US Airways

Dave Darcy Drew Tedeschi Laura Schumacher Charles McAfee Alison Boyd

Introduction

2006 Results Completed Merger of US Airways And America West $304 Million Profit $3 billion in Total cash ($2.4b Unrestricted) $700 Million In Merger Synergies Savings First Quarter 2007 Net income $66 Million, Revenues up 3.8%
Topped analysts' forecasts Good Quarter In Spite of Weather & Disruptions In Converting To A Single Reservation System.

Executive Summary
Pursue a Merger and Acquisition Strategy Gain Market Power Gain Market Share Create Synergies-Reduce Costs, SynergiesEconomies of Scale & Scope, Increase Financial Strength Provide Customers With Advantages of Network Carrier at a Competitive Price

Mission
US Airways mission is to be the carrier of choice and is committed to be the industry s premier global passenger airline by exceeding customer expectations and delivering exceptional shareholder value.

Objectives
Increase market share and economies of size Provide competitive pricing, superior operational performance, innovative technology and outstanding customer service. To make every flight count for valued customers To have the safety and satisfaction of our customers a top priority.

Major Strategies

Major Strategies
Articulated strategy
CEO Doug Parker is an advocate of industry consolidation and may pursue another merger.

Major Strategies
International Strategy

Merge with a carrier that has a large global footprint and capture the lucrative revenues of international routes.

Major Strategies
Horizontal Integration Strategy
Mergers and acquisitions are a large part of the corporate firm s strategy.

Major Strategies
Concentration Strategy Passenger air travel is their main business.

Major Strategies
Geographic Roll-Up Strategy RollAcquire firms that are in the same industry segment but in many different geographic arenas. (America West).

Industry Analysis
U.S. Airways is now the 5th largest domestic carrier Primary hubs in Charlotte, Philadelphia and Phoenix. Secondary hubs in Pittsburgh, Las Vegas, New York, Washington, D.C. and Boston The company is a low-cost carrier offering 3,700 lowflights daily to 233 cities in the U.S., Canada, the Caribbean, Latin America and Europe Mainline fleet consists of 373 mainline jets

Industry Analysis
Geographically Diverse airline Barriers of Entry/Exit High Most suppliers oligopolies- Airlines less oligopoliesadvantageous position

Commoditization of the Industry

Sales depend less on product features and more on price

Industry's Main Source of Revenues

Slow Growth Rate

Low Switching Costs

Rivalry

Low Cost vs. Legacy Carriers

Perfect Price Information

NonNon-Price Competition & Global Influences

In-Flight Entertainment

Terrorist

Passenger Classes Non-Price Competition

Frequent Flier Miles

Governmental Global Issues

Health Scares

International Service

Co-Branded Credit Cards

Alliances

Economic Conditions

Opportunities
- Merging with Delta Airlines - Developing an increase in market power - More international exposure Open Sky
Agreement Global Markets - 3,700 flights daily (of which only 629 are international) - International RASM is up nearly double digits - Increase in air travel demand

Threats
Crude oil and natural gas prices increasing New entrants creating more competition in the market Low cost carriers increasing market power Low cost carriers stealing market share Perfect pricing information Substitutes alternative means of transportation Hassle of air travel Security Issues $40 million lost in 3rd quarter 2006

Industry & Internal Financial Analysis

163 Bankruptcies Since 1979 Lost from 1990-1994 1990Earned from 1995-2000 1995.. .$13 Billion . .$23 Billion

Lost from 2001 through 2005.....$35 Billion

Typical Financial Data

(Represents 139 U.S. Passenger/Cargo Airlines) (in millions, 2006)

Industry Revenues Operating Expenses Net Profit (Loss) $150,764 $150,465 ($5,673)

Southwest US Airways Group $9,086 $8,152 $499 $11,557 $10,999 $304

US Airlines Market Share 2006

(in millions)

Southwest $9,086 8% Us Airways Group $11,557 10%

Alaska $3,334 3%

JetBlue $2,363 2%

American $22,646 21%

United 19,340 18% Continental $13,128 12% Delta $15,024 15%

Northwest $12,568 11%

Airline Industry Profitability Measures

30.00% 20.00% 10.00% 0.00% ROE -10.00% -20.00% -30.00% ROI ROA

24.60% 13.10% 4.00% 3.00% 2.40%

5 Yr. Industry Avg. Industry TTM

-25.20%

Comparative Profitability Ratios-2006

24.60% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% ROE ROI ROA 4.00% 6.60% 13.10% 4.20%
Industry TTM Us Airways Group

43.60%

Us Airways Group Profitability Measures (2006) 50.00% 45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% ROE ROI ROA 6.60% 4.20%

43.60%

US Airways Net Income (M)

$400 $300 $200 $100 $0 ($100) ($200) ($300) ($400) ($500) ($600) 2006 2005 2004 2003
US Airways Bankruptcies

