America West and US Airways Confirm Merger

America West Holdings Corporation and US Airways Group have today announced an agreement to merge and
create the first full-service nationwide airline, with the
consumer-friendly pricing structure of a low-fare carrier. Operating as
the first national low-cost (LCC) hub-and-spoke network carrier, customers
can look forward to simplified pricing, international scope, access to
low-fare service to over 200 cities across the U.S., Canada, Mexico, the
Caribbean and Europe, and amenities that include a robust frequent flyer
program, airport clubs, assigned seating and First Class cabin service. America West Holdings Corporation Chairman, President and CEO Doug Parker
said: “Building upon two complementary networks with similar fleets,
closely-aligned labor contracts and two outstanding teams of people, this
merger creates the first nationwide full service low-cost airline. Through
this combination, we are seizing the opportunity to strengthen our
business rather than waiting for the industry environment to improve. A
combined US Airways/America West places the new airline in a position of
strength and future growth that neither of us could have achieved on our
own.”

US Airways President and CEO Bruce Lakefield said: “US Airways has a
strong franchise and great employees that will be enhanced by America
West’s strengths and success in the low-fare, low-cost marketplace. That
we have secured such an impressive slate of equity investors and partner
support in a period of such industry uncertainty is a strong indication of
the prospects and enthusiasm for this transaction. It has been my
objective to ensure the long-term viability of US Airways and the security
of our outstanding employees; this merger with America West will
accomplish that objective.”

Subject to approval by the U.S. Bankruptcy Court overseeing US Airways’
pending Chapter 11 case and transaction closing, which is anticipated to
occur this fall, the merged airlines will operate under the US Airways
brand under the leadership of CEO Doug Parker. The merged airline’s
13-member board will be comprised of one member from each of three new
equity investment companies, six members from the current America West
board, including Parker as chairman, and four members from the current US
Airways board, including Lakefield as vice-chairman. The combined
airline’s headquarters will be consolidated into America West’s
headquarters in Tempe, Ariz. For regulatory purposes, both airlines will
operate under separate operating certificates for a transition period of
two to three years, keeping flight crew, maintenance and safety procedures
for each airline separate. To ensure that the substantial consumer
benefits are realized quickly, however, the airlines will work together to
coordinate schedules, frequent flyer programs and other marketing programs
as soon as practical.

Lakefield continued: “We believe that the airline created from the merger
of US Airways and America West will bring more choices for customers, as
we expand the low-fare pricing structure of America West to dozens of new
cities, while also offering passenger-service amenities, such as an
attractive frequent flyer program, assigned seating and a First Class
cabin.”

Customers

ADVERTISEMENT

With the creation of the first full-service nationwide airline, customers
will enjoy simplified pricing across an expanded east/west network along
with access to international destinations. Both airlines’ frequent flyer
programs will ultimately be combined once the merger is complete. Members
of both programs will retain all of their miles and elite status
designation and will receive similar benefits in the merged airline’s
frequent flyer program. Other customer amenities will include access to
airport clubs, assigned seating and First Class upgrades.

Financing

The merger is expected to create one of the industry’s most financially
stable players, with over US$10 billion in annual revenues and a strong
balance sheet that includes approximately US$2 billion in total cash at
closing with which to weather the current industry environment and fund
further growth strategies. The airline’s strong cash balance is expected
to be created through a combination of current cash on hand at US
Airways/America West, US$350 million of new equity commitments (which may
be supplemented with additional commitments), and proceeds from a
contemplated US$150 million rights offering. In addition, the merged
airline will receive cash infusions of over US$1.1 billion, principally
from partners and suppliers (approximately US$675 million), asset-based
financings or sales of surplus aircraft (approximately US$250 million) and
release of certain cash reserves (approximately US$200-300 million).

The US$350 million of new equity is expected to be provided by four
separate investor groups. The new investors are: ACE Aviation Holdings
Inc., (US$75 million commitment) a Canadian holding company that owns Air
Canada, Canada’s largest airline with over US$7.5 billion in annual
revenues; PAR Investment Partners, L.P., (US$100 million commitment) a
Boston-based investment firm; Peninsula Investment Partners, L.P., (US$50
million commitment) a Virginia-based investment firm; and Eastshore
Holdings LLC, (US$125 million commitment and agreement to provide regional
airline services), which is owned by Air Wisconsin Airlines Corporation
and its shareholders. The merged company also plans to conduct a rights
offering that could provide an additional US$150 million of equity
financing.

Approximately US$675 million of additional cash financing is being secured
through a combination of refunding of certain deposits, debt refinancing
(which reduces collateralization) 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
US$425 million in additional cash liquidity from strategic partners and
vendors, including over US$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. Another
US$250 million will come from Airbus in the form of a loan. The companies
have also agreed that the merged company will be the launch customer for
the Airbus A350, with deliveries scheduled from 2011 to 2013.

Synergies

“We are exceptionally pleased with the financial support this transaction
has received, but it would not be available if we did not have a business
model that worked in today’s difficult industry environment,” said Parker.
“We have created a competitive business that is profitable even with oil
prices at US$50 per barrel, achieved primarily because of the US$600
million of annual net operating synergies. These synergies are higher than
generally experienced in airline mergers for two reasons. First, US
Airways and America West now have very similar labor costs so there are no
large negative synergies related to contract integration, and second, US
Airways’ bankruptcy allows us to right-size capacity, thus increasing the
network synergies.”

