Wings Magazine

American, US Airways deal creates world’s largest airline

Feb. 15, 2013, Dallas, Tx. - US Airways CEO Doug Parker has landed the big merger he sought for years. Now the soon-to-be CEO of the new American Airlines has to make it work.

February 15, 2013  By Carey Fredericks

The fleet needs new planes and new paint. Frequent flier programs have to be combined. American's on-time performance must improve. And the airline needs to win back business travellers who have drifted to competitors. But Parker's nothing if not persistent.

After months of courting, the companies on Thursday announced an $11 billion merger that will turn American into the world's biggest airline, with 6,700 daily flights and annual revenue of roughly $40 billion. It's a coup for Parker, who runs the much-smaller US Airways Group Inc. and believes that mergers help airlines achieve higher revenue and consistent profits.

When the deal closes later this year, the four biggest U.S. airlines –  American, United, Delta and Southwest – will all be the
products of mergers that began in 2008. Those deals have helped the industry control seats, push fares higher and return to
profitability. But it's not easy to stitch two airlines together.

Some of Parker's work has already been done. American parent AMR Corp. has cut costs and debt since it filed for bankruptcy
protection in late 2011. Pilots from both airlines have agreed on steps that should make it easier to combine their groups under a single labour contract, a big hurdle in many airline mergers. But when the deal closes – expected by September as part of AMR's plan to emerge from bankruptcy protection – there will still plenty to do.


The new company will have to combine the separate computer systems that American and US Airways use for reservations and other functions, while avoiding the glitches that have plagued United since it switched to Continental's system. The airline will have to fly better. Last year, American ranked 14th out of 15 airlines for on-time performance, according to government statistics. It cancelled flights at a higher rate than its closest rivals. It had the second-worst rate of complaints, better only than United, which was hit by periodic computer outages.

The executive likely to be charged with making the airline run more smoothly is US Airways' chief operating officer, Robert Isom. He said his company fixed similar problems in 2007 through regimented maintenance schedules, stricter rules on how long to wait for connecting passengers, and using bonuses to encourage workers to hit performance goals. US Airways ranked fifth in on-time arrivals last year.

Leaders of American's unions say they're ready to help the airline perform better. They should be — after all, they helped kick
American's current management to the curb by supporting a merger with Parker running the combined company.

"Without us, a merger would not have occurred in bankruptcy,'' said Keith Wilson, president of the Allied Pilots Association.

"We think we're going to get a change of culture,'' added Laura Glading, president of the flight attendants' union at American.

The union leaders say employees will have more job security at a larger airline that's better able to compete with United and Delta. Their support of a merger was critical because the unions held three of the nine seats on the committee of AMR's bankruptcy creditors.

A lawyer who advised that committee, Jay Goffman of Skadden, Arps, Slate, Meagher & Flom, said the influential committee became convinced that a merger would produce an airline that could boost revenue faster than American by itself. "And frankly, the fact that the unions were fully supportive of a merger made a big difference,'' Goffman said.

Over the past year, Parker and AMR CEO Tom Horton were adversaries who had wildly different strategies for their companies. Parker raided Horton's turf to enlist American's labour unions in his campaign for a merger. Horton seemed more aloof, preferring that American remain on its own. As the airlines held private discussions during the fall and into winter, speculation centred on which man would end up running the company if there were a merger.

Those differences were set aside Thursday when the men stood before TV cameras for a news conference at Dallas-Fort Worth International Airport. A backdrop was splashed with the logos of both airlines. Parker and Horton traded banter about each other's looks and about working at adjoining cubicles at American 25 years ago.

Horton called Parker "my good, longtime friend,'' and Parker said Horton was "the best – he knows this business.''

If Horton was disappointed in not getting to run the new American, he didn't admit it.

"I don't think it would be fair to say my goal was to run the biggest and best airline,'' Horton said. "My goal was to make sure
American Airlines is the best airline in the world. And that's exactly what's going to happen here.''