$304

US Airways Group US Airways/Amer ica West

$57

2002

2001

($89) ($250) ($388) ($537)

Comparative Leverarge Ratio-2006

3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00
Industry TTM Debt/Equity Us Airways Group Southwest

3.05

3.09

Debt/Equity

0.26

America West Net Income (M)

0 (50) (100) (150) (200) (250) (300) (350) (400) (450)
($397)

2005

2004
($85)

Revenue Per Available Seat Mile(Cents)

14.10
16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 Industry (Network)

14.49 10.10

Cents

Industry (LowCost)

US Airways Group

Cost Per Available Seat Mile(Cents)

13.10
16.00 14.00 12.00 10.00 Cents 8.00 6.00 4.00 2.00 0.00 Industry (Network)

14.28 9.80

Industry (LowCost)

US Airways Group

Load Factor & Passengers Flown (%+-)

79.10%
80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% -10.00%
Load Factor Passengers Flow n

79.65%

0.20%

-8.48%

Industry (Network)

US Airways Group

Yield (Average Price Paid Per Mile)

12.50
12.60 12.40 12.20 Cents 12.00 11.80 11.60 11.40 Industry (Network) Industry (Low-Cost) US Airways Group

12.53

11.80
Yield

Strengths
Newly found nationwide route network Strong load factor Management capabilities (Merger) Improved financial performance

Weaknesses
Vulnerable cost structure Severely strained labor relations High non-fuel cost per available seat mile nonthan true low-cost competitors lowLabor intensive

Recommendation
Pursue a Merger and Acquisition Strategy with Delta Airlines
Why How Who Where

Why
Few Options Left To Maximize Shareholder Value Revenue Perfect Pricing Information Increasing Threats By LowLow-Cost Carriers Driving The Industry s Pricing Decisions Stealing Market Share

Expense Massive Cost-Costing CostThrough Bankruptcies & M&A Exogenous Effects Fuel Cost Geo-political GeoHealth Scares

Why
20002000-2005
FullFull-Time Equivalent Employees Number of Aircraft Passenger Revenues Operating Expenses (Ex(Ex-Fuel)

Network Carriers
-33.3%

LowLow-Cost Carriers
22.4%

-15.2% -$12.6 billion -$13.5 billion

41.9% $4.8 billion $3.9 billion

Why
20002000-2005 LowLow-Cost Carriers Increased Capacity 61.1% Increased Market Share By 61%

Legacy Airlines Reduced their Capacity By 11.2% (4) Have Filed For BankruptcyBankruptcy-(UAUA & LCC Twice)

Why
Larger Network Captures Passengers Economies of Scale Benefits Economies of Scope Benefits

Post Merger Market Share ("Delta Airways")

Southwest $9,086 8% Alaska $3,334 3% JetBlue $2,363 2%

Delta Airways $26,390 24%

Northwest $12,568 12% American $22,646 21% United $19,340 18%

Continental $13,128 12%

Potential Post-Merger Results PostMerger US Synergy Airways Revenues + 3% $11,557 Delta Delta Airways $26,390

$15024

Operating - 5% Expenses Net Profit (Loss)

$10,999

15084

$24,884

$304

($43)

$857

How
Financing
Financing from Suppliers (i.e. Airbus) Maintenance Suppliers Current Investors Retirement Systems Other Carriers Credit Card Company Investment banks Appropriate Amounts Cash & Debt

How
Implementation Due Diligence- screening, analysis, and Diligencenegotiations Management Integration Technical and Cultural Integration

Where
Leverage each companies airport locations More connecting flights More destinations

Who
Delta
2nd largest carrier in region World s leading carrier between United States and Europe America s fastest growing international carrier 461 worldwide destinations in 96 countries More destinations than any other global airline Cost structure improved due to bankruptcy

Advantages of Recommendation
1.) Marketing
Pricing
Less Competition Removal of capacity Financial flexibility

Promotion Two recognized strong brand names Product

More Diversified Offerings (Routes & Connecting Flights)

Advantages of Recommendation
2.) Financial Lower cost structure
 Renegotiate Supplier and Financial Contracts  Removal of Redundancies (Cost Synergies) (IT, S&A, Overheads, Facilities) Facilities)  Increased Revenues (Network Synergies) (Larger Network Captures More Passengers Bound For A Wider Set Of Cities) Cities) (Larger Market Share In Overlapping Cities) Cities)

Advantages of Recommendation
Competitive
Increase market access in geographic arenas Increase market power (influence pricing) Become one of the largest carriers in the world Be able to provide the most flights on the East Coast and in transatlantic travel

Advantages of Recommendation
Managerial and Core Skills
Increase value through adopting best practices and core competencies. Utilization of merger Target s resources, knowledge, and capabilities.

