America West Airlines chief executive Doug Parker told a group of industry investors Tuesday his carrier is churning more revenue than ever, but because oil prices are expected to remain high for years, the company decided to propose a merger with troubled US Airways.
"The futures markets now project crude oil to be above $50 a barrel through 2011, which is as far out as the curve goes," Parker told the Citigroup Fixed Income Research Airline Industry Conference.
"If, in fact, fuel prices are going to be above $50 a barrel for the foreseeable future, the models we all have in place need to be modified. Our people are doing as well as they have ever done and doing everything as well as they can, running a great airline, taking care of customers, producing record revenue performance, keeping our nonfuel costs lower than our competitors, producing earnings that are well in excess of our peers, but still struggling to actually keep your head above water and to actually make a profit."
The Tempe company announced last month that it signed a merger agreement with US Airways to create national, low-cost network airline that will have an approximately $10 billion in annual revenue.
"We believe this new airline can be profitable at $50 a barrel crude oil," Parker said. "The reason for that is no heroic assumptions whatsoever as to the economy. We actually anticipate it will stay much the same. The only assumption you need to believe is we can create $600 million in synergies. That clearly is an assumption that needs to be proven and one that you should test, but one we have certainly tested and feel very comfortable about."
Once the merger closes later this year, the combined companies will have $2 billion in cash, a comfortable number that will ward off competitors that are trying to run US Airways out of business, Parker said. The deal also includes between $500 million and $650 million of new equity financing and another $675 million from partners and suppliers.
While most industry consolidations were a flop, Parker said this merger will work for several reasons.
The companies labor costs are similar. US Airways has slashed payroll in the midst of two bankruptcies in three years.
"The contracts in place now are essentially the same in terms of economics as America West’s contracts," Parker said. "They actually targeted America West wage rates, they targeted JetBlue Airways productivity and they came very, very close to that."
The bankruptcy proceedings will allow the merged airline to "right size" its fleet, unlike in other mergers where the two companies are left with too many aircraft, Parker said.
"We are in process of returning about 60 airplanes, about 15 percent of the combined fleet, to lessors," he said, adding most of the airplanes are going to GE Corp. which is looking to place virtually all of them outside of North America, a move that will help reduce overcapacity in the United States.
Parker said the route networks of the two airlines will allow the merger to succeed as well. "The two networks have only four routes that are in common," he said. US Airways routes are primarily north-south trips on the East Coast and America West routes are primarily eastwest routes from Phoenix Sky Harbor International Airport and Las Vegas.
Route restructuring is expected to save the combined carriers between $150 million to $200 million annually, Parker said. A merger will allow the two companies to better gauge demand and eliminate unprofitable flying, he said.