US Airways, America West Agree to Merge

PHOENIX (AP) -- US Airways Group Inc. and America West Holdings Corp., the nation's seventh and eighth largest carriers, said Thursday that they are merging.

The combined company, which will operate under the name US Airways, will be funded by $1.5 billion in new capital from a variety of investors, including aircraft maker Airbus.

The goal of the merger is to stitch together two geographically distinct carriers with a history of financial struggles into a stronger airline that would compete better with lower-cost rivals such as Southwest Airlines Inc. and JetBlue Airways Corp.

''Building upon two complementary networks with similar fleets, closely aligned labor contracts and two outstanding teams of people, this merger creates the first nationwide full service low-cost airline,'' said Doug Parker, chief executive and president of America West Holdings. ''Through this combination, we are seizing the opportunity to strengthen our business rather than waiting for the industry environment to improve.''

US Airways President and CEO Bruce Lakefield said the merger will ensure US Airways' long-term viability and the security of its employees.

US Airways, which last year made its second trip into bankruptcy in two years, slashed worker pay by $1 billion a year and shed $3 billion in pension obligations.

The Arlington, Va.-based carrier said its goal was to reinvent itself as a low-cost carrier like Jet Blue or America West. But even after the cost reductions, the airline struggled as fuel costs soared and low-fare competitors drove ticket prices down.

America West, which was founded in 1983 and is based in Tempe, Ariz., operates flights across the country through its hubs in Phoenix and Las Vegas.

When Parker took over as chief executive in 2001, America West was dogged by a reputation as a carrier that delayed flights, lost luggage and left customers waiting.

The company was pushed to the brink of bankruptcy shortly after the Sept. 11, 2001 terrorist attacks and secured a $429 million loan guarantee from the federal government. Parker has said the guarantee allowed America West to avoid Chapter 11 bankruptcy, a move the airline might not have survived.

Its service record has since improved. In July 2003, the company reported its first of several quarters of profits after more than two years of losses. Its earnings have since have been mixed, due largely to high fuel costs and too many cheap fares in the market.

The merged airlines will be led by Parker and headquartered in Arizona. The airline's 13-member board will include six members from the current America West board and four members from the current US Airways board.

The merger with America West is designed to provide the final investment necessary to allow US Airways to emerge from bankruptcy.

While the entire airline industry has struggled since the Sept. 11 attacks, US Airways' difficulties have been particularly acute. Even before then, federal regulators rejected a proposed takeover by UAL Corp.'s United Airlines that US Airways executives had believed would cure the carrier's woes.

After Sept. 11, US Airways suffered from the prolonged closure of Reagan National Airport across the river from downtown Washington, D.C., where it was the largest carrier. High-fare business travel, which had been a strength of US Airways, dried up, and long security lines at airports convinced many travelers to drive rather than fly on some of the short-haul flights in which US Airways had specialized.

When US Airways first filed for bankruptcy in 2002, it exited after only eight months after winning about $1 billion a year in labor concessions. The airline believed its new cost structure would allow it to compete with the other ''legacy'' carriers it viewed as its competition.

The company's exit from bankruptcy was sped along thanks to a $900 million government loan that was part of a post Sept. 11 bailout of the industry, and a $240 million investment from the Retirement Systems of Alabama, a pension fund whose chief executive, David Bronner, had built a reputation as something of a maverick.

But company executives were forced to quickly admit they underestimated the growth of low-fare carriers, and that US Airways needed to compete not just with legacy carriers like United and AMR Corp.'s American Airlines, but with low-fare airlines like JetBlue and AirTran Holdings Inc.

Bronner, who now serves as US Airways' chairman, has said that one reason that a merger between US Airways and America West can work is that US Airways' management team will be happy to step to the sidelines. Lakefield is a longtime associate of Bronner who had no experience in the airline industry before his appointment to the US Airways board of directors in 2003.

As part of an earlier search for capital before its talks with America West heated up, US Airways was able to convince two regional carriers, Air Wisconsin Airlines Corp. and Republic Airways Holdings Inc., to each invest $125 million in US Airways, but only on the condition that US Airways agree to use those carriers as part of its US Airways Express regional fleet.

The deal with Wexford Capital, which controls Republic Airways, was also conditioned on US Airways' ability to attract additional financing and also required US Airways to sell valuable slots at Reagan National Airport and LaGuardia Airport in New York, though US Airways also retained the right to repurchase those slots.

The deals with both Air Wisconsin and Republic gave US Airways the opportunity to walk away from those deals if it found a partner willing to invest on more favorable terms.

Because the airline industry as a whole was struggling in 2004 and 2005, the airline concluded that the $250 million in investments from the two regional carriers was insufficent to boost the company out of bankruptcy.

Also, low-fare competition in recent years has increased most dramatically on the East Coast, which has been US Airways' strength.

Last year, for instance, Southwest Airlines Inc. began offering flights at US Airways' hub in Philadelphia. This year Southwest is moving in to Pittsburgh, a former hub where US Airways still maintains a strong presence.

Bill McGlashen, president of the 2,650-member America West Association of Flight Attendants, said employees of the Arizona-based airline are concerned about the possibility that their seniority could get watered down when the staffs of both carriers are combined and thus could lead to less flexible schedules for workers.

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