The $125 million cash infusion that privately held Air Wisconsin has agreed to give the bankrupt US Airways [UAIRQ] has the potential to turn the regional industry upside down.

At a minimum, Air Wisconsin is hedging its bet. Faced with the possible loss of its contract with United Airlines [UALAQ], Air Wisconsin has secured with its investment the right to fly the US Airways Express colors.

On the grand scale, Air Wisconsin may be acting as a proxy for United in an eventual merger of United and US Airways.

Industry insiders outlined for Regional Aviation News three distinct scenarios that may be spun out of this deal:

• Air Wisconsin begins flying for US Airways with little impact on the current three independent carriers providing RJ service.
• A major realignment of regional carrier alliances takes place even if Air Wisconsin does not begin flying for US Airways.
• And then, the investment ploy in which Air Wisconsin is more interested in a strategic deal than an operational contract.

Air Wisconsin, with an 87-jet fleet, has annual revenues estimated at $700 million. It has long been part of the United Express family - in fact, United owned the carrier for one year in the early 1990s. However, late last year United invited seven other carriers and Air Wisconsin to submit bids to fly RJ flights out of Chicago, Denver and Washington Dulles. United is Air Wisconsin's only code-share partner. AirTran [AAI] last summer ended it 20-month feeder experiment with Air Wisconsin.

An investment unit of Air Wisconsin, Eastshore Aviation, has agreed to initially provide US Airways $75 million with two subsequent $25 million infusions. In return for its investment, Eastshore will own a significant percent of US Airways' stock once it emerges from bankruptcy. Depending on the amount of money raised from others, Eastshore will own at least 19.2 percent or as much as 26.3 percent of the new stock.

US Airway has been seeking an investment of $250 million in new capital so that it may be secure enough to exit bankruptcy. An aircraft refinancing deal with GE Commercial Aviation Services (GECAS) stipulates that US Airways exit its second Chapter 11 proceedings by June 30.

The investment pact permits Air Wisconsin to fly its 50-seat RJs for US Airways. However, it does not mandate an operational agreement. The 42-page jet service agreement filed with the bankruptcy court redacts specifics such as the maximum number of planes Air Wisconsin would fly. The financial terms of the operational pact were also sealed.

A spokesman for US Airways would not comment on either a trigger event for Air Wisconsin to begin flying or a timeline for any decision. Furthermore, the carrier would not say how many of the 70 Bombardier [BBD] CRJ 200s would be flown.

A spokesperson for Air Wisconsin could not be reached for comment.

The jury is still out on whether US Airways will avoid liquidation. While $250 million is what the carrier said it needs to exit bankruptcy, others believe a much larger sum is needed to thrive in its second post-bankruptcy world.

"Fuel costs are above what their forecast predicted and revenues have continued to decline. The environment for the $250 million investment has deteriorated," said Robert Mann, a consultant with RW Mann & Associates. "I would argue that there is no amount big enough in the present environment."

Last week, the price of crude oil rose 3 percent, casting doubt on the industry's hopes for more moderate jet fuel tabs.

Without a larger cash infusion, Doug Abbey, a consultant with The Velocity Group, doubts US Airways will be able to compete with the benchmark, low-fare carriers. "In this day and age, cash is king and cash buys you survival. Unless big changes are made, it only postpones the inevitable."

Air Wisconsin: A flying partner

Air Wisconsin may start flying for US Airways if it loses its current United contract or it may decide to fly for both carriers to diversify its operational risk.

"If they are not flying for United they need to be flying for someone," Abbey said. "They need to be able to turn off the United switch on day one and turn on the US Airways switch on day two. It is paramount for Air Wisconsin that they have the ability to switch horses very quickly."

Stuart Klaskin, of KKC Aviation Consulting, suggests that Air Wisconsin would also fly for US Airways even if it retains the United contract. "They want to diversify their base," he said.

If Air Wisconsin shifts its entire fleet of 70 CRJ 200s to US Airways, then it stands to reason that the current RJs operators - Mesa Air Group [MESA], Chautauqua Airlines [RJET] and Trans States Airlines - would lose business. Mesa has 59 RJs with US Airways, Chautauqua has 35, and Trans States has 13.

Not necessarily, Mann said. US Airways "can put far more into regional flying than they have suppliers. I don't think there will be losers."

