Will America West Fly Away?

Prospectus' fine print reveals that if America West decides to sell, Continental is in the pilot's seat

As part of its strategy to emerge from bankruptcy, America West Airlines combined its marketing and passenger-flow services with Houston-based Continental Airlines' in 1994.

Although industry analysts said at the time that a merger of the two airlines looked inevitable, America West chairman Bill Franke and Continental chairman David Bonderman asserted that the airlines would remain separate.

Next year, however, a three-year merger moratorium that was a condition of America West's bankruptcy reorganization will be lifted, clearing the runway for a Continental takeover that could move company headquarters--and thousands of local America West jobs--to Houston.

In February, for the first time since emerging from bankruptcy, America West made a public-stock offering. Continental sold 1.4 million shares of its America West stock, generating a tidy $12.5 million and leaving Continental with just 1 percent equity in America West.

But the February prospectus issued by America West in connection with the stock offering reveals an agreement that grants Continental the right of first refusal in the event that America West's majority stockholders--America Texas Partners Group, TPG Parallel and Air Partners II--decide to sell. (Bonderman is listed as an executive officer in a limited partnership that serves as general partner in those three organizations.)

While it would be speculative to say that Continental and America West will merge, it is clear that the two airlines have laid the groundwork for a merger.

A former America West employee who pointed out the existence of the agreement in the prospectus is furious about it.

"The company [America West] claimed . . . that there was no possibility of a merger or control, because Continental Airlines was only a minority shareholder," says the former employee, who requested anonymity. If the agreement had been revealed earlier, he adds, America West officials "would have been hard-pressed to defend that that wasn't a preamble to [Continental's] eventual control."

Continental first disclosed the deal in 1994, in a Priority Distribution Agreement filed with the U.S. Securities Exchange Commission. America West did not disclose the agreement until February 1996, when it was mentioned in the prospectus prepared for the first postbankruptcy public-stock offering.

SEC spokesman John Heine refuses to comment on the matter, but one securities expert tells New Times that the agreement should have been revealed by America West in earlier documents, particularly its annual reports.

Stephen Johnson, the airline's senior vice president for legal affairs, says America West didn't think the deal was material to its shareholders, and therefore didn't reveal it earlier.

Continental officials did not return repeated phone calls.
Industry analysts say a merger would greatly affect both airlines, with the biggest impact felt in Phoenix.

Scott Hamilton, editor of Commercial Aviation Report in Dallas, an airline finance newsmagazine, believes a merger is inevitable. And when it happens, he says, the merged airline will be based in Houston.

"It would become a Texas airline," he says. "Anytime one company acquires another, the acquired company is the one that's going to get the shaft."

Mike Boyd, who runs Aviation Systems Research Corporation in Denver, agrees that Phoenix would lose in the event of a merger. He says he thought by now the companies would be preparing to merge--even though Boyd thinks that would be a bad idea. He says stock prices would probably go up in the event of a merger, but would not stay up.

"Now, shareholders might benefit in the near term," he says, "but I think in the long term when the dust settles, I don't know of any merger where you put the two airlines together and the result has been better for everybody involved."

There would be at least one notable exception: America West chairman and CEO Bill Franke. According to Franke's employment contract, approved in 1995, Franke would get a golden parachute of $1.5 million if he were terminated before 1999. So if Continental were to buy America West and give Franke the boot, he would get a cash windfall.

Perhaps more lucrative is Franke's stock option. According to the 1995 contract, he has an option on 150,000 shares that will become vested over the next three years. But if there is a change in control of the company, Franke's stock options would immediately become vested. That means Franke could buy the 150,000 shares of stock at $16.50 (the value at the time the contract was approved) and turn around and sell them immediately--almost certainly for much, much more.

Other America West employees would not fare as well.
Ken Doyle, a fired America West mechanic and union activist, says, "[A merger with Continental] would not be an improvement. It would probably mean the loss of hundreds of more jobs in Phoenix. The company headquarters would not be relocated to Phoenix."

Doyle, along with other current and former America West mechanics, voted to join the International Brotherhood of Teamsters last month. In a recent handbill, the Teamsters claim that Arizona taxpayers have given America West more than $100 million in subsidies--including $98 million in tax-exempt revenue bonds to build America West's technical support center and to equip Sky Harbor Terminal Four, and a $1 million loan from the state to help bail out the company in 1992.

In addition, local companies lent America West millions of dollars in 1994, at the time of the reorganization.

Doyle doesn't approve of America West's treatment of its employees, but the alternative could be worse, he says.

"Continental's already got quite a ruthless reputation for dealing with their employees, and it would not be seen as a good thing--I'm sure of that.

 
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