The federal government has become the single largest player in the fate of America West Airlines, agreeing to guarantee it $429 million in loans after the airline made a dramatic plea for early approval - without which it was poised to go into bankruptcy.

The plea sped up its negotiations with government over the loan guarantees, giving the Airline Stabilization Board the power to demand that the airline grant it an even greater stake than it had offered in two earlier rounds of negotiations.

Under the deal, the government agreed to repay up to $380 million if America West defaults on the loan. In return, America West had to give the government the option over 10 years to buy one-third of the company's publicly traded stock at a fixed price - 18.7 million shares for $3 each. The deal also calls for America West to pay the government $135 million annually over the nearly five-year life of the loan and a $3.8 million upfront fee.

But the board, which was deeply split on the issue, made an implied policy statement: it really did not want to just give away free money, as many critics had feared it would. Standard & Poor's analyst Phil Baggaley says the terms required are "sufficiently difficult as to deter airlines from applying unless they have few or no alternatives - which is probably what the board intends."

Among the conditions, America West agreed to keep labour costs down. If in any one year actual unit labour costs exceed those included in the seven-year business plan approved by the board, America West will be required to partially prepay the new loan.

Internet analyst Holly Hegeman of planebusiness.com says: "The problem at America West has never been one of keeping labour costs low. The problem has always been the opposite - the airline has routinely paid dirt-cheap wages. This has been one of the main factors in the issue of poor employee productivity and morale at the airline. As a result, from an operational and customer service standpoint, some kind of 'lid' on labour costs at America West could be one of the worst things to happen to the airline longer term."

America West's pilots were not amused either. Air Line Pilots Association spokesman Eric Edwards said: "The federal government, which is mediating our negotiations as a neutral third party, could become a major shareholder in the airline. This could present a conflict of interest."

The only other airline to apply for a loan guarantee is Vanguard Airlines, the small, low-fare carrier based in Kansas City. Airlines have until 28 June to apply.

Source: Airline Business