Merger talk intensifies for US Airways and American

Posted: January 07, 2013

US Airways Group Inc. and American Airlines are hurtling down a path toward a potential merger, with American's board scheduled to meet Wednesday and likely to consider creating the world's largest carrier - or remaining independent.

Expectations are high, but American chief executive officer Tom Horton told employees Thursday that the company would decide "within a matter of weeks."

Union leaders of American's pilots, flight attendants, mechanics, and ground workers are firmly behind the merger and want US Airways CEO Doug Parker at the helm.

US Airways pilots also are in favor, but want certain protections for flights and aircraft.

AMR Corp., American's parent, has until March 11 to come up with an independent reorganization plan to emerge from bankruptcy, which it entered in 2011. Horton and his team stand to gain millions in company shares and other compensation if American exits bankruptcy a stand-alone - and later buys US Airways or another carrier.

"Time is of the essence, but AMR runs the clock," said aviation consultant Robert W. Mann, "and I think they will run the clock as long as they have the clock in their hands."

Momentum picked up over the holidays with signals that a merger should occur, airline analyst Hunter Keay, of Wolfe Trahan & Co., wrote Friday in a client note.

The union leadership for American pilots voted 11-5 on Dec. 29 to approve a transitional labor agreement until a joint contract for American and US Airways pilots was negotiated.

The proposal is being considered by management at both airlines and also by US Airways pilots, whose board voted unanimously Friday to recommend it to members for ratification. If the merger happens, the union said, the framework for a labor accord "is the quickest and surest path to a better lifestyle for all of us."

Attendants memorandum

The American flight attendants' union announced Thursday night that leaders agreed to a "memorandum of understanding" for American and their counterparts at US Airways that "further illuminates the financial benefits of a merger to AMR's creditors."

Specifics were not disclosed. Both airlines and the labor groups have signed nondisclosure agreements to keep discussions confidential.

"We think a merger is more likely than less likely," airline analyst Helane Becker, of Dahlman Rose & Co., said in an interview. "US Airways has made a very strong case, from what I understand, to the unsecured creditors. In the end, it's going to wind up whatever presents the best recovery for the unsecured creditors to get the most money they can get."

Even if the AMR board votes to go it alone, the decision will be up to the bankruptcy court and the creditors committee, whose members include American's three largest unions. The unions in April struck conditional contract deals with US Airways, if a merger occurs. US Airways pilots also recently joined the discussions.

While American had been intent on remaining independent, the creditors over the summer pressured the airline to consider US Airways' offer. The two have been in confidential negotiations since September.

US Airways has proposed an all-stock merger that would give the creditors group 70 percent of the combined airline, and US Airways shareholders 30 percent, with the equity value of a combined carrier at about $9.5 billion, corporate bond analyst Vicki Bryan, of Gimme Credit L.L.C., said in a client update.

The price could nudge higher, with a greater percentage for AMR's creditors. A split of 80/20 would provide $10.9 billion in equity, Bryan wrote, adding, "Fair value is somewhere in between."

A challenge in any airline merger is combining the workforces, including seniority integration of pilots, the highest-paid unionized employee group. Seniority affects who gets the best routes, the size of aircraft flown, and pay levels.

US Airways pilots have the lowest wages of any major airline after twice going through bankruptcy, in 2002 and 2004. "One of the things that's important to pilots in any merger is to assure that the flying they bring to the merger, they still are able to fly," said Capt. James Ray, spokesman for the US Airline Pilots Association, representing US Airways pilots. "And any future flying that was planned for their company, they would have expectations to fly."

Mann said some "dissident" American pilots have enlisted former members of American management, including past CEO Bob Crandall, to "raise issues surrounding a proposed merger in bankruptcy, focusing specifically on seniority issues and seniority integration."

"There are also dissidents within US Airways," Mann said, "who don't necessarily think it's advisable either to accelerate a merger or that a merger would be in anyone's interest."

Among nearly 13,000 pilots, there may be a small group who don't think a merger is a good idea, "but they are the extreme minority," Ray said. "That's not going to derail this thing."

Who would run the new airline, called American and based in Fort Worth, Texas?

Analysts say Parker has a better shot, if the merger occurs during bankruptcy. Horton's chances go up if it happens later.

"My guess is it would be one from Column A and one from Column B," Becker said. "Tom Horton and his team feel they deserve the ability to run the company, and Doug Parker and his team feel similarly. One may be the CEO and the other the chairman. They may split it."

Parker has said that all the hubs would remain - Philadelphia, Charlotte, Phoenix, and Washington, which is a "focus" city for US Airways. American's hubs are Miami, Chicago, New York, Los Angeles, and Dallas-Fort Worth.

"It's easy to say that, but strategies change," one US Airways pilot said. "I've lived through four mergers, and I've never seen that happen yet. Most of the hub flying is safe for now. I think the most vulnerable place is Phoenix."

Safe hubs

The reason: Los Angeles is a major city for American, and Dallas-Fort Worth, where American is located, is the second-largest airline hub in the world - after Delta Air Line's hub in Atlanta.

Combining US Airways, the fifth-largest carrier, with No. 3 American would surpass United Continental and Delta as the world's largest carrier, based on passenger traffic.

Regulatory approval should not be a problem, experts say, because the two carriers have few overlapping routes. Only 12 nonstop city pairs (flights from one city to another without a stop) are identical.

"It's very much two complementary networks coming together," said Dennis Tajer, spokesman for American's Allied Pilots Association. "The East Coast would be the most exciting part of this merger. The combined entity would be No. 1 in the East and in the Midwest, and No. 3 in the West."


By the Numbers

American Airlines US Airways Group

and American Eagle and US Airways Express

861 Aircraft 624

$23.9 billion Annual revenue $13.1 billion

3,500, Daily flights 3,036,

to 50 countries to 25 countries

or territories or territories

78,376 Employees 32,335

8,000 Pilots 4,279

16,000 Flight attendants 6,805

SOURCES: AMR Corp. and US Airways  


Contact Linda Loyd at 215-854-2831 or lloyd@phillynews.com.

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