US Airways Gets Voice in AMR Bankruptcy By Buying Debt

US Airways Group Inc. seized an opportunity to influence bankruptcy proceedings for potential merger target American Airlines by buying $1 million worth of parent AMR Corp.’s debt.

US Airways paid $630,000 to buy AMR’s 6.25 percent notes due in October 2014 and become a creditor in the bankruptcy, the Tempe, Arizona-based airline said. News of the purchase yesterday followed American’s statement that the airline is ready to consider strategic alternatives, including a possible merger, to its plan to exit bankruptcy as a stand-alone company.

As a creditor, US Airways gains the right to show up at bankruptcy hearings, comment on issues before the judge and file documents in the court record, said Ivan Kallick of Manatt, Phelps & Phillips, and other bankruptcy lawyers. US Airways Chief Executive Officer Doug Parker has said he wants to merge with American, although a formal bid hasn’t been made.

“Parker is saying, now there is no way you can lock me out,” said Anthony Sabino, co-founder of New York-based Sabino & Sabino law firm. “Now we’ll know every step from things of great magnitude to the ridiculously trivial. He’s saying, ‘I knocked on the door, I grabbed a chair and I’m sitting at the table.’ The timing is exquisite.”

A combination of American, now the third-biggest U.S. carrier, and No. 5 US Airways would create the world’s largest airline, surpassing current leader United Continental Holdings Inc., based on miles flown by paying passengers.

Union Support

US Airways garnered support from American’s unions in April, reaching contracts with pilots, flight attendants, mechanics, baggage handlers and other airport ground workers, contingent upon a merger. It has been working to build support among American bondholders and other creditors.

Becoming a participant in the bankruptcy case “will be particularly important now that AMR has publicly committed itself to a review of strategic alternatives,” said Todd Lehmacher, a US Airways spokesman.

US Airways was one of five carriers that American CEO Tom Horton mentioned when he talked to the airline’s bankruptcy creditors committee about strategic options on July 10, people familiar with the matter have said. The others are JetBlue Airways Corp., Alaska Airlines, Frontier Airlines and Virgin America Inc.

US Airways acknowledged purchasing the debt in a court filing yesterday in which it also supported an American request that U.S. Bankruptcy Judge Sean Lane extend to the end of this year its exclusive right to submit a reorganization plan. The motion, supported by the creditors committee, is set for a July 19 hearing.

‘Meaningless Ploy’

“US Airways’ filing in court is a meaningless ploy to garner publicity,” said Bruce Hicks, an American spokesman. “US Airways admits they own a very small amount of debt which gives them no special position with the court or in this process.”

The $1 million in debt held by US Airways compares with $29.6 billion in total debt that AMR listed in its Chapter 11 filing.

While US Airways gains a voice in the bankruptcy process, the carrier may have to work harder to convince the judge that it’s speaking as a creditor on certain issues and not as a potential merger partner, said Michael Friedman, a bankruptcy attorney with Richards Kibbe & Orbe. The airline had no position in the case just as a would-be suitor.

‘Treasure Chest’

“They’ll have the challenge of convincing the court that what they say is related to their role as a creditor,” he said in an interview today. “It’s a low-cost way of not being booted out of the process from the get-go, but it’s not as if they hit the treasure chest and are now going to be heard on all matters or what they say is going to carry any more weight than other creditors.”

American, based in Fort Worth, Texas, will begin contacting “interested parties” soon to lay out possible restructuring options, Horton told employees in a letter.

American reached an agreement in May with its nine-member creditors committee, which has a voice in major decisions during bankruptcy, to evaluate alternatives by comparing them against its stand-alone plan.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE