AP Sources: American Airlines, US Airways to merge

Published on NewsOK Modified: February 14, 2013 at 2:39 am •  Published: February 14, 2013
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The merger is an impressive achievement for Parker and his management team at US Airways, based in Tempe, Ariz. 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 American's management and its union workers and by convincing American's 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 $637 million last year.

"They've done an absolutely terrific job with what they have," said Bill Swelbar, an airline-industry researcher at MIT and board member of Hawaiian Airlines' parent company.

Parker began pursuing a merger almost as soon as AMR filed for Chapter 11. He found willing partners in American's 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.

AMR's 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).

"They are continually at the bottom in on-time and customer service, and they're losing more money than anyone else," Herbst said. "American's management is leaving because that's what needs to happen."

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 — an arcane-sounding statistic but one that is closely watched in the airline business — rose faster than at its rivals for much of the year. With leverage from bankruptcy laws, AMR won new union contracts with lower costs.

"I'm a big fan of Tom's; he's done a great job," said Mike Derchin, an analyst with CRT Capital Group. "He restructured the balance sheet, made the company more efficient and got a pilots' contract. He positioned the company for the future."

That performance may also have gotten a better deal for Horton's creditors. US Airways' 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, they'll 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.

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