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Parker Keeps His Promise

Before bidding for Delta, the US Air CEO learned what works and what doesn't when it comes to M&A.

A little more than two years ago, low-cost regional carrier America West Airlines decided to enter the merger business and launched a bid for troubled ATA Airlines.

The attempt failed, but it obviously set the stage for bigger things.

Within a year, the America West management team headed by Doug Parker had engineered a combination with

US Airways


. Today the same team is still at it, pursuing an effort to merge their new US Airways with

Delta Air Lines


and create the world's biggest carrier.

Much has changed since the ATA bid, but one thing is the same -- Parker is still drawn to carriers in bankruptcy because of their ability to reduce expenses, particularly the cost of leasing airplanes, in court. Ironically, a disagreement over lease costs was in part responsible for the collapse of the ATA bid.

In its effort to acquire Indianapolis-based ATA, America West was outgunned by powerful

Southwest Airlines

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, which created a partnership with ATA that enabled it to acquire prized gates at Chicago's Midway Airport.

Back then, America West had $2.4 billion in revenue and about $400 million in cash. Now, US Airways has nine-month revenue of $11.5 billion, about $3 billion in cash, another $7.2 billion in financing, and is a powerful force in the airline industry.

An airline executive, who asked not to be named but was familiar with the effort, said the failed ATA bid "may have been the first step in saying 'Why can't you take two weak carriers and make one strong one?'

"They were trying to do a prepackaged restructuring, and they went from that to looking at US Airways, which was also in bankruptcy," he said. "Somewhere along the line, Doug figured out that you can use the bankruptcy court to restructure, and you'll end up with a stronger company."

In mid-2004, ATA was in trouble, the victim of a syndrome that included a series of new plane arrivals, financed with high-cost leases, just as the airline economy entered a nosedive. Once exclusively a charter carrier, ATA had grown into the country's 10th-largest airline, with a route system based at its Midway hub.

America West engaged in lengthy merger talks with ATA and offered jobs to its employees but no agreement materialized.

ATA subsequently filed for bankruptcy protection and announced an agreement with

AirTran Airways


. AirTran was to pay $87.6 million for 14 of ATA's 16 Midway gates, as well as slots at New York LaGuardia and Washington Reagan National. ATA would shift its focus back to its Indianapolis hub.

America West kept trying. In December 2004, it prepared a bid to submit to the bankruptcy court. But then it was forced to drop out of because it couldn't reach lease agreements with ATA's aircraft lessors. "We were being asked to pay more than we thought was justified," Parker said at the time.

Because America West wanted to acquire the whole ATA operation, it needed "most of the aircraft and employees to stay with the company," Parker said. Lessors felt they could get more value for the 34 Boeing 737-800 planes owned by ATA by turning them over to Asian operators.

ATA employees weren't pleased. In a statement reported by the Chicago Tribune, Eric Engdahl, chairman of the ATA chapter of the Air Line Pilots Association, explained as much at the time. "We're furious that ATA's aircraft lessors apparently refused to cooperate with America West, even though the AWA plan was the best one to keep all of ATA's airplanes flying."

Parker said then that although he had "chosen to pass on this particular transaction," America West wasn't done. "We feel confident there will be future growth and acquisition opportunities," he said, promising to play "a role in the continued consolidation of the industry."