The planned merger of
is aimed to ensure smooth flying for both companies.
But many on Wall Street see turbulence ahead. They question the airlines' expectations for meshing, forecast problems integrating employee groups and note that the merged company will still face tremendous competition.
"Given the difficult state of the industry, better-financed competitors, a cash sink at US Airways and a step-up in weight class for America West management, we would say that the odds of a successful merger are not high," wrote Roger King and Glenn Reynolds, analysts at CreditSights, an independent research firm based in New York that does no investment banking.
There may be a silver lining for the industry as a whole, though. Because the merged airline will operate with fewer planes than the two carriers currently use, it is likely to reduce domestic capacity. A glut of seats on U.S. routes has left individual carriers unable to raise fares enough to offset high fuel expenses.
"Any time that the industry removes capacity, it should be viewed favorably," wrote Helane Becker, airline analyst at the Benchmark Co., a New York-based brokerage that does no business with companies it covers. "The capacity reductions will come from America West leaving the transcontinental market and US Airways rationalizing some of its West Coast routes. As a result, this merger, which is likely to receive antitrust approval (no overlapping routes between the two companies), should be beneficial to the group."
The deal, announced Thursday, will create the nation's sixth-largest carrier according to 2004 traffic figures, although No. 5
will not be far ahead.
ranked sixth last year, followed by US Airways and then America West.
The pact, which both 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.
The agreement also will lift US Airways out of its second trip through Chapter 11 bankruptcy since the Sept. 11 terror attacks. By raising fresh capital, it will help America West avoid a potential liquidity squeeze later this year.
The merger partners expect to achieve about $600 million in annual benefits, something they say would enable them to turn a profit even if crude oil remains at $50 a barrel. Restructuring routes would yield $150 million to $200 million. Another $150 million to $200 million would come from increased revenue, as the combined carrier would be able to appeal to more consumers with a bigger network. Cost savings of an additional $250 million to $300 million would come from reducing administrative overhead and integrating computer systems.
Those estimates could be overly ambitious, according to Jamie Baker, a J.P. Morgan analyst. "Revenue synergies are short-term by nature, and likely to be competed away over time as incumbent networks reallocate resources in order to preserve
market share," he wrote. "Cost synergies are longer-lasting, but pro forma, US Air already has an advantage over legacy operators, seemingly to no avail." J.P. Morgan does and seeks to do business with companies covered in its research reports.
Meanwhile, Glenn Engel, a Goldman Sachs analyst, contends that America West will suffer by expanding its route network. Engel downgraded America West shares to in-line from outperform Friday.
"The thesis of our outperform rating was based on America West's exposure to West Coast markets, where unit revenues and yields are benefiting from benign capacity growth vs. double-digit capacity growth seen in eastern markets," he wrote in a research note. "We believe the addition of an East Coast carrier will overwhelm any possibility of a return to profitability for America West."
The downgrade failed to depress America West shares, however; they gained 31 cents, or 6.4%, to $5.12.
The difficulties of putting together two different employee groups are likely to be daunting. Although America West is the stronger of the two partners and is effectively the acquirer in the merger, US Airways workers tend to have been on the job longer, the CreditSights analysts noted. That means if the two airlines merged right now, layoffs would hit America West workers first.
"Seniority issues are the number one hangup of airline mergers," the Credit Sights analysts wrote.
America West employees have already sounded alarms. Several expressed concern about a potential merger at the company's annual meeting on Tuesday. After the merger announcement, Capt. J.R. Baker, who heads the America West unit of the Air Line Pilots Association, warned in a statement that integrating pilots on a "date-of-hire" basis would be "unworkable."
"We are a vital part of America West, and we will not allow our pilots' career expectations to be sacrificed as a result of our airline's success," Baker said.
In a conference call, America West CEO Parker acknowledged that integrating seniority lists will be a challenge. He also noted that by reducing their combined fleets by almost 60 airplanes, the merger partners wouldn't need as many employees as they have today. Still, "major" furloughs would be unlikely, he added.
The merged airline will take its time integrating work groups, a process management says will minimize "dislocations." Although the airlines will quickly present a unified brand, schedule and frequent-flyer program to consumers, they will fly under separate operating certificates for two to three years, keeping flight crews and maintenance procedures separate.