The US$600 million in anticipated annual synergies are the result of route
restructuring, revenue synergies and cost savings. Route restructuring
synergies of approximately US$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. Revenue synergies of US$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. Lastly, the combined airline expects
to realize cost synergies of US$250-300 million annually by reducing
administrative overhead, consolidating both airlines’ information
technology systems and combining facilities.

In addition to the operating synergies created by the merger, the new
relationship with Air Canada provides for even greater operating
improvements. The merged airline and Air Canada plan to work together to
create value for each other through maintenance contracts, airport
handling agreements and the eventual expansion of the Star Alliance
agreement, which could include codesharing with Air Canada, consistent
with the U.S.-Canada bilateral aviation agreement.

Fleet/Route System

US Airways/US Airways Express currently serves 179 cities and America
West/America West Express serves 96 cities. When merged, the combined
airline will become the nation’s fifth largest airline, as measured by
domestic Available Seat Miles (ASMs). The combined airline is expected to
operate a mainline fleet of 361 planes (supported by 239 regional jets and
57 turboprops for feed into the mainline system), down from a total of 419
mainline aircraft operated by both airlines at the beginning of 2005.

US Airways projects returning 25 additional aircraft by the end of 2006,
in addition to the 46 aircraft that US Airways already has announced it
plans to return. Nearly all of the aircraft are being returned to General
Electric Capital Aviation Services (GECAS). The combined airline also will
take delivery of 13 Airbus A320 family aircraft previously ordered by
America West Airlines. Airbus has also agreed to reschedule and reconfirm
30 narrow body A320-family aircraft deliveries from 2006 - 2008 to 2009 -
2010. To rationalize international flying, the merged company will work
with Airbus to transition to an all-Airbus international fleet of A330
aircraft and, beginning in 2011, A350 aircraft.

Once fully integrated, the airline plans to have primary hubs in
Charlotte, Phoenix and Philadelphia, and secondary hubs in Las Vegas and
Pittsburgh. The merged airline plans to have focus cities in Boston, New
York/LaGuardia, Washington, D.C., and Fort Lauderdale.

People/Culture

US Airways currently employs 30,100 people and America West employs 14,000
people. Contract integration of represented employees is expected to occur
after integrated seniority lists have been negotiated between each
respective airline’s labor groups.

America West’s Parker continued: “Although US Airways and America West are
clearly two different airlines with two different cultures, our common
traits far outnumber our differences. We are all aviation professionals
proud of our heritage, eager to serve the traveling public and hopeful for
the future. While seniority integration will be a challenge for us and our
employees, we will ensure that those issues are discussed and resolved in
a fair and equitable manner. Throughout this process, as has always been
the case, we will continue our commitment of open and honest communication
with our employees. We are building a new future that will present far
greater job security and growth opportunities than either airline would
have achieved on its own, and we are doing so with the ability for all to
share in the collective upside.”

Equity Allocation

The US$350 million of private equity commitments are based upon a total
implied private full equity value of US$850 million for the merged
corporation. Of that US$850 million valuation, 45 percent will be
allocated to America West, 41 percent to the new equity and 14 percent to
US Airways. This valuation results in an implied value of US$6.12 per
share for the publicly traded America West stock, taking into effect
dilution from outstanding warrants and options and the anticipated
treatment of convertible securities. The partners have agreed that up to
US$650 million of total equity can be raised including any proceeds from
planned a rights offering. Any additional equity would dilute all
participants pro rata. However, any additional equity raised above US$350
million will not reduce the US$6.12 per share of implied value for the
publicly traded America West stock. The right to participate in a rights
offering for up to US$150 million in common shares of the merged companies
is to be allocated 61.5 percent to the stakeholders of US Airways and 38.5
percent to the common stockholders of America West.

Approvals

Under the terms of the agreement, the merger is expected to occur
subsequent to confirmation of US Airways’ plan of reorganization and
emergence from Chapter 11. Because the merger and related equity
investments are subject to US Airways’ pending Chapter 11 proceedings in
the U.S. Bankruptcy Court for the Eastern District of Virginia in
Alexandria, the transaction will also have to be approved by the U.S.
Bankruptcy Court and will be subject to a competitive bidding process that
will be proposed to the Court. The transaction, which has been approved by
both company’s boards of directors, is also subject to the approval of
America West’s shareholders.

Both airlines will file the necessary documents for review with the U.S.
Department of Justice, the U.S. Department of Transportation and the
Securities and Exchange Commission as well as secure other necessary
regulatory approvals. In addition, both airlines hold loans with a federal
guarantee from the Air Transportation Stabilization Board (ATSB), and the
carriers are in joint negotiations with the ATSB on the treatment of those
loans under the proposed merger.

US Airways Group, Inc. is being advised by Seabury Group LLC as
restructuring advisor and financial advisor and the law firm of Arnold &
Porter LLP; advisors for America West Holdings Corp. include Greenhill &
Co., LLC as its principal financial advisor, Merrill Lynch & Co. as
structuring advisor to certain financings, and the law firms of Skadden,
Arps, Slate Meagher and Flom, LLP and Cooley, Godward LLP.
——-