"US Airways poised for future merger"

Wednesday, March 16, 2005

US Airways poised for future merger
By Thomas Olson
The Pittsburgh (PA) Tribune-Review


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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