The largest airline in the world will be formed. This announcement is to be expected Thursday morning.
The boards of American parent AMR Corp. and US Airways approved a deal late Wednesday, according to the Times.
American Airlines and US Airways agreed Wednesday to a merger that will create the worldโs biggest airline. The deal caps a turbulent period of bankruptcies and consolidation that leaves the US airline industry dominated by four big carriers.
The carrier will keep the American Airlines name but will be run by US Airways CEO Doug Parker. Americanโs CEO, Tom Horton, will serve as Chairman of the new company until mid-2014, these people said. They requested anonymity because the merger negotiations were private.
The deal has been in the works since August, when creditors pushed for merger talks so they could decide which earned them a better return: a merger or Hortonโs plan for an independent airline. American has been restructuring under bankruptcy protection since late 2011. AMR creditors and possibly its shareholders will own 72 percent of the stock, and US Airways Group Inc. shareholders will get the rest, three of the people said.
A formal announcement is expected Thursday morning.
If the deal is approved by AMRโs bankruptcy judge and antitrust regulators, the new American will have more than 900 planes, 3,200 daily flights, and about 95,000 employees, not counting regional affiliates. It will be slightly bigger than United Airlines by passenger traffic.
Since 2008, Delta gobbled up Northwest, United absorbed Continental, and Southwest bought AirTran Airways. If this latest merger goes through, American, United, Delta, and Southwest will control about three-quarters of US airline traffic.
The rapid consolidation has allowed the surviving airlines to offer bigger route networks that appeal to high-paying business travelers. And it has allowed them to limit the supply of seats, which helps prop up fares and airline profits.
Word of an American-US Airways merger raised new concern among passenger advocates. Charles Leocha of the Consumer Travel Alliance said that with just four big airlines instead of five, it will be easier to raise fares. โThe benefits of this deal will go only to the corporations, not to consumers,โ he said.
But industry officials say there will still be plenty of competition. A recent study by PricewaterhouseCoopers found that adjusting for inflation, domestic US airfares fell 1 percent between 2004 and 2011, a period that included several airline mergers.
Travelers on American and US Airways wonโt notice immediate changes. It likely will be months before the frequent-flier programs are combined and years before the two airlines are fully integrated.
When that happens, Americanโs presence will grow in key East Coast markets including New Yorkโs LaGuardia Airport and Washingtonโs Reagan National Airport. The merger will add US Airways hubs in Charlotte, Philadelphia, and Phoenix to Americanโs in Dallas-Fort Worth, Chicago, Miami, New York, and Los Angeles.
US Airways will boost Americanโs service to Europe and the Latin America-Caribbean market but wouldnโt fix Americanโs weakness on routes to Asia.
Just five years ago, American was the worldโs biggest airline. It boasted a history reaching back 80 years to the beginning of air travel. It had popularized the frequent-flier program and developed the modern system of pricing airline tickets to match demand.
But years of heavy losses drove AMR into bankruptcy protection. The company blamed bloated labor costs; its unions accused executives of mismanagement. AMR lost more than US$12 billion between 2001 and 2010. It has lost another US$2.8 billion since it filed for bankruptcy protection in November 2011 โ a period in which US Airways earned about US$650 million.
The merger is an impressive achievement for Parker and his management team at US Airways, based in Tempe, Arizona. Just a few years ago, they were running a mid-sized carrier called America West Airlines when they bought the old US Airways out of bankruptcy.
US Airways is only half the size of American and is less familiar around the world, but he prevailed by driving a wedge between Americanโs management and its union workers and by convincing Americanโs creditors that a merger made business sense.
Despite its smaller size, US Airways has prospered in the last several years, earning a record profit of US$637 million last year.
โTheyโve done an absolutely terrific job with what they have,โ said Bill Swelbar, an airline-industry researcher at MIT and board member of Hawaiian Airlinesโ parent company.
Parker began pursuing a merger almost as soon as AMR filed for Chapter 11. He found willing partners in Americanโs three labor unions, who have long fought with management at their own company over pay, work rules, and executive bonuses. American suffered strikes by pilots and flight attendants in the 1990s. Bad feelings hardened in the early 2000s, when union workers took pay cuts to keep the company out of bankruptcy while AMR gave bonuses to management employees after the stock price rose.
AMRโs Horton professed no interest in thinking about a merger until his company was out of bankruptcy court, but his creditors pressured him to reconsider. Some of them, along with Wall Street analysts, called for new management at AMR.
Bob Herbst, a financial analyst who studies airlines, said AMR has failed to adapt to changes in the industry since consolidation began in the middle of the last decade. He said AMR was fixated on gaining market share rather than on profitability.
American placed 14th out of 15 airlines in government rankings for on-time performance in 2012 (US Airways was fifth). Only United had a higher rate of complaints than American (but US Airways was barely better than American).
โThey are continually at the bottom in on-time and customer service, and theyโre losing more money than anyone else,โ Herbst said, โAmericanโs management is leaving, because thatโs what needs to happen.โ
AMR, however, has made measurable progress under Horton, who became CEO the day before the company filed for bankruptcy protection. The company earned operating profits in the second and third quarters of 2012, and its revenue for every seat flown one mile โ an arcane-sounding statistic but one that is closely watched in the airline business โ rose faster than at its rivals for much of the year. With leverage from bankruptcy laws, AMR won new union contracts with lower costs.
โIโm a big fan of Tomโs; heโs done a great job,โ said Mike Derchin, an analyst with CRT Capital Group, โHe restructured the balance sheet, made the company more efficient, and got a pilotsโ contract. He positioned the company for the future.โ
That performance may also have gotten a better deal for Hortonโs creditors. US Airwaysโ initial proposal called for AMR creditors to get only 49 percent of the stock in the combined company, according to people familiar with the talks. Instead, theyโll get 72 percent, although they might have to share some of that with shareholders, said the people familiar with the deal.
In recent weeks, AMR won bankruptcy court approval to buy hundreds of new planes from Boeing and Airbus, an important step to reduce fuel costs and offer a more comfortable experience for passengers. American even unveiled a new logo and paint job for its planes, although the reviews were mixed.
WHAT TO TAKE AWAY FROM THIS ARTICLE:
- US Airways is only half the size of American and is less familiar around the world, but he prevailed by driving a wedge between American's management and its union workers and by convincing American's creditors that a merger made business sense.
- Just a few years ago, they were running a mid-sized carrier called America West Airlines when they bought the old US Airways out of bankruptcy.
- The merger will add US Airways hubs in Charlotte, Philadelphia, and Phoenix to American's in Dallas-Fort Worth, Chicago, Miami, New York, and Los Angeles.