Abbey agrees. "There is still plenty of mainline flying that should be flown on RJs. Theoretically, no one would suffer a loss."

US Airways has not said how many more flights may be handled by regional carriers with the spring or summer flight schedules.

However, if US Airways does not do any additional regional flying when Air Wisconsin joins its network, the others may fly proportionately less. "I suspect it will be spread evenly," Abbey said. "It would be painful for the others. They are not going to recoup that flying anytime soon."

The jet service agreement on file with the bankruptcy court raises the possibility of Air Wisconsin flying the CRJ 900, a 90-seat RJ. The larger plane may be flown as an addition to the fleet or replacing CRJ 200s.

At this point, Air Wisconsin does not own any CRJ 900s. It does have 17 Bae Avro 146s, either configured for 86 passengers or 100 passengers. "I don't know if the US Airways scope permits a 100-seat plane," Abbey said. If Air Wisconsin loses the United contract, there is no indication what would happen to these larger RJs.

The Swap

If Air Wisconsin begins flying for US Airways, one industry insider suggested that Mesa and Republic, Chautauqua's parent, would abandon US Airways instead of taking a smaller piece of the pie. Instead, he suggested that Mesa and Republic, who both fly for United, would take over the Air Wisconsin United Express routes.

While "everyone is incentivized to do nothing," some United's partners may try to convince United to drop Air Wisconsin. "US Airways has the incentive to take their money and keep the others as partners. United is incentivized to keep Air Wisconsin because the change would disrupt service," the inside source said.

If fact, he suggested that Air Wisconsin's latest deal may send United back to the other carriers to seek updated bids. He suggests some carriers may be more aggressive to see that Air Wisconsin is shut out of the United routes.

JP Morgan analyst Jamie Baker sees a similar situation shaping up. However, he believes that Air Wisconsin will retain most of its contract. United will then award "a few more silvers of growth" to Mesa and SkyWest [SKYW], another United Express code-share partner.

While the industry insider said Mesa and Republic are taking a united front, Raymond James analyst James Park said that Republic is negotiating with US Airways to purchase the Embraer [ERJ] 170s now flown by Midatlantic Airlines, a unit of US Airways. Should Republic be successful, Parker said it is most likely that its current contract will be re-affirmed.

"Mesa may be more at risk if US Airways were to take out some of its current RJs and replace them with Air Wisconsin's RJs since Mesa has the most exposure to US Airways. However, if this were to take place, there would be a void at United such that some or all of Mesa's RJs taken out of US Airways Express service could be placed at United," Parker said.

However, Parker said, "there is a low probability that these regional airlines trade places at US Airways and United."

The Investment

Air Wisconsin is hedging its bet - not on US Airways as a fallback to the United contract - but on the potential of generating a substantial return on the $125 million investment. "I don't know if I see great opportunities for Air Wisconsin to become a US Airways Express operator as much as being in the middle as a financial player down the road between two large clients. It is a strategic financial move," Klaskin told Regional Aviation News.

"The investment group that owns Air Wisconsin are very astute players. They are very conservative. They understand this industry. They are not buying into US Airways on the fly," he said.

By buying a large stake in US Airways, Klaskin said, it enhances their relationship with United. "There is an argument that these guys are being encouraged to go after US Airways. Six months to a year from now when United emerges from bankruptcy, they cannot politically justify buying US Airways. They can buy one of their regional carriers, Air Wisconsin, and also get a big chunk of US Airways. That is a very plausible deal. It works beautifully for all parties. A year down the road, United then buys the rest of US Airways."

If Air Wisconsin simply wants to buy its way into a carrier to assure more flying, Klaskin said then it would have talked to Continental Airlines [CAL] about purchasing its shares of ExpressJet [XJT], or with Delta Air Lines [DAL] to buy either Comair or Atlantic Southeast Airlines, or with American Airlines [AMR] to buy American Eagle. "You would not be looking at the weakest of the weak if you are just worried about a customer base. There has to be a transactional strategy behind this move."

>>Contacts: Stuart Klaskin, KKC Aviation, (305) 445-7600; Robert Mann, RW Mann & Assoc., (516) 944-0900; Doug Abbey, Velocity Group, (202) 338-1727; Jamie Baker, JP Morgan, (212) 622-6713; James Parker, Raymond James, (404) 442-5860.<<