Capital Markets

Airline Deal Flies, Thanks to Financing

Combining US Airways and America West into a successful low-cost nationwide carrier will depend on hefty operating synergies, but just to get the d...
Stephen TaubMay 23, 2005

The merger agreement between US Airways and America West is interesting not only because it aims to create a successful, low-cost carrier that can compete with the likes of Southwest Airlines Inc. and JetBlue Airways Corp. The transaction is also interesting for its financing arrangements that draw on a wide array of interested parties.

The transaction is expected to be financed with $350 million of committed new equity; a rights offering that could provide an additional $150 million of equity financing; more than $675 million from partners and suppliers; $250 million or more from aircraft-related financings or sales; and the expected release of $200 million to $300 million in cash reserves.

“The combination would form one of the industry’s most financially stable airlines with $10 billion in annual revenues, approximately $2 billion in total cash, and among the lowest debt levels of all major airlines,” the two companies asserted in a press release when they announced the deal.

The $350 million of new equity is expected to be provided by four separate investor groups: ACE Aviation Holdings Inc. ($75 million), which owns Air Canada; PAR Investment Partners L.P. ($100 million); Peninsula Investment Partners L.P. ($50 million); and Eastshore Holdings LLC ($125 million). Eastshore, which is owned by Air Wisconsin Airlines Corp. and its shareholders, also agreed to provide regional airline services.

Another $675 million of cash financing is being secured through the refunding of certain deposits; debt refinancing; and signing bonuses from companies interested in long-term business relationships with the merged airline.

The companies have signed commitments or firm proposals for more than $425 million in additional cash liquidity from strategic partners and vendors, including more than $300 million in a signing bonus and a loan from prospective affinity credit-card providers for the merged company. The airlines added that negotiations with credit-card companies are still in progress.

Yet another $250 million will come in a loan from Airbus. The companies have agreed that the merged company will be the launch customer for the Airbus A350, with deliveries scheduled from 2011 to 2013.

In a statement, America West Holdings Corp. chairman, president, and chief executive officer Doug Parker asserted that the merged company would be profitable even with oil at $50 per barrel, primarily because of what he estimated as $600 million of annual net operating synergies.

The companies expect route-restructuring synergies of approximately $150-200 million; revenue synergies of $150-200 million by combining “two largely regional airlines and creating one nationwide, low-cost carrier”; and cost synergies of $250-300 million by reducing administrative overhead, consolidating information technology systems, and combining facilities.