America West, US Air talks may include Airbus

Mary Schlangenstein

Monday, May 16, 2005 | 9:30 a.m.

America West Airlines and US Airways Group Inc. are talking with Airbus SAS, hedge fund Par Capital Management Inc. and Air Canada's parent about funding a merger of the two U.S. carriers, people familiar with the talks said.

Airbus may provide a $250 million loan in exchange for aircraft orders, Air Canada parent Ace Aviation Holdings Inc. may contribute $100 million to $150 million in equity, and Par Capital and a second hedge fund may provide a combined $125 million in equity, the Wall Street Journal said late Sunay.

The two carriers need financial partners for a merger because US Airways doesn't have funding to emerge from bankruptcy and America West has said it won't invest much of its own capital. A merger would combine the East Coast network of US Airways with the U.S. West-focused route system of America West. The two carriers said April 22 that they were in talks.

"There's probably somebody you could find that would invest in this combination, but the real issue is what's the business plan going forward," said Robert Mann, head of R.W. Mann & Co., an airline consulting firm based in Port Washington, N.Y. "Unless they can really show they can sweat out all the costs and not have any (labor) integration problems, I just don't see how this works in the short term."

US Airways, of Arlington, Va., and Phoenix-based America West declined to comment. Airbus and Air Canada declined to comment as well. Par Capital Vice President David Tobin didn't immediately return a call to his office late yesterday.

A combined US Airways and America West would displace Southwest Airlines Co., the world's largest low-fare carrier, as the No. 6 U.S. airline based on miles flown by paying passengers. US Airways currently is No. 7, and America West is No. 8.

The merged airline likely would require as much as $750 million in financing to meet the $350 million US Airways said it needed to emerge from bankruptcy and the funding America West needs to avoid its own liquidity problems later this year, Mann said.

"You can run through a half-billion dollars in the airline industry faster than you can sneeze," he said.

Airbus, of Toulouse, France, the world's largest aircraft maker, would provide funding in exchange for an order for 20 of its new A350 planes, while ACE is interested in gaining maintenance work from the combined carriers, the Journal reported. A second unidentified hedge fund is involved in the talks with Boston-based Par Capital, which at one time owned 15 percent of America West, the Journal said.

The U.S. airline industry has had combined losses of $33.2 billion since 2000 and is forecast to lose another $5 billion this year as competition keeps fares low and rising fuel prices boost costs. US Airways, UAL Corp.'s United Airlines and ATA Holdings Corp. are operating under bankruptcy protection.

US Airways filed for bankruptcy in September for the second time in as many years. It already has gotten commitments for $125 million each from Republic Airways Holdings Inc. and a group led by Air Wisconsin Airlines Corp. The Republic agreement includes an option for another $110 million.

Mesa Air Group Inc., a regional carrier that gets about 75 percent of its revenue from making flights for America West and US Airways, still is considering an investment, Chief Executive Jonathan Ornstein said in an interview.

"At this point in time, we haven't come to any agreement as regards to any investment," he said.

A merger agreement must be approved by U.S. antitrust regulators and the Air Transportation Stabilization Board, which provided a $900 million federal loan guarantee for US Airways and a $380 million guarantee for America West following the Sept. 11, 2001, terrorist attacks on the U.S. The unions and shareholders of both airlines would also have to approve an agreement.

The board could require the two airlines to pay off their guarantees -- a total of about $1 billion -- before any merger could occur, Mann said.