Following on the news reported in this earlier post, America West Holdings Corp and U.S. Airways Group Inc. announced yesterday that they are proceeding with a merger that — contrary to the usual optimism surrounding such deals — could sink both airlines.
The theory of the deal is that, by combining the smaller, low-cost America West to US Airways larger but more costly operation, the companies would create a full-service nationwide airline with a competitive pricing structure that could be profitable even at the current high level of fuel prices. The combined company will be based in Tempe, Ariz., where America West is now based, but will be called “US Airways.”
New equity investors will infuse $350 million for a 41% stake in the merged company, America West shareholders will receive 45%, and 14% will go to US Airways creditors. The airlines believe that they can attract another $1.6 billion in new capital — including the new equity and financing from partners, suppliers, asset-based loans, etc. — so that they expect to have less debt and $2 billion in cash on hand when the deal closes this fall. The two carriers pegged the equity value of the combined airline at $850 million.
US Airways has been a basket case for quite some time and has been wallowing in a chapter 22 (i.e., it’s second chapter 11 case) since September, 2004. Last year, the company posted a net loss of over $600 million on revenue of just a bit over $7 billion. Here are some previous posts on that troubled airline.
Meanwhile, America West narrowly escaped a chapter 11 case in late 2001 by arranging a bailout loan of over $400 million backed by federal guaranties. America West posted a net loss last year of almost $90 million on revenue of about $2.35 billion, and ended 2004 with about $400 million in cash.
So, although far from a surefire success at this point, the merger does have at least glimmer of hope — the reduction of one airline from the over-crowded U.S. airline industry. Maybe markets still do work in the inscrutable airline industry!