CHARLOTTE, N.C. -- The merger between US Airways ( LCC) and America West two years ago was in many ways among the most successful airline deals in history, but it hasn't done much for long-term shareholders.

In fact, US Airways shares recently dipped below $20, their price when the airline emerged from bankruptcy in September 2005. The shares traded as high as $63.27 in November 2006. On Friday, they closed at $20.77.

To be sure, some investors made money. Most prominent among them is Boston hedge fund PAR Investment Partners, an early investor during the US Airways bankruptcy and at one time the combined airline's largest shareholder. PAR sold 6.75 million shares in May at around $36 and 6.5 million in February at about $58. It had bought about 11 million shares at $15 and another 2.75 million at around $40.

But in general, the recent story of US Airways is a cautionary chapter in the long saga of how airlines have destroyed investment value throughout the industry's history.

The US Airways and America West combination "shows that mergers work, but they work in the short term," says Morningstar airline analyst Brian Nelson. "This transaction enabled the company to extract several hundred million dollars in network synergies, but I don't think it was enough to ultimately fix the carrier or to stimulate widespread consolidation."

It is easily forgotten today, but giddiness abounded in the merger's early days. The transaction combined an airline in bankruptcy with a smaller airline closing in on bankruptcy to produce astonishing second-quarter 2006 growth in revenue per available seat mile: 28.8% at the former carrier and 18.6% at the latter. In the spring of 2006, shares surged, and JP Morgan analyst Jamie Baker set a target price of $100.

Flush with success -- or perhaps aware that it could not possibly continue -- CEO Doug Parker mounted a hostile bid to acquire Delta ( DAL). That merger would have enabled the eighth-biggest airline, measured by 2004 revenue passenger miles, to take over the seventh- and third-largest airlines in less than two years.

Failure meant a plunge in the share price. The bid for Delta was unveiled Nov. 15, 2006, and withdrawn Jan. 31 this year. From its opening on the day the merger collapsed, the shares have lost about 63% of their value, while the Amex Airline Index has fallen about 34%.

Today, US Airways no longer has a lead role in the industry's consolidation drama. "It's not as if we can force it to happen at this point," Parker conceded at a recent investor conference. "Being the sixth of the big six, we're not going to be somebody's first choice."

FTN Midwest Securities analyst Mike Derchin says part of the reason the stock went up was merger fever. "But after the attempt with Delta failed, people assumed there would be no more mergers for a while, which affected all the airlines," he says. "Then, as the year went on, we had higher oil prices and people got nervous about the economy."

Other factors also came into play.

As the legacy carriers' focus shifted to more profitable international flying, US Airways lagged. US Airways has less than a third of its capacity in international markets. In 2006, international flights accounted for just 20% of the total, largely explaining why "US Airways is probably least attractive in consolidation scenarios," Nelson says.

Labor integration has gone poorly, largely owing to a questionable ruling on seniority by an arbitrator for the Air Line Pilots Association. Pilots from the former US Airways find the ruling so deeply inequitable that they are seeking to replace ALPA, a divisive process that has delayed negotiations for a new pilot contract.

"Because the work forces of America West and US Airways have not been integrated, you don't really know what the final labor cost number is going to be," Derchin says. "I don't think it will be outrageous, but everybody assumes it will be higher, and it is an overhang on the stock."

Other issues include a relatively low amount of hedging against increases in fuel-cost expenses, as well as increased spending to improve customer service.

Despite unresolved labor issues, few dispute the wisdom of the merger. "You can't fault management, but the market has been brutal on the stock," Derchin says, as the cards have stacked up against the carrier.

Says Nelson: "A merger premium was introduced, then eliminated. The market is pricing in elevated jet fuel prices. There is economic uncertainty and possibly a downturn in air travel. US Airways is primarily domestic and has a rising cost structure, including looming labor cost inflation.

"Throw all of these things in a hat," he continues. "Any one of them could be the reason the stock has not performed well."

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