Updated from May 19
are teaming up in a planned merger that will create a major nationwide airline with plenty of cash.
The deal, announced Thursday, will create the nation's sixth-largest carrier according to 2004 traffic figures.
currently holds that position. US Airways was ranked No. 7 and America West No. 8. last year.
Thursday's announcement ends weeks of speculation about a merger. Last month, both companies acknowledged holding talks.
The pact, which the parties expect to close this fall, will combine US Airways' East Coast, Caribbean and European routes with America West's concentration of West Coast flights out of its Phoenix and Las Vegas hubs. In a conference call with reporters, the chief executives of both companies said the expanded network will give consumers more choices.
The merger will create "the nation's first full-service airline with the customer-friendly pricing structure of a low-fare carrier," said America West CEO Doug Parker.
The agreement also will lift US Airways out of its second trip through Chapter 11 bankruptcy since the Sept. 11, 2001, terror attacks. And by raising fresh capital, it will help America West avoid a potential liquidity squeeze later this year.
Observers say the deal will come with plenty of challenges, notably the integration of two different employee groups.
The new carrier will issue fresh shares, but the actual number that America West shareholders will get for each current share will be determined later. America West shares rose 35 cents, or 7.3%, to $5.16 Friday.
The merged carrier will operate under the US Airways brand, but America West's Parker will be in charge, and executive offices will be consolidated at America West's Tempe, Ariz., headquarters.
The two executives said the combined airline will generate about $600 million in annual cost savings and revenue improvements, allowing it to turn a profit even if crude oil prices are above $50 a barrel. That assertion is likely to generate skepticism among other airline executives, some of whom have warned that when crude oil is between $50 and $60 a barrel, no major airline is capable of turning a profit without fuel hedges.
Although both carriers were short on cash before, the merged airline will be flush with about $2 billion in total cash, thanks to infusions from a wide range of partners and investors.
The airlines expect to receive $350 million of new equity from four investors:
ACE Aviation Holdings
, the parent of
, with $75 million;
PAR Investment Partners
, a Boston-based hedge fund, with $100 million;
Peninsula Investment Partners
, a Virginia-based hedge fund, with $50 million; and
Eastshore Holdings LLC
, an affiliate of regional carrier Air Wisconsin, with $125 million.
Another $150 million of equity financing could come from a possible rights offering.
The airlines will secure another $675 million of cash from companies interested in doing business with the new US Airways. That includes a $250 million loan from airplane maker
, a joint venture of the
European Aeronautic Defence & Space Co.
. In return, the merged airline will be the launch customer for Airbus' planned A350 aircraft, which is designed to compete with
planned 787 Dreamliner.
The $350 million in private equity commitments are based on a total implied private full equity value of $850 million for the new airline. Of that valuation, 45% will be allocated to America West, 41% to the new equity and 14% to US Airways. That results in an implied value of $6.12 a share for the publicly traded America West stock.
Analysts have warned that the merger faces significant hurdles. Among them is the integration of two employee groups with different contracts and seniority lists. That could create tensions that hurt operations and customer service.
In Thursday's conference call, Parker said the two airlines have very similar labor costs, meaning there will not be a "big, negative synergy" from contract integration. He acknowledged that seniority integration will be a challenge, however. He also noted that by reducing their combined fleets by a total of 59 airplanes, the merger partners wouldn't need as many employees as they have today. Still, "major" furloughs would be unlikely, he added.
Discounter Southwest, one of the few airlines to turn a profit recently, is likely to fiercely respond to the merger of two of its rivals. Southwest goes head-to-head against America West in Phoenix and Las Vegas. A year ago, it invaded the Philadelphia stronghold of US Airways, and last month it upped the ante by moving into Pittsburgh.
The planned merger must still receive the blessing of the court overseeing US Airways' bankruptcy. The two partners must also restructure about $1 billion worth of loans guaranteed by the federal Air Transportation Stabilization Board. Parker voiced optimism the group would support the merger because it would create a stronger airline and thus reduce the board's risk.