In the end, US Airways, once famously dismissed as “the ugly girl,” wooed bankrupt American Airlines’ unions and creditors, and wrangled an $11 billion merger agreement with AMR Corp., announced on Valentine’s Day, to create the globe’s largest airline.
American Airlines and US Airways officials confirmed this morning they have a “definitive merger agreement under which the companies will combine to create a premier global carrier — the new American Airlines,” and they have scheduled a press conference for 11 a.m. EST.
With the airlines’ boards and American’s creditors committee approving the marriage yesterday, more than 15 months after American Airlines filed for Chapter 11 bankruptcy protection to “achieve industry competitiveness,” the announcement was a bit anticlimactic.
The merger, which many believe marks the final consolidation among legacy carriers in the U.S., comes more than two years after then-Continental CEO Jeff Smisek dismissed US Airways as “the ugly girl” that was spurned by United in favor of the prettier girl and eventual merger partner, Continental Airlines.
The airline will be called American Airlines, and the holding company will be dubbed American Airlines Group Inc.
Today’s announcement is expected to have few surprises: Doug Parker, CEO of the smaller, scrappy and profitable US Airways, becomes CEO of the new American Airlines, which will be branded as such and headquartered in its current offices in Dallas/Fort Worth.
American Airlines CEO Tom Horton, who stubbornly resisted the merger for a protracted period and sought to take his airline through bankruptcy solitarily, becomes non-executive chairman of the combined airlines. He will serve in that post, and as the new American’s representative to one world, through the first annual meeting of shareholders.
Parker becomes chairman of the board following Horton’s exit.
The 12-member board wlll include three American Airlines representatives, including Horton, four from US Airways, including Parker, and five representatives of AMR’s creditors.
Under the terms of the all-stock deal, American Airlines’ creditors own 72% of the new airline, and US Airways shareholders get 28%.
Champagne and competition
While champagne corks are undoubtedly popping in the boardroom at Tempe, Arizona, home to US Airways, there may also be some minor celebrations under way in Chicago and Atlanta, the headquarters of United and Delta, respectively, because the whole industry saw consolidation as a big plus.
The merger, which is subject to regulatory and bankruptcy court approval, strengthens the combined American and US Airways domestically, but does little to bolster American’s international position, particularly in China and Japan, where it is weak despite being an anchor member of the Oneworld alliance, where the merged airline would remain as a member.
The merger announcement triggers a multi-year process to integrate the two airlines and wrest $1 billion in synergies.
Regulatory approvals are said to be highly likely because the two airlines operate only about a dozen overlapping routes, although the carriers may be forced to divest some assets/slots in several cities.
There is a rabid debate about whether this merger was really necessary. US Airways is the big beneficiary while American has less to gain, although some argue that American had to get bigger in order to compete with Delta and United, and to become truly global.
Delta likely will come out a winner because although it will face increased competition at hubs in LaGuardia and even Atlanta, given the new American’s hubs in Charlotte and Miami, Delta has its merger with Northwest in the rearview mirror while American-US Airways will have to deal with integration angst for the next few years.
Horton didn’t hatch the egg, Parker did
Horton resisted the merger as he and other American top managers could have taken home $300 million to $600 million dollars in incentives if the airline managed to exit the reorganization process independently, and it then could have worried about a marriage with US Airways, or someone else, later. Horton may have also truly felt that a merger wasn’t necessary.
But, US Airways CEO Doug Parker and US Airways pilots stalked American almost like an obsessed lover. And, American’s own bondholders and creditors put pressure on the airline to do what the industry craved and deemed almost inevitable: get hitched with US Airways.
American’s unions found Parker relatively attractive because after 15 years of labor discord under American’s leadership, they wanted anyone but Horton.
A very big airline
The merger pairs American, the country’s third-largest airline, with US Airways, the fourth largest, in a transaction that will create the world’s largest airline.
Former CEO and chairman Robert Crandall and pundits agree that integration of the pilot groups’ seniority lists is a key hurdle to making for an effective merger.
The American-US Airways merger, which follows Southwest-AirTran in 2011, United-Continental in 2010, Delta-Northwest in 2008, and AmericaWest-US Airways in 2005, creates a new American Airlines, based in Dallas, with Phoenix, US Airways’ base, slated for some trimming.
The combined airlines would have hubs in Dallas/Fort Worth, Chicago O’Hare, Miami, JFK and Los Angeles, Charlotte, Philadelphia and Phoenix. Reagan-National in Washington is a US Airways focus city, and there would be a large presence at LaGuardia.
With one legacy airline out of the picture, travelers can expect fares to rise in some cities, and service to smaller cities to suffer as the merged airlines trim and rationalize their routes.
The merger press release included a statement from Horton, which says:
“Today, we are proud to launch the new American Airlines – a premier global carrier well equipped to compete and win against the best in the world. Together, we will be even better positioned to deliver for all of our stakeholders, including our customers, people, investors, partners, and the many communities we serve.
“The combination of American and US Airways brings together two highly complementary networks with access to the best destinations around the globe and gives us a strong platform to provide our customers the most connected, comfortable travel experience available. The operational and financial strength of the combined airline is expected to enable continued investment in new products and technologies and will create exciting new opportunities for our people, even as we deliver strong cash flow and sustainable profitability.
“Over the past year, the American team stood tall as we established a rock solid foundation for long-term success through an efficient and effective restructuring. As part of this process, after months of exhaustive analysis and a thorough review of all alternatives, we concluded that this merger is the best outcome for our company, delivering not only the greatest value for our financial stakeholders, but also positioning us well for sustainable success over the long term.
“This merger provides enhanced potential for full recovery for our creditors. In addition, I am pleased that we were able to obtain the support of a sizable portion of our unsecured creditors for a plan that provides a recovery of at least a 3.5% aggregate ownership stake in the combined airline for our shareholders.
“It is unusual in Chapter 11 cases – and unprecedented in recent airline restructurings – for shareholders to receive meaningful recoveries. I look forward to working closely with Doug Parker, whom I have known as a friend for more than 25 years, and with the leadership teams of both companies to assure a smooth integration and the creation of a new industry leader.”
And, Parker, who will head the new entity, stated:
“Today marks an exciting new chapter for American Airlines and US Airways. American Airlines is one of the world’s most iconic brands. The combined airline will have the scale, breadth and capabilities to compete more effectively and profitably in the global marketplace. Our combined network will provide a significantly more attractive offering to customers, ensuring that we are always able to take them where they want to travel, when they want to go.
“Today’s announcement is possible only because of the important work carried out over the past year by Tom Horton and the American team. No one cares more about the long-term success of American Airlines and its people than Tom. Through a successful restructuring and this merger, Tom and the American team have established an excellent foundation for the new American Airlines to become a premier global airline. I am grateful for all that Tom has done to ensure that American is in the best position possible for future success and am delighted he has agreed to remain on board to assist with the transition.
“I am particularly pleased for the employees of both US Airways and American. This merger will create a stronger company, with the path to improved compensation and benefits and greater long-term opportunities for all our employees. We are grateful to have the support of both companies’ unions and thank them and their leaders for their hard work and vision. We look forward to a bright future for our employees and enhanced service and choice for our customers. With today’s announcement, we start becoming one team and one new airline.”