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Old 03-15-2005, 09:35 PM   #1  
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Smile US Airways poised for future merger

US Airways poised for future merger
By Thomas Olson
Wednesday, March 16, 2005

Steps taken by US Airways to partner with regional carriers and reorganize itself out of bankruptcy could lead to an outright merger within two years, some analysts said Tuesday.

The bankrupt carrier in less than one month has inked agreements with two of its express carrier affiliates -- Republic Airways and Air Wisconsin -- to inject $250 million into US Airways and float it through Chapter 11 reorganization. Republic agreed to supply $125 million late Monday, provided US Airways can raise another $100 million somewhere else.

"This was a very important deal. It gives them room to breathe," said Darryl Jenkins, professor at Embry-Riddle Aeronautical University, Fort Lauderdale, Fla.

"But what's going on here is US Airways is making a big play to become a merger partner in the next year or two," said the industry expert.

Badgered by stiff competition and steep fuel costs, few carriers have the cash or leverage to acquire a major airline, analysts say. But possible acquirers in the past have included Britain's Virgin Atlantic and United Airlines, whose merger with US Airways fell apart in mid-2001.

Air Wisconsin led a group that agreed to loan US Airways $125 million on Feb. 18, in exchange for flying its regional jets as a US Airways Express carrier. It now flies express for United Airlines only, but could lose the contract because United is rebidding the business.

Based in Indianapolis, Republic made its $125 million investment contingent on US Airways raising another $100 million. Analysts say the funds might come from another US Airways Express partner, such as Mesa Airlines, in Phoenix.

"Mesa could create access to $100 million or more. And it would be protecting its stream of revenue from US Airways code-share flying," said Robert Mann Jr., head of R.W. Mann & Co. Inc., an airline consultancy based on Long Island.

The profitable regional carrier flies 50-seaters and prop-jets for US Airways, and also flies as an express carrier for United and America West airlines. Mann said CEO Jonathan Ornstein is "no newcomer" to investing in turnaround situations either, such as discounter lndependence Air.

Ornstein could not be reached yesterday.

Republic and its majority owner, Wexford Capital, also could acquire aircraft and landing rights from US Airways before the end of the year. That would provide another $110 million for the Arlington, Va.-based airline to operate while reorganizing.

Terms would allow Republic to acquire from US Airways up to 28 regional jets with 70 seats and for its Chautauqua Airlines to fly them under the US Airways Express flag. The aircraft would continue to feed US Airways mainline service.

The regional jets currently are to be flown by MidAtlantic Airways, US Airways' wholly owned express subsidiary based in Pittsburgh. US Airways said the fleet transfer would "lower our costs and simplify our business," and that the financially stronger Republic had better prospects for growing the business of flying 70-seaters.

"This looks like US Airways will outsource all of MidAtlantic to Republic," said Mann. With the appearance of giving up on MidAtlantic, it tells me (US Airways) is essentially all up for grabs."

Republic also could acquire 113 commuter landing slots at Reagan Washington National Airport and 24 slots at New York's LaGuardia Airport -- both lucrative and coveted assets. It would lease the slots back to US Airways, which could even reacquire them after two years, say deal terms.

Republic's Chautauqua Airlines provides over 700 daily flights to 79 U.S. cities, Canada and the Bahamas through code-sharing with express units of US Airways, American, Delta and United airlines.

Republic also acquired the right to approve US Airways' reorganization plan. It was supposed to be filed yesterday, but the airline said creditors gave it a second, one-month extension, until April 15, to file the plan.

"We're not going to put the equity in unless we're convinced the (reorganization) plan is viable. But we're convinced it's real," said Republic Chairman and Chief Executive Bryan Bedford, during a conference call with analysts yesterday.

He also said Republic's investment in US Airways certainly helps the nation's seventh-largest carrier avoid liquidation. "But if they don't come out of Chapter 11, we're in no worse condition than we were last week," he said. Bedford declined to project when the carrier would emerge from bankruptcy.
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