Ready for Takeoff
Merger puts US Airways on the runway to success
Savings. But the merger idea quickly gained support from key players, including big creditors like Airbus and GE Commercial Aviation Services. By February 2005, meanwhile, US Airways was almost out of money. The Seabury Group, an investment bank advising the carrier, began touting a merger as the only likely alternative to outright liquidation. In March, executives of the two airlines met and decided that if they merged, they could save $600 million a year.
A fresh infusion of cash was needed, too--at least $350 million. Oil had just hit $55 a barrel and looked to be heading higher. Airline losses were piling up, with the industry headed toward a combined $5.6 billion in red ink for the year. "Our pitch to investors was, 'We're at the bottom,'" says Scott Kirby, who was America West's sales and marketing director.
About 40 investor groups said no thanks. Finally, in May 2005, a Boston private-equity firm, PAR Capital Management, pledged to invest $150 million in the venture. Other lenders joined in, and by last summer the company had raised $565 million. The merger plan cleared various government hurdles. Finally, on Sept. 27, 2005, the combined airline emerged from Chapter 11. The same day, the "new" US Airways--the corporate name of the merged carriers--held a stock offering that raised $190 million, with shares opening at about $21. A week later, the share price had risen by about a dollar--a respectable market reaction.
Most of the America West management team, including Parker and Kirby, slid over into similar posts at the new company. They brought in a few recruits from the old US Airways. Then they started executing the work that had looked so good in the prospectus. The company is nearly finished retiring 60 jets from its fleet and transferring over more-efficient America West planes. Routes have been consolidated; the new airline has scotched money-losing flights from Phoenix to cities like Raleigh, N.C., and Billings, Mont., for instance, while offering new service on promising routes like Philadelphia to Portland, Ore.
For a while, the new US Airways was just another airline struggling to stanch losses. Then in April, the company's first-quarter earnings--a tidy $65 million profit--galvanized attention on Wall Street. The modest profit put US Airways in "very elite company," wrote Lehman Brothers analyst Gary Chase, who compared the new carrier to industry darlings Southwest and Alaska airlines. By cutting unprofitable flying, the airline raised its revenue per seat by 24 percent.
Investors have been celebrating. US Airways' share price has soared to as high as $56. The private lenders who invested in two weak carriers have seen returns approaching 400 percent. US Airways has also used fresh financing and improved cash flow to pay off two federal government loans, one for each of the old carriers. Including interest and fees, the government has earned almost $300 million on its investment.
For all the whooping, however, the coup at US Airways has not been bloodless. Through bankruptcy, US Airways furloughed more than 7,000 pilots, mechanics, and other union employees. Both companies combined have shed an additional 1,200 management jobs. The layoffs have especially hurt Pittsburgh, where there is little left, besides a minor hub, of an operation that was once large enough to justify a multibillion-dollar new airport. To US Airways survivors, that's a better outcome than total liquidation would have been. "We didn't want that," says Al Crellin, operations director for both the old and the new US Airways, "because of all the employees and the families." As business has improved, US Airways has hired back about 65 pilots and 200 flight attendants.
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