Disadvantages and Risks of the Recommendation

1. 2. 3. 4. 5. 6. 7.
Antitrust clearance not achieved Labor issues not resolved Assumption of high debt Realizing of cost savings in a timely manner Integration problems Overpaying for the Target firm. Opportunity missed with Open Skies Agreement

Justification
Not Going To Be A Pure Low-Cost Carrier LowDifferentiation Initiates Muted Affect Expanding Internationally-Open Skies, CapEx InternationallyThe Heavy Lifting Has Been Done Bankruptcies Cost-Cutting, Tech Efficiency Cost-

7S Analysis

Structure

Strategy

Systems

Superordinate Goals

Skills

Style

Staff

Superordinate Goals
To be the number one most chosen carrier serving their customers with excellent service with the most flights available filled at full capacity. Both companies share similar mission

Staff
35,000 employees Senior ranks consist mostly with executives from America West Labor intensive business Wages make up 20% of US Airways operating expenses President: Scott Kirby

Staff
Doug Parker Became Chairman and CEO in September 2006 Prior to merger: Chairman, President, and CEO of America West Holdings since September 2001 Advocate of industry consolidation

Staff
Chairman s Award program designed to celebrate and reward employees who demonstrate outstanding work ethic, initiative and tenacity. Program originated with America West in 2000. http://www.usairways.com/awa/content/a boutus/pressroom/executivebios.aspx

GE Matrix
I n d u s t r y A t t r a c t i v e n e s s

Strong
Invest/Grow Strongly

Competitive Position Average

Invest/Grow Selectively Planner Entrepreneur Earn/Protect Profit Planner

Weak
Dominate Delay/Divest Turnaround Entrepreneur Harvest/Divest

+
Mature Entrepreneur Invest/Grow selectively

Sophisticated Planner Earn/Protect Harvest/Divest Experienced CostCost-cutter

Turnaround US Air Specialist Harvest/Divest Professional Liquidator

Professional Manager

Merger Impacts on Staff

Increase in employees Layoffs of duplicate positions Changes in the senior ranks of management

Core Skills
The largest U.S. low-cost carrier as measured by lowrevenue passenger miles (RPMs) U.S. Airways revenue passenger miles increased 1.3% in 2006 to 654 billion miles traveled Also rose 5.2% in 2005 and 10.4% in 2004 Merging will increase the RPMs even more, providing advantages of a larger full-service fullprovider with cost structure of a low-fare carrier low-

Strategy
U.S. Air is in a growth strategy Aiming to become the world s largest airline carrier Previous merger with America West thus far has been a success Not a new concept, they have experience to effectively merge again with Delta Airlines

Structure
Centralized, Functional Structure Organization has one main business line

Style
US Airways invests in community organizations and initiatives to enhance the quality of life in the airline s hub markets. US Airways is committed to arts and culture, health and human services, and education. The US Airways Board of Directors believes good corporate citizenship is in the best interest of U.S. Air and helps ensure the airline's longlongterm viability.

Style
Customer service has always been a priority at US Airways, and are committed to making every flight count for their customers. Safety and satisfaction of customers is a top priority for US Air. Customers First is the result of a joint effort of the airline industry, the US Congress, and the US Department of Transportation to address the key service elements that affect customers.

Style
US Air s community relations activities include contributing to the economic and social well being of a range of stakeholders, including employees, shareholders, passengers and the communities in which they operate. US Air s corporate philanthropy is support of a broad range of nonprofit organizations, including arts and culture, health and human services, education, environmental and civic.

Style
US Airways employees are actively involved in making a difference in the community through different community programs. The US Airways Education Foundation, Inc. supports educational initiatives in communities served by the airline. US Airways partners with Dividend Miles members to donate miles to several charitable organizations.

Systems
US Air combined two reservations systems onto one platform (SHARES), which provides a single system for reservation and airport customer service agents (US Air/AWA) This enabled the Company to simplify ticketing processes, remove redundant systems and provide a consistent product to its customers. US Air continues to implement enhancements to the SHARES product based on feedback from customers and frontline employees.

Systems
US Air continues to lower fares by 38% in approximately 1,100 markets since its merger in September 2005. US Air plans to build a new 60,000 square foot center, which is scheduled to open in 2009. The airline's 600 scheduling, planning and other operation critical employees will be located at this new facility.

Systems
US Air launched usairways.com, which integrated the US Air and America West websites. Bookings on this website have exceeded the combined revenues from the two standalone sites. Developed and launched the new airline brand Fly with US and the new employee brand I make US fly .

Merger Impact on Systems

Critical to integrate systems of US Airways and Delta - eliminate redundancies and realize merger synergies

Conclusion
Pursue a Merger and Acquisition Strategy Gain Market Power Gain Market Share Create Synergies-Reduce Costs, SynergiesEconomies of Scale & Scope, Increase Financial Strength Provide Customers With Advantages of Network Carrier at a Competitive Price