Airline industry Frankenstein could creak to life
By Caroline Daniel in Chicago
Published: May 15 2005 20:08 | Last updated: May 15 2005 20:08
Airline mergers, like airline bankruptcies, have a slim record of success, yet these two solutions are becoming the chief restructuring tools of the US airline industry. In the proposed merger between US Airways and America West, both methods are coming to the fore.
For some observers, that suggests double trouble. As one former senior airline executive puts it, “it is like combining two one-legged men. They are not going to be a track star, even if they are ambulatory.â€
Variations on this theme - two weakened individuals propping each other up - have become a popular metaphor. It is easy to see why. America West lacks a strong balance sheet and faces strategic challenges when it comes to finding growth opportunities. US Airways has languished through two bankruptcies, haemorraghed management and steadily shrunk in order to staunch losses.
As soon as the talks were confirmed, analysts raced to dismiss the chances of success. Shares in America West have been in steady decline, while US Airways remains mired in bankruptcy. Yet as more details of the proposed merger emerge - possibly as early as this week - analysts could start to rethink their initial reactions.
The first concern had been whether there would be sufficient cash to lubricate the deal, providing flexibility to weather the tough integration period. According to several people involved in the talks, that pessimism is unwarranted. “There could be more liquidity than any other airline of its size. This will not be at death’s door,†said one participant.
Instead, the combined carrier - which will be called US Airways and will be headquartered in Phoenix - could emerge with significantly more than $2bn in total liquidity, making it one of the best-financed US airlines.
More than $1bn in new funding is expected to come from equity, a rights issue and debt, adding to the more than $1bn of restricted cash that the two companies had on their balance sheets at the end of March.
The first tranche is equity investments. The airlines remain in talks to secure three of four equity partners who will invest $125m each, providing either $375m or $500m in initial funds. The preliminary shortlist includes Air Canada, Par Capital, an investment group, and Air Wisconsin, which has already transferred the cash to US Airways.
Depending on the final equity deal, and how much further cash is needed, there will be an additional rights offer generating several hundred million in financing when the deal is closed. The companies are also in advanced talks about “partner financing†to generate more than $500m in financing, from debt, signing bonuses from its credit card partners and support from Airbus, the European aircraft manufacturer.
Merger talks are proceeding unusually quickly, with a timetable for filing a potential reorganisation plan at the end of the month, with a potential exit from bankruptcy by US Airways set for later this year. Progress has been swift because, as one person involved in the discussions says, “there is something in it for everyoneâ€.
For Doug Parker, who is leading America West’s acquisition of US Airways and would become the new chief executive, the deal would confirm him as one of the leading industry executives. He has long preached the merits of consolidation among low-cost carriers and is now, in the words of David Neeleman, chief executive of JetBlue, “drinking his own bath water - or Kool-Aidâ€.
For Bruce Lakefield, a former board member and interim chief executive of US Airways, handing over executive control to Mr Parker offers a way to finally leave respectably.
For Airbus, which could provide debt or other financing when the deal is closed, it makes sense to help create a strong carrier. The combined entity could emerge as the largest operator of Airbus aircraft, after Northwest, with a fleet of about 220 Airbus airplanes.
Moreover, it will make the first credible order for the A350, as the new company is poised to order 20 of the new mid-sized aircraft. That would salve Airbus’s wounds from its failure to secure orders from Northwest and Air Canada, which recently opted to buy rival Boeing’s 787 aircraft.
For General Electric’s aircraft leasing arm, which has significant exposure to both US Airways and America West, the deal provides the opportunity to take back about 60 of its aircraft, representing about 15 per cent of the combined fleet. It is expected to place these aircraft overseas, at higher leasing rates, thus reducing its exposure to the US airlines. It is also understood to have secured the engine orders on the A350 deal.
For Air Canada, a $125m equity investment could be a prelude to forging closer strategic ties with a Star Alliance partner, a means to secure potential additional aircraft maintenance outsourcing work for Air Canada Technical Services, and a chance to put to work the C$2.1bn in cash currently on its balance sheet.
The Airline Transportation Stabilisation Board, the federal agency owed more that $1bn from the two carriers, could still could veto any deal. Yet a successful merger would raise the chance of having its loans re-paid. The ATSB is understood to be willing to back the deal, according to several officials.
Risks do remain. Alternative investment groups could scotch the deal. Unions may not agree. There are big integration challenges ahead. Yet with so many groups having an interest in the merger succeeding, executives seem to have secured the support of powerful friends.
