The new US Airways - post merger with America West Airlines - will not be in the market for new regional aircraft.

Should the merger go through next fall, the combined US Airways [UAIRQ] and America West [AWAC] operation would have a fleet of 239 regional jets and 57 turboprops in its commuter unit. The combined carrier would likely trim regional aircraft instead of buying additional regional lift. The mainline unit would have a fleet of 361 airplanes. This would be after US Airways returns to the lessor 25 more units, on top of nearly 30 already returned.

The combined operation hopes to obtain 10 percent of its synergistic savings - $60 million - by redeploying regional jets on routes currently served by mainline aircraft. By consolidating operations, the unified carrier hopes to save $600 million annually.

In a deal that would create the nation's fifth largest carrier - and largest low-fare carrier - US Airways and America West earlier this month agreed to a merge. While the new carrier would bear the US Airways brand and livery, America West executives would manage it from their current headquarters in Tempe, Ariz. It is not a merger of equals, as America West would have the upper hand in the boardroom.

Each company's shareholders and various federal agencies must approve the deal, but it does not require the endorsement of any labor group. Likewise, it is not contingent upon any union accepting new contract terms, said Doug Parker, the CEO of America West and the designated chairman and CEO of the new US Airways.

If the deal is sealed, the new US Airways will have more than $10 billion in annual sales and $2 billion in cash on hand. Four separate investor groups are plowing $350 million of new equity into the unified carrier while vendors and suppliers are set to provide another $675 million.

The cash infusion includes $125 million from Eastshore Holdings, a unit of Air Wisconsin. The privately held carrier agreed in February to invest a similar sum in US Airways in return for the right to fly Bombardier [BBD] CRJ 200s for US Airways Express. Another $75 million is coming from ACE Aviation Holdings [ACE], the newly recapitalized parent of Air Canada. The investment has secured ACE's right to compete for $280 million annually in outsourced maintenance work. Passive investors - those that are not necessarily getting new business in return for their investment - include PAR Investment Partners, for $100 million, and Peninsula Investment Partners, for $50 million.

Notably absent from the list of investors are Republic Airways [RJET] and Mesa Air Group [MESA].

Republic in March had agreed to invest $125 million in US Airways in a deal that secured the renewal of its jet service agreement, reduced the operating costs of its 50-seat RJs and gave it the right to purchase $110 million in US Airways assets.

Both Parker and Republic acknowledged that the regional carrier is not making an investment at this time. "At this point we have not invested in the proposed US Airways-America West merger," said Warren Wilkinson, Republic's spokesman.

Parker told analysts in a conference call that the deal continues to attract the interest of additional equity partners. Ray Neidl, an analyst with Calyon Securities, believes that Republic still might invest in the unified carrier.

The "door remains open" on the possible asset sale to Republic, said David Castelveter, US Airways' spokesman. If US Airways decides to go through with the asset sale, the deal would give Republic the right to buy US Airways slots in New York and Washington along with its fleet of Embraer [ERJ] 170s for $110 million. After the carrier exits bankruptcy, Republic still has the right to "call" the Embraer fleet.

Parker said no decision has been made on an asset sale. Neidl added that he doubts the new carrier will sell assets.

Mesa's Involvement

Long rumored to be a possible investor in the deal, Mesa's CEO Jonathan Ornstein told Regional Aviation News that "at this point in time, we don't believe we will make an investment in the larger company."

Mesa is the sole provider of express service for America West and it derives 41 percent of its revenue from the code-share agreement. In the past several weeks, Mesa has signed agreements that will removed its 59 50-seat RJs from the US Airways Express fleet and place them with Delta Air Lines [DAL] and United Airlines [UALAQ] (RAN, May 23). US Airways still needs to "reject our contract and then we can talk about a transition," Ornstein said.

The Mesa contract with America West runs through 2013.

In merging the two carriers, Parker will be combining two networks with little overlap. US Airways is primarily an East Coast network carrier while America West has transformed itself into a low-cost/low-fare carrier with some transcontinental operations from major East Coast cities to its western network. Unlike other low-cost carriers, America West has maintained a hub-and-spoke operation with hubs in Phoenix and Las Vegas.

Once combined, the carrier would maintain hubs in Phoenix, Las Vegas, Philadelphia and Charlotte, N.C.

Route restructuring is expected to yield $150 million to $200 million in savings by allowing US Airways to return 25 more airplanes to its lessors, reducing unprofitable flying, matching the right sized plane to each route and adding Hawaii to the route map. Improving the connectivity between the two existing networks and improving aircraft utilization can gain another $150 million to $200 million in new revenue, Parker said. Once combined, the operations hopes to save nearly $300 million a year by eliminating duplicate administrative overhead.

US Airways currently serves 179 markets with 280 mainline aircraft and 23,770 employees. It had 48.6 million enplanements last year. America West serves 96 destinations with 139 mainline aircraft and 14,030 employees. It had 21 million enplanements last year. The two carriers now provide service to 38 overlapping markets.