Parker said, "This isn't about me or Tom. This is about doing what's best for the combined companies.'' He said the CEO title was just one of many decisions they had to make. "It's one that I'm very happy with, one that Tom has told you he's happy with,'' Parker said. He thanked Horton for agreeing "to hang around and help me with that transition.''

"Well, best of luck,'' Horton interjected, as employees of both airlines laughed.

The deal needs approval by AMR's bankruptcy judge, federal antitrust regulators, and US Airways shareholders. Parker, Horton and most analysts predict smooth sailing. Even if they're right, American and US Airways will continue operating as separate airlines for months or even a couple years. Officials promised that frequent-flier programs would continue untouched.

The merger follows Delta's acquisition of Northwest in 2008, the United-Continental deal in 2010, and Southwest's purchase of AirTran Airways in 2011. The rapid consolidation has allowed the remaining airlines to lure high-paying business travellers with better route maps. And it has helped them limit the supply of seats, pushing up fares and fees.

That concerns some consumer advocates, but Parker argued that competition will increase, not decrease.

"There are two very large airlines right now and this creates a third,'' Parker said in an interview, referring to United and Delta, currently the world's two biggest airlines. "It provides good competition to those two.''

Mary Gorman, who was at Miami International Airport on Thursday for a flight home to Virginia Beach after a cruise with her husband, said she hoped that together the airlines would offer better service than either does by itself.

"If the service is better, I don't mind paying more for a ticket,'' Gorman said.

Most airline mergers have resulted in fewer flights and shrinkage at some hubs, as happened to Cincinnati after Delta bought
Northwest. Parker said this deal will be different because US Airways and American overlap on just 12 routes. He said the new
airline will keep all of American's hubs – Dallas-Fort Worth, Chicago, Miami, New York and Los Angeles – and those of US Airways, in Phoenix, Charlotte and Philadelphia.

Besides continuing the American Airlines name, the combined carrier will be based in American's hometown of Fort Worth, Texas. With Parker set to become CEO, Horton will serve as board chairman until its first shareholder meeting, likely in mid-2014. Parker will add the chairman's title after Horton leaves.

AMR creditors, workers and shareholders will own 72 per cent of the new company including 23.6 per cent for employees and unions. US Airways shareholders will get the other 28 per cent. The companies said they expect $1.05 billion in annual benefits from the merger by 2015, based on the assumption that they will attract more business travellers.

The extra revenue and savings would have been higher, but the company expects to pay out $400 million per year in pay raises. Unionized workers at both airlines have seen their pay languish, with some US Airways pilots still flying under a contract signed when that carrier was in bankruptcy protection in 2005.

The new American will be slightly bigger than United Airlines by passenger traffic, not counting regional affiliate airlines. The
mammoth size of Delta and United has helped those carriers get more than their share of business travellers, US Airways President Scott Kirby said on a conference call.

For instance, Delta's shuttle service up and down the East Coast competes against a similar offering by US Airways. But Delta
passengers can connect to more overseas cities than US Airways passengers can, and American doesn't have a shuttle at all. But with the US Airways shuttle feeding passengers into American's overseas flights, the merged airline will get more business travellers, US Airways argued in its presentation to creditors in January, which was filed publicly on Thursday.

The combination will also boost American's service to Europe and Latin America and the Caribbean. Some analysts noted that the new American will still be weak on routes to Asia, however.

"Without a major Pacific presence (just a mere five destinations and eight routes), American doesn't come close to either Delta or United's presence in the market,'' Helane Becker, airlines analyst for Dahlman Rose & Co., wrote Thursday in a note to clients.

The new American will stay in the oneworld airline alliance with partners including British Airways and Japan Airlines. For US
Airways passengers, that will eventually mean an end to redeeming miles on Star Alliance members United and Lufthansa.

The new board of directors will have 12 members: Three from American, including Horton; four from US Airways, including Parker; and five appointed by American's creditors. Horton said AMR's bankruptcy creditors might be repaid in full. He noted that his company cut costs, reduced debt and moved ahead with orders for new planes during the bankruptcy process, increasing AMR's value to US Airways.

That, he said, "allowed us to make a deal with US Air that was on the right terms for American and our people.''


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