US Airways Leads AMR Merger to Create Largest Airline

AMR Corp.’s $11 billion merger with US Airways Group Inc. caps a wave of consolidation that has swept up five of the 10 biggest U.S. airlines since 2005 and leaves a three-way rivalry at the top of the industry.

Yesterday’s tie-up will push AMR’s American Airlines past United Continental Holdings Inc. and Delta Air Lines Inc. to be the world’s largest carrier, making it “hard to imagine” another U.S. combination of similar size, said US Airways Chief Executive Officer Doug Parker, who will run the new company.

“With the combination of American and US Airways, it’s creating a third, very strong competitor to United and Delta who have already gone through similar consolidation,” Parker said at a news conference at Dallas-Fort Worth International Airport near American’s headquarters. “You’re left with a very competitive, but much more rational business model.”

The merger will produce annual savings and new revenue totaling more than $1 billion by 2015, the airlines said. The dealmaking set in motion almost eight years ago when Parker led America West Holdings Corp. into a tie-up with US Airways will now leave American, United and Delta as the only U.S. carriers with full-service cabins and trans-oceanic routes.

Consolidation and slumping travel demand after the 2008-2009 financial crisis pared U.S. airline employment to 382,000 as of November, according to the latest federal statistics, about 32,000 fewer than when Parker engineered the US Airways-America West combination.

‘Complementary Networks’

Parker will preside over the new airline, which will retain American’s name, as AMR CEO Tom Horton becomes chairman, the companies said in a statement. AMR’s bankruptcy creditors will own 72 percent of the equity, while 28 percent will go to US Airways shareholders.

“One of the really nice things is how complementary the route networks are,” Parker, 51, said in an interview. “Of over 900 routes, only 12 have any overlap, which is phenomenal. We are going to need to keep all the hubs in place, the cities we fly to we will need to continue to fly to.”

His challenges at the combined company will include soothing a history of labor strife at American and meshing technology systems, union workforces and aircraft. Recent history has shown that airline mergers can take years to be bolted together seamlessly.

United, Southwest

United, for example, struggled in late 2012 with chronically tardy flights stemming from struggles to blend operations with predecessor UAL Corp. and 2010 merger partner Continental Airlines Inc. Southwest Airlines Co. has said full integration of its 2011 purchase of AirTran Holdings Inc. won’t come until the end of 2014.

US Airways fell 4.6 percent to $13.99 yesterday in New York, a slump that Michael Derchin, a CRT Capital Group LLC analyst, attributed in part to “some selling on the news.”

Investors already had been betting on a deal, almost doubling the price since Jan. 25, 2012, when the company confirmed its interest in a merger, through Feb. 13.

“It is clearly a positive event” for both airlines and the industry, said Derchin, who is based in Stamford, Connecticut, and has a buy rating on US Airways.

Most of the projected yearly benefits from combining American, the third-largest U.S. airline, with No. 5 US Airways will be in new revenue, at about $900 million, the companies said. There will be about $150 million in savings excluding initial expenses to put all employees onto the same pay scale.

Integration Outlook

One-time transaction costs will be $1.2 billion spread over the next three years, according to the companies, which said they expect a third-quarter closing. Full integration should be completed within 18 months, with the combined American appearing to consumers as one airline before then, Parker said. The merged company will keep American’s Fort Worth, Texas, headquarters.

Stockholders of Tempe, Arizona-based US Airways will receive one share of the new company for each share they now hold, according to the companies. Horton said AMR’s shareholders will recover “at least a 3.5 percent aggregate ownership stake” under an agreement with creditors.

The airlines don’t expect to have to divest any assets to secure U.S. antitrust approval, or any difficulty winning an endorsement from European Union competition regulators, Horton said on a conference call with analysts and reporters. The merger also requires the backing of the bankruptcy court and US Airways shareholders.

11 Years

For Parker, taking over at American completes an 11-year quest to build a bigger airline. America West was the eighth-largest U.S. carrier when he became CEO there in 2001, four years before he combined the company with US Airways. A bid to buy Delta and two efforts at a United Airlines merger all fell through in the past six years.

Parker began pursuing American shortly after it sought bankruptcy protection on Nov. 29, 2011. He wooed AMR’s unsecured creditors committee, an ad hoc bondholder group and American’s unions as the airlines agreed in August to swap confidential data as a prelude to a tie-up.

After initially pushing to have AMR exit bankruptcy as a stand-alone carrier before weighing consolidation, Horton said that a combination emerged as the best outcome.

New Board

The new board will have 12 members, with Horton and two others from American, four from US Airways, including Parker, and five appointed by AMR’s creditors. Horton, 51, will be chairman through the combined airline’s first annual meeting.

American had about 62,400 employees based on a three-month average as of Dec. 31, while US Airways’ total was 31,236, according to the airlines.

Investor optimism ahead of the deal helped AMR’s $460 million of 6.25 percent convertible notes due October 2014 rally more than fivefold through Feb. 13, from 17.75 cents on the dollar after the bankruptcy filing. The debt jumped 4.75 cents to 105 cents on the dollar yesterday in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Members of each airline’s frequent-flier program will continue to earn benefits as the carriers operate separately, according to the companies, which said they will detail the plans’ consolidation later.

Oneworld Membership

American will remain in the Oneworld airline marketing group that includes International Consolidated Airlines Group SA’s British Airways. US Airways is a member of the Star Alliance led by United.

The combined airline will have a main jet fleet of more than 900 planes and hubs stretching across the U.S., with an emphasis east of the Mississippi River. American’s hubs are in Chicago, Dallas-Fort Worth, New York, Miami and Los Angeles, while US Airways’ are in Philadelphia, Phoenix and Charlotte, North Carolina. US Airways calls Washington a “focus city.”

Washington is one of three cities in the Northeast U.S., along with New York and Boston, where US Airways operates a daily shuttle service targeted at business fliers.

Melding the carriers’ route systems will build on American’s network in Latin America, the biggest among its U.S. peers, and on its joint ventures with British Airways across the Atlantic and Japan Airlines Co. over the Pacific.

Bulking Up

US Airways’ size relative to its larger rivals had left it at a disadvantage in the U.S. industry, and Parker’s quest for a merger began long before he trained his sights on American.

In January 2007, his hostile bid to take over Delta in bankruptcy collapsed when he couldn’t gain the support of the airline’s creditors or pilot union. Talks with United fell short in 2008 and again in 2010, with the second go-round followed days later by United’s agreement to merge with Continental.

Barclays and Millstein & Co. are serving as financial advisers to US Airways, and Latham & Watkins LLP, O’Melveny & Myers, Cadwalader, Wickersham & Taft LLP, and Dechert LLP are serving as legal counsel to US Airways. American’s financial adviser is Rothschild, and its legal team consists of Weil, Gotshal & Manges LLP, Jones Day, Paul Hastings LLP, Debevoise & Plimpton LLP and K&L Gates LLP.

Moelis & Co. and Mesirow Financial Inc. are advising the creditors committee, whose legal counsel is Skadden, Arps, Slate, Meagher & Flom LLP and Togut, Segal & Segal LLP.

The case is in re AMR Corp., 11-15463, U.S. Bankruptcy Court, Southern District of New York (Manhattan).