Is bigger necessarily better? Doug Parker, the CEO of the newly merged US Airways, thinks so. The merger of US Airways and America West Airlines has created the fifth-largest domestic US carrier. It has made it possible for US Airways to emerge from Chapter 11 and has given America West a much larger network.

The two airlines had discussed merging several times, but it was not until spring 2004 that talks began in earnest. Seabury Group, which was hired as financial adviser to US Airways, provided strategic advice and helped to devise a merger strategy.

"In spring 2004 we looked at a merger with America West but we concluded that it would be uneconomic unless US Airways could get its labour costs in line with America West's," says John Luth, CEO of Seabury Group. "US Airways attempted to do so out of court but this provedto be too difficult and the airline filed for Chapter 11 in September 2004."

The new airline may be called US Airways, and will retain its traditional blue and white livery, but it is dominated by America West, even though it was US Airways that acquired America West.

"This merger structure was unique," say Luth. "US Airways is the only US carrier to have contemplated a merger as part of its financialreorganization and to have acquired another airline while operating under Chapter 11. It was US Airways that raised the equity capital and debt financing by a collaborated effort with the management team ofAmerica West."

While nothing is certain, US Airways has been given a decent chance of achieving its aim of becoming the best domestic airline in the US. It has the liquidity, the lowest balance sheet deficit in North America and one of the hardest working management teams.

Parker, who was CEO at America West before the merger, is confident that US Airways has a bright future but it was certainly not an easy journey.

Airfinance Journal: What was the main motivation to merge with US Airways?

Parker: It was really a long-term strategy decision that we thought would be the best solution for both airlines. With US Airways in its second bankruptcy, the situation at America West was also not great. We were doing okay but, like most US airlines, we were struggling to compete in a difficult environment. America West's strong cost advantage was its best asset but it had a competitive disadvantage because of its route network. As a result, the long-term cost advantage would soon have disappeared as other airlines, including US Airways, would have lowered their costs under Chapter 11 and would also have continued to lower its fares in response to the competitive environment. US Airways had already lowered its cost levels down to those of America West under bankruptcy and we were concerned that America West would lose its cost advantage and still have a revenue disadvantage.

The merger of the two airlines was a nice fit for both of us. US Airways needed a larger-scale operation but wanted an exit strategy from bankruptcy and America West needed to consider its long-term future.

How long did you take to make your decision?

The initial idea came from US Airways. The former CEO, Dave Seigel, suggested it as a way to reduce labour costs but this was not takenseriously in the beginning. But as US Airways was going through bankruptcy, Dave called me and suggested that we resume talks about a possible merger on a more serious level. We also had calls from people at Airbus and GE who suggested similar ideas.

With the amount of US airlines operating under Chapter 11 and withfuel at the level it was, even with lower costs, it was clear that we, America West, wouldn't be able to survive alone.

Was the fact that the airline was in bankruptcy a positive aspect,or even the driving force behind the deal?

Bankruptcy facilitated the merger as it allowed US Airways to reduce its labour costs down to America West's levels. It also gave US Airways the ability to return some of its surplus aircraft to lessors. There was also little overlap between the two fleets. The new airlinereturned 15% of our aircraft, which we were only able to do because US Airways was in bankruptcy.

Bankruptcy would have involved a greater amount of red tape. What were the main challenges you had to overcome?

The bankruptcy process itself was amazingly cumbersome--there werelots of lawyers and other advisers involved that all did a great job. They had to renegotiate labour contracts, navigate the bankruptcy and complete a merger all in one go.

Serious talks about a merger began in March 2005 and we closed in September, so it took six months of intense work. We had laid out a plan to close in six months and we stuck to it.

How difficult was it to secure financing?

It wasn't easy at first. It is not easy for airlines to find financing at the best of times, let alone one with these sorts of challenges. It helped having the support from our key suppliers such as GE and Airbus, although that was not enough to allow the two companies to merge.

Our business plan promised to improve profitability by $600 million and our financiers believed in us. We found a number of investors who understood the upside to the deal, and once we had these, it became easier to attract others. The end result is that we raised $867 million in equity when we were trying to raise just $357 million of new equity. We originally tried all of the usual subjects such as GE and Airbus but none of the $867 million is that type of financing. There are a couple of strategic investors, such as Air Canada and Air Wisconsin, but the majority is from private equity groups.

Why did you order the A350?

We are very excited about our A350 order but US Airways would not have been a launch customer without the investment from Airbus. Airbus provided the $250 million loan in exchange for our order for the A350s and we were very happy with that. We will use the aircraft to replace all of our older A330s.

What about your fleet?

US Airways renegotiated its aircraft leases while under Chapter 11. America West has a number of EETCs, which are still in place. Lessors, especially GE, were eager to get some of their aircraft back fromUS Airways and America West, as they wanted to reduce their exposurein the US. The demand for narrowbody aircraft in Europe and Asia wasa factor in them wanting their aircraft back as they could get higher lease rates abroad.

Some critics have expressed doubt about whether such culturally different airlines can integrate successfully. What is your response tothis?

There are always different working cultures at different airlines but we hope to be able to make the transition in the best interest ofthe employees of both airlines. We do have some serious issues to work out with our employees, particularly the seniority issues with ourpilots and flight attendants. We are trying to work through those and other issues to achieve an acceptable compromise, although we realize that it will be impossible to please everyone. But without the merger, the employees of both airlines would be in a much worse situation. Our main job is to focus on making this merger work.

We are in a rapid period of change at the moment but this will become less dramatic in a year or so. Obviously, it will be difficult tointegrate the two airlines but the real issue for us is maintaining the internal enthusiasm for our new airline.

What is your vision for the new US Airways?

My goal is to build the best airline in the US and we have all thenecessary factors in place to make that happen. Our employees have done all that they can to enable the merger to succeed--they have agreed to pay cuts, contract changes and different route structures designed to generate more revenue. Our investors have supplied us with enough cash to be able to implement our plans, and our cost structure has been structured to be more than able to compete with low-cost competition in today's environment.

The foundations have, therefore, already been laid to build an airline that is better than any in the US, and it is up to management and the employees to execute the integration successfully. I have everyconfidence we can do so.

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