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America West Holdings Corp.’s planned acquisition of US Airways Group Inc. is a pivotal moment in the acquirer’s 24-year history — a deal that could vault the airline into the upper echelon of the industry or plague it with labor strife and other troubles that could take years to overcome. The $850 million deal is a coming of age for America West, which since incorporating in 1981 has spent most of its existence as a second-tier, regional player. By combining with US Airways, the company would overnight become a heavyweight able to compete against the industry’s largest airlines with a complete set of offerings, including a comprehensive network and a strong international alliance. But the transaction could also be an albatross. The company risks jeopardizing the best labor relations it has had in recent history. And it quickly could become a target for both legacy network airlines and younger discounters to attack. Tempe, Ariz.-based America West said late Thursday it has a deal to buy US Airways out of bankruptcy, confirming weeks of speculation about a possible linkup. Terms of the deal, which is subject to regulatory, shareholder and bankruptcy court approval, value the merged company at $850 million, with 45 percent allocated to America West, 41 percent to new equity and the remaining 14 percent to creditors of Arlington, Va.-based US Airways. Additionally, the deal will boost the combined entity’s balance sheet. The transaction includes about $1.5 billion in new capital, including $350 million from investors PAR Investment Partners LP, Peninsula Investment Partners LP, Air Canada Inc. parent ACE Aviation Holdings Inc. and an entity owned by Air Wisconsin Airlines Corp. Robert Mann, a Port Washington, N.Y.-based consultant, said that the combined company would be much more attractive to corporate customers in many markets. In Dallas, for example, neither America West nor US Airways is a factor because alone each only offered service to half the country. Combined, “even if they are not a formable competitor, at least they are believable,” Mann said. “The combined company becomes a factor in a whole tier of cities where they were not previously a factor.” America West has always had a reputation as an underdog in the industry. The company stands as the only post-deregulation startup to survive and grow to major airline status, outlasting more prominent names such as People’s Express, New York Air and Midway Airlines. The airline spent three years in the early 1990s in bankruptcy, faced numerous mechanical difficulties and survived bitter struggles with its labor groups. But under the leadership of Doug Parker, who was elevated to CEO in September 2001, the airline’s standing on Wall Street and with customers has steadily improved. America West was the first airline to apply for federal loan guarantees after Sept. 11 and started an industry trend when it altered its pricing structure to cap prices and reduce restrictions on discount fares. Analysts said the company has been better than most at resisting fare wars, succeeding in capturing higher-priced fares consumers settle for after the discounted tickets at other airlines are sold out. But despite this progress, America West was still relegated to second-tier status, with little presence east of the Mississippi River and without major international partnerships to ferry customers overseas. US Airways, though wounded by high costs and intense competition, offers America West the breadth the airline feels it needs, with bankruptcy-imposed restructuring bringing down its costs. “Through this combination, we are seizing the opportunity to strengthen our business rather than waiting for the industry environment to improve,” Parker said in a statement Thursday evening. “A combined US Airways/America West places the new airline in a position of strength and future growth that neither of us could have achieved on our own.” The merged company’s cash position should help it weather high oil prices, but it will not shield it from other potential pitfalls. Labor officials on Friday promised to keep an open mind about the transaction, but many in the industry predict tensions. Pilot wages and assignments are dictated by seniority. America West pilots are on average younger than their counterparts at US Airways, setting up a delicate negotiation. “America West pilots are going to look at this deal and ask, ‘What’s in it for me?’” an executive at a rival airline said. “They are not going to be motivated to disturb the status quo.” The combined company should also expect aggressive competition from Southwest Airlines Co., which has large or growing operations at new US Airways strongholds Philadelphia, Las Vegas and Phoenix, as well as from established carriers such as American Airlines Inc. and Delta Air Lines Inc., fearful that the merged airline will steal corporate business. Although it is too early to say whether America West’s gamble will pay off, airline observers promise that the rest of the industry will be watching. After years of mounting losses due to competitive pressure from point-to-point fliers such as Southwest and regional discount network operators such as AirTran Airways Inc., there are a lot of airline executives looking for a new model to compete. “There isn’t a low-cost network carrier in existence on a nationwide basis today,” Mann said. “If there is to be a way to compete against the low-cost carriers who have emerged, this might be the silver bullet.” Copyright �2005 TDD, LLC. All rights reserved.

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