In restructuring the routes, Parker said both carriers would eliminate point-to-point transcontinental service, which has been losing money for each carrier. Instead, the carrier would fly more connecting flights out of its hubs to the major market destinations. "Our emphasis is to size the coast-to-coast markets principally for local traffic," Parker told analysts. By eliminating unprofitable flying, Parker said the operation could reduce its capacity by 15 percent.

As it adjusts the routes, it would redeploy its regional aircraft fleet. While the bulk of the plans are still being drafted, the master plan calls for a reduction of 50-seat RJs and redeploying some of Mesa's CRJ 900s to the East Coast.

Currently, America West uses the 86-seat CRJ 900 in the west. Ornstein said some of his largest planes fly point-to-point routes out of Los Angeles to Mexico and Canada. The new route plans call for transferring up to 19 CRJ 900s to the current US Airways network to replace Boeing [BA] 737s or Airbus 319s.

America West has not reviewed any other express carrier routes at this time, said Philip Gee, an America West spokesman.

Castelveter added that US Airways would maintain its relationships with its code-share partners, which include Trans States Airlines and Colgan Air.

The combined operation would have 160 50-seaters, said Scott Kirby, America West's vice president for planning. The count would likely be reduced to 140, he added, without indicating whose planes it would choose not to fly. The combined operation would have 38 70-seat RJs and 41 CRJ 900s. A few more Embraer 170s are still to be delivered. There are no additional commitments for either Bombardier or Embraer aircraft once the current firm orders are delivered. Kirby added that the carrier would defer mainline Airbus orders by several years as it combines the two fleets.

Under the new operation, the 37-seat Dash 8s, currently flown by Piedmont Airlines, a unit of US Airways, may gain new stature.

"The Dash 8 will stay in the system," Kirby said. "They actually create some flexibility going forward because they are owned or are on very low lease rates. The aircraft are currently profitable and do well in the system today."

The success of the venture is tied to reducing costs so that, once combined, the carrier can profitably operate on America West's current low-fare ticket system. Parker has noted that with the labor givebacks that US Airways extracted from its unions earlier this year, the two carriers' labor costs should now be very similar. Parker has set a goal of operating the new carrier at a cost per available seat mile (CASM) of 7 cents. By comparison, Southwest Airlines [LUV] had a first quarter CASM of 7.7 cents.

"They cannot operate as a low-cost carrier with the current route structure on the East Coast," said Michael Boyd, an airline consultant. "No matter how many westbound spokes they add into Phoenix or Las Vegas, you are stilling dealing with a primarily a North- South route system that loses money. You have to fix that.

"On the East Coast, it is getting really ugly because of the fare pressure. It is getting really tough for small planes," Boyd added.

In the east, US Airways Express operates a mixture of aircraft including the 19-seat Beechcraft 1900Ds, Colgan's Saab 340s, Piedmont's Dash 8s, small RJs and the 70-seat Embraer 170. Mesa's 1900Ds will not be replaced, as the 19-seater is dead, Boyd said. The Saab 340 and Dash 8 will be the floor. "They can generate revenue where other planes can't go," he added.

The key to the success of the new operation will be US Airways' continued dominance of the Charlotte hub. If Southwest Airlines makes a serious run at Charlotte, the new US Airways may have problems.

"Charlotte is a gateway to a whole lot of communities in the Carolinas and the Deep South. If US Airways is forced to retreat, then the feeder service to a lot of communities will be gone. The Dash 8 can bring revenue out of Lynchburg, Va., to Charlotte. AirTran [AAI] can't access that Lynchburg traffic. Southwest would not be able to access that traffic. The Dash 8 can," Boyd noted.

The proposed hub structure may work in the near-term for the combined operation, said Richard Butler, an economist specializing in airline hub operations at Trinity University in San Antonio. But a mid-continent hub likely would have to be part of a long-range plan. Describing the currently proposed route map as a barbell - two "blobs" on each coast - it would be difficult to support small markets out of the coastal hubs, Butler said. It makes little sense to fly directly to State College, Pa., from Phoenix. However, for someone on the West Coast to reach the home of Penn State may require a flight from Phoenix to Charlotte and then to State College. "In the end, that will not be real competitive. I don't see that as the way America West runs an airline," Butler said.

The alternative would be the development of a mid-continent hub within five years. A mid-continent hub "would knit the two systems together. If they are going to get the synergies, they need to go beyond the barbell model," Butler said.

The Deal's Odds

"The fact that America West is going to run the airline gives me some hope it will succeed," Butler said.

The odds are 80/20 that the merger will be consummated, Boyd said, and another 80/20 that the deal will actually succeed. "Unlike a lot of hair-brained ideas, this US Airways-America West merger could be fraught with possibilities. If it is done right, it could be a powerful deal. The odds are 50-50 that another carrier will try to zap this deal."

>>Doug Parker, America West, (480) 693-0800; Jonathan Ornstein, Mesa, (602) 685-4001; David Castelveter, US Airways, (703) 872-5116; Warren Wilkinson, Republic, (317) 484-6042; Ray Neidl, Calyon, (212) 261-4057; Michael Boyd, Boyd Group, (303) 674-2000; Richard Butler, Trinity University, (210) 999-7256.<<