By Caroline Daniel in Chicago
Published: May 15 2005 20:08 | Last updated: May 15 2005 20:08
Airline mergers, like airline bankruptcies, have a slim record of success, yet these two solutions are becoming the chief restructuring tools of the US airline industry. In the proposed merger between US Airways and America West, both methods are coming to the fore.
For some observers, that suggests double trouble. As one former senior airline executive puts it, “it is like combining two one-legged men. They are not going to be a track star, even if they are ambulatory.â€
Variations on this theme - two weakened individuals propping each other up - have become a popular metaphor. It is easy to see why. America West lacks a strong balance sheet and faces strategic challenges when it comes to finding growth opportunities. US Airways has languished through two bankruptcies, haemorraghed management and steadily shrunk in order to staunch losses.
As soon as the talks were confirmed, analysts raced to dismiss the chances of success. Shares in America West have been in steady decline, while US Airways remains mired in bankruptcy. Yet as more details of the proposed merger emerge - possibly as early as this week - analysts could start to rethink their initial reactions.
The first concern had been whether there would be sufficient cash to lubricate the deal, providing flexibility to weather the tough integration period. According to several people involved in the talks, that pessimism is unwarranted. “There could be more liquidity than any other airline of its size. This will not be at death’s door,†said one participant.
Instead, the combined carrier - which will be called US Airways and will be headquartered in Phoenix - could emerge with significantly more than $2bn in total liquidity, making it one of the best-financed US airlines.
More than $1bn in new funding is expected to come from equity, a rights issue and debt, adding to the more than $1bn of restricted cash that the two companies had on their balance sheets at the end of March.
The first tranche is equity investments. The airlines remain in talks to secure three of four equity partners who will invest $125m each, providing either $375m or $500m in initial funds. The preliminary shortlist includes Air Canada, Par Capital, an investment group, and Air Wisconsin, which has already transferred the cash to US Airways.
Depending on the final equity deal, and how much further cash is needed, there will be an additional rights offer generating several hundred million in financing when the deal is closed. The companies are also in advanced talks about “partner financing†to generate more than $500m in financing, from debt, signing bonuses from its credit card partners and support from Airbus, the European aircraft manufacturer.
Merger talks are proceeding unusually quickly, with a timetable for filing a potential reorganisation plan at the end of the month, with a potential exit from bankruptcy by US Airways set for later this year. Progress has been swift because, as one person involved in the discussions says, “there is something in it for everyoneâ€.
For Doug Parker, who is leading America West’s acquisition of US Airways and would become the new chief executive, the deal would confirm him as one of the leading industry executives. He has long preached the merits of consolidation among low-cost carriers and is now, in the words of David Neeleman, chief executive of JetBlue, “drinking his own bath water - or Kool-Aidâ€.
For Bruce Lakefield, a former board member and interim chief executive of US Airways, handing over executive control to Mr Parker offers a way to finally leave respectably.
For Airbus, which could provide debt or other financing when the deal is closed, it makes sense to help create a strong carrier. The combined entity could emerge as the largest operator of Airbus aircraft, after Northwest, with a fleet of about 220 Airbus airplanes.
Moreover, it will make the first credible order for the A350, as the new company is poised to order 20 of the new mid-sized aircraft. That would salve Airbus’s wounds from its failure to secure orders from Northwest and Air Canada, which recently opted to buy rival Boeing’s 787 aircraft.
For General Electric’s aircraft leasing arm, which has significant exposure to both US Airways and America West, the deal provides the opportunity to take back about 60 of its aircraft, representing about 15 per cent of the combined fleet. It is expected to place these aircraft overseas, at higher leasing rates, thus reducing its exposure to the US airlines. It is also understood to have secured the engine orders on the A350 deal.
For Air Canada, a $125m equity investment could be a prelude to forging closer strategic ties with a Star Alliance partner, a means to secure potential additional aircraft maintenance outsourcing work for Air Canada Technical Services, and a chance to put to work the C$2.1bn in cash currently on its balance sheet.
The Airline Transportation Stabilisation Board, the federal agency owed more that $1bn from the two carriers, could still could veto any deal. Yet a successful merger would raise the chance of having its loans re-paid. The ATSB is understood to be willing to back the deal, according to several officials.
Risks do remain. Alternative investment groups could scotch the deal. Unions may not agree. There are big integration challenges ahead. Yet with so many groups having an interest in the merger succeeding, executives seem to have secured the support of powerful friends.
