformed America West into a profitable low-cost carrier from a struggling traditional hub-and-spoke airline merely to expand America West's presence along the East Coast through an expensive merger with US Airways.
"He is not willing to jeopardize America West as an ongoing concern going forward," Becker said.
She said an outside investor might help finance a deal between the two airlines.
One possible broker may be Texas Pacific Group. 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. A Texas Pacific spokeswoman yesterday declined to comment on the America West speculation.
For its part, US Airways sought to continue with business as usual. In a special telephone message to employees, Bruce R. Lakefield, US Airways president and chief executive, said the airline was focusing on its plan to emerge from bankruptcy protection and on its efforts to raise new capital through a "substantial equity investment." In the message, Lakefield acknowledged that the Arlington carrier was in discussions with a "number of interested parties" as it finalized its strategic plan to exit Chapter 11.
"While this process continues, however, I encourage all employees to keep doing what you do best to take care of our customers. Please stay focused on your work, with the comfort and safety of our passengers at the top of the list," Lakefield said.
America West's Parker has been a leading voice within the industry for airline consolidation. Last fall, he led a bid to acquire rival ATA Airlines, a budget carrier that had filed for bankruptcy. But Parker eventually backed away from the move because ATA's leases were too costly.
Acquiring US Airways would be a major undertaking for America West, the nation's eighth-largest carrier. US Airways, the nation's seventh-largest airline, has 28,000 employees and is nearly twice the size of America West.
But America West is stronger financially than most other larger carriers. Yesterday, the airline surprised Wall Street by reporting first-quarter earnings of $33.6 million. Consensus estimates compiled by Thomson Financial had predicted a loss of about $21 million. During the same period a year ago, America West reported a loss of $1.6 million.
Yesterday, AMR Corp., parent of American Airlines, the world's largest carrier, reported a loss of $162 million, down from a loss of $166 million during the comparable 2004 quarter. Continental Airlines, the nation's No. 5 carrier, yesterday reported a first-quarter loss of $184 million, compared with a loss of $124 million in the corresponding period a year ago.
