America West Airlines will change its name of more than two decades and merge with US Airways in a deal that is expected to create a $10 billion global carrier headquartered in Tempe.
The partnership announced Thursday will create the sixth largest passenger airline in the United States, putting it one ahead of perennial powerhouse Southwest Airlines.
The two companies called the deal a well-thought-out merger that will combine two airlines with enough similarities to make it one of the strongest in the business. It would parlay predominately north and south flying in US Airways’ extensive East Coast network with mostly east and west flying in America West’s West Coast routes.
"What we will create with this merger is the nation’s first full-service airline with a customer-friendly pricing structure of a low-fare carrier," said America West CEO Doug Parker. The transaction will be financed with $1.5 billion in new capital and it gives the company $2 billion in cash at some of the lowest debt levels of all major airlines, Parker said.
"This is the beginning of something that could change our industry and we are excited to be on the leading edge of that," he said, adding that the US Airways name will be used because it is better known.
The merged airline will be run by Parker and offer customers simplified pricing to more than 200 cities across the United States, Canada, Mexico, the Caribbean and Europe. Amenities will include a wide frequent flier program, airport clubs, assigned seating and first-class cabins, the carriers said.
The two expect the deal to be finalized this fall, but employees will have to be integrated over two or three years as the merged company works toward a federal OK to fly under one operating certificate. Consumers will notice changes in schedules, pricing and frequent flier programs a few months following the close, Parker said. Redoing the paint on planes may take longer, he said.
Analysts have been skeptical of the deal, saying it will be hard to merge the two because of US Airways’ higher costs and diverse company cultures.
"US Airways is still a relatively high cost carrier," said Mike Boyd of the Boyd Group, an aviation consulting business in Colorado. "The financial restructuring itself may go a long way to fixing the problem, but then the revenue problem, getting more people on the airplane and more brand loyalty, is still a question. There is still going to be an open question about calling the thing US Airways. The US Airways franchise right now doesn’t have the highest image on the East Coast."
The deal is subject to approval by the U.S. Bankruptcy Court overseeing US Airways’ pending Chapter 11 case. It also must be approved by the federal government because the two airlines owe a combined $1 billion in loan guarantees they were given following the terrorists attacks of Sept. 11, 2001.
The merged airline plans to have primary hubs in Charlotte, N.C., Phoenix and Philadelphia, and secondary hubs in Las Vegas and Pittsburgh. The merged company would have "focus cities" in Boston, New York-LaGuardia, Washington, D.C., and Fort Lauderdale, Fla.
"This is good news for consumers," said Bruce Lakefield, US Airways CEO. "Customers will have more choices than ever before. It will add some stability to both our employee work groups and that, in turn, protects jobs for thousands of employees."
The merged company doesn’t plan on any immediate changes in any of the major cities it serves. It’s likely America West Arena will undergo a name change, but details still need to be worked out, Parker said.
US Airways’ Virginia headquarters will close and its 600 employees will be shifted to other departments, Parker and Lakefield said. There are about 44,000 employees between the two airlines and unions at the carriers will integrate their own seniority lists. The company plans to save costs by returning 59 airplanes to lessors.
"We won’t need as many employees that exist today at the two companies," Parker said. "However, how we get there is still to be seen. There’s been a good bit of attrition at US Airways of late and they find themselves somewhat tight on people. We certainly do not anticipate major reductions in force."
The decision to remain in Tempe was driven by lower costs and adequate space at the headquarters. Also, the two decided on staying in the East Valley because US Airways can terminate office leases under bankruptcy protection, but America West can’t.
The two airlines began discussions more than a year ago, but the deal was not done until US Airways lowered its labor costs in the bankruptcy process.
It’s still possible others could bid for US Airways or its assets in bankruptcy, but Parker said the deal is one that won’t be beat. He also doesn’t expect problems with an approval from the Air Transportation Stabilization Board, guarantor of $1 billion in government loans.
"I can’t imagine the entire loan will be paid off," Parker said. "What hopefully the ATSB will see is the risk of their $1 billion is now dramatically reduced because the combined airlines are much stronger than either airline together."
The airlines received $350 million of equity from the parent of regional airline Air Wisconsin, two investment firms and the parent of Air Canada.
About $675 million in additional cash financing was secured through partners and others who want to do business with the new company, including $300 million in a signing bonus and a loan from prospective credit card providers. About $250 million will come from Airbus SAS in form of loan in exchange for the merged company ordering Airbus A-350s with deliveries scheduled for 2011 to 2013.
The company says it will make another $600 million by restructuring routes, returning aircraft to GE Corp. and reducing overhead by consolidating departments.