US Airways, America West Holdings agree to merge

By Caroline Salls

Pittsburgh, May 19 - America West Holdings Corp. and US Airways Group, Inc. said they have agreed to merge.

The merger will create the first national low-cost hub-and-spoke network carrier with access to low-fare service to over 200 cities across the United States, Canada, Mexico, the Caribbean and Europe, the companies said.

Subject to U.S. Bankruptcy Court approval, the merged airlines will operate under the US Airways brand under Doug Parker, currently chairman, president and chief executive officer of America West.

The merged airline's 13-member board will be comprised of one member from each of the three new equity investment companies, six members from the current America West board, including Parker as chairman, and four members from the current US Airways board, including Bruce Lakefield as vice-chairman. Lakefield is currently president and chief executive officer of US Airways.

The combined airline's headquarters will be consolidated into America West's headquarters in Tempe, Ariz.

For regulatory purposes, both airlines will operate under separate operating certificates for a transition period of two to three years, keeping flight crew, maintenance and safety procedures for each airline separate. However, the airlines will work together to coordinate schedules, frequent flyer programs and other marketing programs as soon as practical.

The merger is expected to create one of the industry's most financially stable players, with over $10 billion in annual revenues and a strong balance sheet that includes about $2 billion in total cash at closing, according to the announcement.

The airline's strong cash balance is expected to be created through a combination of current cash on hand at US Airways and America West, $350 million of new equity commitments and proceeds from a possible $150 million rights offering.

In addition, the merged airline will receive cash infusions of over $1.1 billion, principally from partners and suppliers ($675 million), asset-based financings or sales of surplus aircraft ($250 million) and release of cash reserves ($200 to $300 million).

$350 million of equity commitments

The $350 million of new equity is expected to be provided by ACE Aviation Holdings Inc., ($75 million commitment), PAR Investment Partners, LP, ($100 million commitment), Peninsula Investment Partners, LP, ($50 million commitment) and Eastshore Holdings LLC, ($125 million commitment and agreement to provide regional airline services), which is owned by Air Wisconsin Airlines Corp. and its shareholders.

The merged company also plans to conduct a rights offering that could provide an additional $150 million of equity financing.

About $675 million of additional cash financing is being secured through a combination of refunding of deposits, debt refinancing and signing bonuses from companies interested in long-term business relationships with the merged airline.

The companies have signed commitments or proposals for more than $425 million in additional cash liquidity from strategic partners and vendors, including over $300 million in a signing bonus and a loan from prospective affinity credit card providers for the merged company.

Another $250 million will come from Airbus in the form of a loan.

The companies have also agreed that the merged company will be the launch customer for the Airbus A350, with deliveries scheduled from 2011 to 2013.

The combined airline expects to realize cost synergies of $250 to $300 million annually by reducing administrative overhead, consolidating both airlines' information technology systems and combining facilities.

5th largest U.S. airline

When merged, the combined airline will become the nation's fifth largest airline. The combined airline is expected to operate a mainline fleet of 361 planes (supported by a regional jet fleet of 239 planes and 57 turboprops), down from a total of 419 mainline aircraft operated by both airlines at the beginning of 2005.

US Airways projects returning 25 additional aircraft by the end of 2006, in addition to the 46 aircraft it already plans to return.

US Airways employs 30,100 people and America West employs 14,000 people.

The $350 million of private equity commitments are based upon a total implied private full equity value of $850 million for the merged corporation. Of that $850 million valuation, 45% will be allocated to America West, 41% to the new equity and 14% to US Airways.

The partners have agreed that up to $650 million of total equity can be raised, including any proceeds from planned a rights offering. The right to participate in a rights offering for up to $150 million in common shares of the merged companies will be allocated 61.5% to the stakeholders of US Airways and 38.5% to the common stockholders of America West.

The merger is expected to occur following confirmation of US Airways' plan of reorganization and emergence from Chapter 11.

The transaction, which has been approved by both companies' boards of directors, is also subject to the approval of America West's shareholders.

US Airways Group, Inc. is being advised by Seabury Group LLC as restructuring adviser and financial adviser and the law firm of Arnold & Porter LLP; advisers for America West Holdings Corp. include Greenhill & Co., LLC as its principal financial adviser, Merrill Lynch & Co. as structuring adviser to some financings, and the law firms of Skadden, Arps, Slate, Meagher & Flom LLP and Cooley, Godward LLP.

US Airways, an Arlington, Va.-based carrier filed for bankruptcy on Sept. 12, 2004. Its Chapter 11 case number is 04-13819.

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