News Column

US Air, American Merger Buzz

Feb 11, 2013

John Stancavage World Business Editor

Catch up with the latest headlines involving American Airlines' bankruptcy proceedings.

Related Story: AMR stock payout a long-odds gamble some investors are risking

For most of the past 14 months, the leaders of bankrupt AMR Corp. have actively resisted a merger with US Airways, but those arguments finally appear to be fading.

The buzz on Wall Street is that a deal could be signed this week. If it happens, the merger will get a lot of support in Tulsa, where American employs about 7,000 people and operates its largest maintenance base.

"We see the combination as the best option for the two airlines to be successful and for Tulsa to be successful," said John Hewitt, chairman of maintenance at Transport Workers Union Local 514 in Tulsa, which represents about 6,000 mechanics and related work groups locally.

A merger would create little overlap, said Robert Herbst, a former commercial pilot, veteran industry consultant and founder of airlinefinancials.com. Herbst first predicted American and US Airways would end up together about two years ago and repeated his forecast when AMR filed for bankruptcy in November 2011.

"Both are flying near their capacity right now," Herbst said in a telephone interview. "They won't need to cut a lot of operations. There may be a few management and front-office jobs that go companywide - maybe 1 percent - but I doubt you'll see any losses in Tulsa."

American's top leaders, including CEO Thomas Horton, have argued since the first day of bankruptcy that they believe it would be a better strategy to emerge as an independent airline before considering merger offers.

The carrier has been fiercely pursued by US Airways CEO Doug Parker, however, since January 2012.

In recent weeks, rumors have intensified that Parker is making strong headway toward his goal. Sources say the two airlines now are talking and studying the numbers, working under nondisclosure agreements that expire Friday.

Why would Horton and his group finally cave in?

"I don't want to sound crass, but it's likely US Airways is crafting a lucrative package for American's senior managers to go out the door gracefully," Herbst said.

The merger would create the world's largest airline - one that would have the potential to soar above its rivals, which themselves have grown through consolidation in the past decade. Currently, American is the No. 3 carrier based on passenger traffic with US Airways No. 5.

A united American and US Airways would be valued at almost $13.1 billion, Dan McKenzie, a Buckingham Research Group Inc. analyst in New York, told Bloomberg News recently.

Some analysts have speculated that US Airways will end up owning about 30 percent of American Airlines, and AMR's creditors would control 70 percent. Even under that arrangement, US Airways would be the dominant entity, consultants say.

That would mean Parker would achieve his dream of running American, which he has said would keep its name and its Fort Worth, Texas, headquarters. Where such a deal would leave Horton and other AMR managers is not known.

That's OK with the TWU, Hewitt said. The union has been critical of American's management for years, particularly for the bonuses paid to higher-ups while the rank and file faced stagnant compensation.

"Part of our expectation in a merger is that we would see some new management faces in Tulsa," the union official said. "There's not a lot of confidence in the current team."

The TWU already has pre-negotiated some of its terms with US Airways, including a 4.3 percent across-the-board raise when the merger is completed. That pay increase would come in addition to a smaller salary bump that already is part of its new contract with American.

The only thing the TWU would have to give up is a 5 percent profit-sharing plan. "But we think we would earn more from the raise," Hewitt said. "And it would help our 401(k) savings plans."

Because the current merger talks most likely include all the large interested parties in the bankruptcy case, approval could be swift, analysts said. The government also would have to certify the combination, but that process probably would happen quickly as well, said Seth Kaplan, editor of Airline Weekly.

Some airline mergers have taken awhile to gel, but Kaplan said the combination of American and Tempe, Ariz.-based US Airways could be especially efficient.

"They could set up to work together as partners even before everything's finalized," he said.

The two could code-share, or allow booking on each others' flights, and open up frequent-flier programs to both groups of customers, the analyst said.

"They will want to start enjoying the synergies as soon as possible," Kaplan said. "Overall, I think they could be flying as one airline within two years."

Company Fact Sheet: AMERICAN AIRLINES

Total daily flights: 3,500 daily departures

Total destinations: 260 cities and airports

Total countries/territories served: 50

Total employees: 61,457, including 7,000 in Tulsa

Hub operations: Dallas/Fort Worth, Chicago, New York, Miami, Los Angeles

Company Fact Sheets: US AIRWAYS

Total daily flights: 3,028 daily departures

Total destinations: 198

Total countries/territories served: 28

Total employees: 32,213

Hub operations: Charlotte, N.C.; Philadelphia; Phoenix

Sources: AMR Corp., US Airways Group Inc


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