News Column

Merger Deal Said to Be Near for US Airways, American

Feb 11, 2013

Linda Loyd

American

A merger between US Airways Group Inc. and bankrupt American Airlines could be announced this week, creating the world's largest airline by passenger traffic.

American parent AMR Corp.'s unsecured creditors planned to meet Monday, and the boards of AMR and US Airways -- already the dominant airline in Philadelphia -- could also vote on merger terms by midweek, according to reports by Reuters, the Wall Street Journal, and other media outlets, citing unnamed sources.

US Airways chief executive officer Doug Parker is expected to head the new company, and American's CEO, Tom Horton, would become nonexecutive board chairman, at least for a time.

Airline executives and staff reportedly met over the weekend to hash out final details. An announcement could be made by Friday, when confidentiality agreements AMR bondholders signed expire.

People familiar with the matter say the talks aren't concluded and could still fall apart.

"It appears that both companies have settled on an equity split of 72/28" in an all-stock transaction, with AMR creditors owning 72 percent of the merged airline, and US Airways shareholders the remainder, Deutsche Bank airline analyst Michael Linenberg said Friday in a note to investors.

"Of course, the situation is fluid, and there could be further changes, including no deal, although that seems less and less likely given the desires of labor and the unsecured creditors' committee," Linenberg wrote. "The bottom line is that we think a merger should be very positive for the majority of constituents at both AMR and US Airways as well as the industry as a whole."

The combined airline, to be called American and based in Fort Worth, Texas, would be equal to, or slightly larger than, United Continental Holdings, as the world's largest. It would have a workforce of 100,000 and a fleet of 1,500 aircraft.

"Frankly, there's no more time to waste," bond analyst Vicki Bryan of Gimme Credit L.L.C. wrote in a client update. "The sooner the deal-wrangling is finally put to bed and the acquisition is confirmed, the sooner CEO Doug Parker can begin the hard work still ahead to make the merger a winning proposition for the flying public."

Are mergers good or bad for passengers?

PricewaterhouseCoopers L.L.P. has analyzed average airfares over the last seven years and concluded that despite four big mergers -- US Airways-America West, United-Continental, Delta-Northwest, and Southwest-AirTran -- average domestic ticket prices did not rise dramatically, nor was service reduced on most routes.

"It really depends on how you measure it," said George Hobica, founder of AirfareWatchdog.com. "Adjusted for inflation, domestic fares have gone down, but international airfares have definitely gone up.

"For the average consumer, I think fares have gone up, and it's a result of consolidation," Hobica said. "You could argue that, inflation-adjusted, they've actually not gone up."

Some passengers can expect higher nonstop fares, especially at smaller airports, and reduced service as the two carriers combine operations.

The impact on ticket prices might be less than with other mergers because there are only a dozen routes that would effectively become monopolies, controlled by the new American. They include Miami-Philadelphia and Dallas-Philadelphia, although discount-carrier Spirit Airlines will begin flying to Dallas-Fort Worth from here April 4.

The new American would have eight hub airports: Philadelphia, Charlotte, and Phoenix (along with Washington as a "focus city"), which are now US Airways'; and American's currents hubs, New York, Miami, Chicago, Dallas-Fort Worth, and Los Angeles.

Parker said last summer all the hub operations would remain, but industry observers said the one exception might be Phoenix, because American has significant operations in Dallas-Fort Worth and Los Angeles.

A key question among both airlines' frequent fliers will be: What happens to their miles?

Earned miles will be safe. Mileage programs are a perk airlines use to hold on to top customers. Each airline's miles would be honored, and, eventually, the new American would consolidate frequent-flier programs and merge accounts of passengers with miles at both airlines, industry experts say.

Even if a merger were approved by the bankruptcy court and it clears antitrust scrutiny, combining operations will take a year or two. During that time, each airline would continue to operate its own flights and sell its own tickets.

Proponents of airline consolidation say there will be an increased number of international destinations available, and better access for American's business travelers to the Northeast, where US Airways' network is strong.

Parker has said US Airways would leave the Star alliance, which also includes Lufthansa, Japan's ANA, United, and other carriers, and switch to the OneWorld global alliance, which includes American, British Airways, Cathay Pacific, Japan Airlines, and others. Worldwide airline partnerships allow customers to buy tickets on one airline and travel via the partners.

"The merger solves US Airways' international-network problem and creates a better combined entity," James Corridore, a Standard & Poor's equity analyst, said in a client note. "We are positive on the potential for additional capacity rationalization. We would prefer US Airways management to remain in control."

Representatives of US Airways and American declined to comment, citing confidentiality agreements.



Distributed by MCT Information Services


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