America West and USAirways to Merge

The press release is here.

As expected, USAirways is essentially being acquired by America West, though the airline will operate with the USAirways name.

Significant cash will be added to the merged airline through the deal, including $75 million from Air Canada. This participation suggests to me that the combined airline will be a member of the Star Alliance.

Of particular interest to me,

    $300 million in a signing bonus and a loan from prospective affinity credit card providers for the merged company. Negotiations with credit card companies are still in progress.

Bank of America currently issues the affinity cards for USAirways and America West both.

Now, this is the part of the press release that I simply don’t believe:

    The $600 million in anticipated annual synergies are the result of route restructuring, revenue synergies and cost savings.

Heh. $600 million a year from synergies. What are they?

    Route restructuring synergies of approximately $150-200 million are created by reducing aircraft and unprofitable flying, better matching aircraft size to consumer demand by route and incorporating Hawaii service into the network.

Why were they flying unprofitable routes to begin with, and how does the merger overcome the problem? In part, fuel and labor costs drove this, and in part low cost competition. The merger doesn’t really solve either of those. They can drop routes, but in many cases they choose not to because flying covers marginal costs but not the cost of capital. A merger doesn’t change that dynamic.

Props to Randy Petersen, though, who predicted new Hawaii service by the combined carrier.

    Revenue synergies of $150-200 million are achieved by taking two largely regional airlines and creating one nationwide, low-cost carrier that can provide more choice for consumers when combined with improving connectivity across both airlines’ networks and by increasing aircraft and other asset utilization.

Maybe. This one has some chance — the bet is increasing returns to scale.

    Lastly, the combined airline expects to realize cost synergies of $250-300 million annually by reducing administrative overhead, consolidating both airlines’ information technology systems and combining facilities.

Not bloody likely. Combining IT systems will probably be a hugely expensive proposition in the near and medium-term.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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