By Keith L. Alexander
Washington Post Staff Writer
Friday, May 20, 2005; A01

US Airways Group Inc. and America West Holdings Corp. said yesterday that they would merge in a $1.5 billion deal that would create the nation's largest budget airline with service throughout the United States and overseas.

The airline would operate under the US Airways name. US Airways would move its headquarters from Crystal City to Tempe, Ariz., the home of America West. The merged carrier would reduce its combined flights 12 to 13 percent. Most destinations would remain, but some current nonstop cross-country flights would be routed through a hub.

Fares probably would come down, industry observers said. "There will be more cities where fares will drop than go up," said Terry Trippler, chief executive of FareFacts.com Inc., which runs a Web site that provides information on airline fares. "America West has been successful and profitable with their lower fares."

A move to Tempe would raise questions about the future of US Airways' 1,970 Washington area workers, 600 of whom work in Crystal City.

"It's not possible to estimate how many layoffs that there may or may not be in Washington," said W. Douglas Parker, chairman and chief executive of America West.

The airline would still operate through US Airways' hubs in Philadelphia and Charlotte, and America West's hub in Phoenix. It would also continue to serve its high-focus cities of Washington, Boston, New York and Fort Lauderdale, Fla. The airlines' frequent-flier programs would be combined and members would retain their mileage points and status designations, executives said. The airlines expect to have their flight schedules coordinated and planes rebranded by year-end.

Parker would be chairman and chief executive of the new airline, while Bruce R. Lakefield, US Airways' president and chief executive, would be vice chairman.

Lakefield said the headquarters would be in Tempe because real estate and other costs are lower there than in the Washington area.

The combined airline would be the nation's fifth-largest carrier and would put pressure on other airlines, particularly low-cost carriers such as Southwest and AirTran Airways. The deal could also encourage struggling carriers such as Delta, Northwest and American to contemplate mergers or even steeper cost-cutting.

US Airways, the nation's seventh-largest carrier with nearly 30,000 employees, is twice the size of America West, the nation's eighth-largest airline with 14,000 employees. Its routes are primarily on the East Coast, while America West concentrates its service in the Midwest and West. US Airways is in its second Chapter 11 bankruptcy reorganization since 2002.

America West was launched in Tempe in 1983 with a fleet of three planes and a couple of hundred employees. Today it has 192 airplanes with about 100 nonstop flights from its hubs. Under Parker, America West became a low-cost carrier, and it began marketing itself as an airline that offers the best of both worlds -- bargain fares and some big-carrier perks. For example, the carrier offers a $198 round-trip coach fare between Baltimore and Las Vegas, with the option of buying a first-class ticket for $1,128.

The deal with America West is US Airways' second attempt to merge with another airline. The carrier sought to combine with United Airlines in 2000. But after the two airlines spent more than a year trying to persuade labor unions, Wall Street and government regulators to accept the deal, the Justice Department killed it, contending that the merger would have reduced competition and resulted in higher fares.

Some industry consultants said it was unlikely that the Justice Department would object to a combination of America West and US Airways because the airlines' route systems do not heavily overlap, as those of United and US Airways did. One of the biggest critics of the United-US Airways deal was R. Hewitt Pate, who resigned this month as head of the department's antitrust division.

Also, airline consultant Robert W. Mann said, Justice Department officials may be less reluctant to object to the deal because airline finances have declined drastically since 2001.

Besides the Justice Department, the deal would also need approval from U.S. Bankruptcy Court, US Airways' major creditors and America West shareholders. The Air Transportation Stabilization Board, the federal agency that pledged government money to back loans for both airlines, would also have to sign off. The two airlines combined have about $1 billion in outstanding loans.

The companies expect the deal to be completed by the fall.

Analysts said the airlines' biggest challenge would be integrating their workforces and sorting out seniority, which affects vacation time and other issues. The airlines don't expect to merge their labor groups for two to three years.

"They're going to have their hands full," said Raymond E. Neidl of Calyon Securities. "I think US Airways has a better chance of surviving now than it did as a stand-alone."

Executives boasted that the combined airline would be one of the industry's strongest with about $10 billion in annual revenue and $2 billion in cash. The deal would save the combined airline about $600 million, the executives said.

Most of the financing came from outside investors. Investment firms including ACE Aviation Holdings, parent company of Air Canada; Boston-based PAR Investment Partners; Virginia-based Peninsula Investment Partners; and Eastshore Aviation Holdings, which is owned by Air Wisconsin Airlines Corp. and shareholders, contributed $350 million. European aircraft manufacturer Airbus invested $250 million in exchange for the airline becoming a launch customer of the upcoming Airbus A350.

The airlines also received $675 million through debt refinancing and other investments from credit card companies. Commitments of $425 million in additional cash came from "strategic partners and vendors," which the airlines did not identify.

America West shareholders would own 45 percent of the new airline, while the new investors would own 41 percent. US Airways' creditors would own about 14 percent.

Retirement Systems of Alabama, which became US Airways' largest shareholder during the carrier's first stint in bankruptcy protection, has not invested in the merger. Lakefield said talks with Retirement Systems Chairman David G. Bronner are continuing.

Staff writer Bill Brubaker contributed to this report.