America West Airlines
might hope a corporate marriage will bring a bright future.
But many on Wall Street view a potential union as about as attractive as the marriage of Liza Minnelli and David Gest.
America West investors expressed displeasure by dumping the company's stock Wednesday, after
The Wall Street Journal
reported the company was in advanced talks to buy US Airways.
The selling came even though America West reported a first-quarter GAAP profit and an adjusted loss that was well ahead of Wall Street's expectations. Shares finished down 31 cents, or 6.4%, at $4.50 on heavy volume.
Meanwhile, analysts say that in addition to the normal problems accompanying airline mergers -- most notably labor tension -- America West and US Airways would bring their own special baggage to the altar.
US Airways is in Chapter 11 bankruptcy protection; neither has a healthy balance sheet, and both have received federal loan guarantees. A merged company would also risk flying straight into the flight path of a much stronger rival --
"The only thing worse than an airline liquidation is an airline merger," write Roger King and Glenn Reynolds, analysts at CreditSights, an independent research firm based in New York that does no investment banking.
About the only cheerleaders on Wednesday were US Airways shareholders, who bid the company's shares up 14 cents, or 20.9%, to 78 cents.
America West did not return a call seeking comment on the reported merger discussions. A US Airways spokesman declined to comment. US Air's chairman, David Bronner, confirmed it was in talks with America West,
The Associated Press
reported, but he added that no deal was imminent.
A combined America West and US Airways would create an airline with a significant national hub-and-spoke network fusing US Airways' web of East Coast routes with America West's Phoenix and Las Vegas hubs.
The airline also presumably would have fairly low costs. America West is known for having low costs among network carriers, and US Airways used its two trips through bankruptcy since the Sept. 11 terrorist attacks to slash wages and benefits.
But analysts voiced concern the risks would outweigh the benefits.
"Airline labor is tied to strict seniority ladders, and merging the seniority lists is practically impossible," write the CreditSights analysts. "Even when US Airways rewrote its pilots contracts in bankruptcy court, it did not touch the seniority inefficiencies. Usually one airline has to be the buyer so the labor of the other goes to the bottom of the seniority list, even when they are both locals of the same union."
The two airlines would be forced to look for outside capital, as neither has an enviable balance sheet. America West ended the first quarter with only $345.3 million in cash, short-term investments and debt investments. US Airways continues to scramble to round up financing to exit bankruptcy.
"It should be noted that neither airline possesses the financial resources nor unencumbered assets to fund any transaction, thereby requiring significant external funding," writes J.P. Morgan's Jamie Baker in a research note. "While the notion of building a supposed low-cost carrier capable of rivaling Southwest may have a nice ring to it, any resulting balance sheet would most certainly pale in comparison to Southwest's." J.P. Morgan does and seeks to do business with companies covered in its research reports.
CreditSights says Southwest never stands still in the face of a threat, noting the airline trumped
bid for Chicago assets of bankrupt
. America West also had considered buying all or part of ATA.
The combination of US Airways and America West would "pale in comparison" to larger network carriers and be vulnerable to Southwest, the CreditSights analysts write, noting that Southwest has a bigger Las Vegas presence and a dominant position in the California corridor. It would be able to roll into more transcontinental routes that America West has backed away from. Southwest also has been attacking bankruptcy-weakened US Airways on its home turf by moving into Philadelphia. It starts Pittsburgh flights next month.
Whatever happens, history doesn't favor a merger, according to J.P. Morgan's Baker.
"We would note that in past decades, there has not been a single successful merger of two large airlines where shareholder value didn't suffer, though recovering airline management addicts regularly appear willing to belly up to the bar for another taste," he writes.