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 deal off the ground, the airlines had to draw on financing from a wide array of interested parties.

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.

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