What’s at stake if US Airways, American merge?

What’s at stake if US Airways, American merge?

What’s at stake if US Airways, American merge?

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by ELY PORTILLO / The Charlotte Observer

WCNC.com

Posted on December 14, 2012 at 10:45 PM

CHARLOTTE, N.C. -- For more than a year, US Airways has been maneuvering closer and closer to a merger with larger rival American Airlines, and many analysts are now saying a combination is very likely to happen.

A marriage of the two companies would create the nation’s largest airline, further consolidating the air travel industry. US Airways is trying to orchestrate the merger before American emerges from Chapter 11.

Tom Horton, CEO of American parent AMR Corp., has said the carrier is still evaluating whether it makes more sense to combine the companies or emerge from bankruptcy as a stand-alone company. American’s pilot union said Horton told them Thursday he still favors coming out of bankruptcy as a stand-alone company, and perhaps pursuing an acquisition of US Airways afterward.

American retains the exclusive right to present a reorganization plan for exiting bankruptcy through Jan. 28 and is seeking to extend that through early March. But some analysts say American could decide on a merger much sooner – perhaps before the first of the year.

US Airways CEO Doug Parker has been campaigning aggressively for a merger, soliciting the support of American’s unions and touting the virtues of joining forces. He’s said that a merger would mean more flights from Charlotte Douglas International Airport.

US Airways has formally submitted a merger plan, which reportedly would value the combined airline at about $8.5 billion and split equity 70 percent-30 percent with American’s creditors and US Airways stockholders, respectively.

The combined company would be named American Airlines, meaning the end of the US Airways name, and would be run from American’s headquarters city of Fort Worth, Texas.

American may well decide it must do a merger to compete with larger rivals Delta Air Lines and United Continental, which have bulked up their networks by merging with other carriers in the past few years.

Whatever happens, it could have a huge impact on Charlotte: US Airways operates about 90 percent of daily flights from Charlotte Douglas International Airport, and more than 7,100 US Airways employees are based here.

So what’s at stake in the merger? It depends on your point of view:

For airport, ‘a risk’

Charlotte’s airport has about $1 billion worth of expansion projects planned or underway to facilitate further growth, funded with bonds backed by revenues from airport operations. An analyst told the Observer in April that it could be risky to pursue such big projects while US Airways’ future is murky.

“Charlotte’s future is so heavily tied to US Airways’ status as an independent airline, and right now there is a lot of uncertainty,” said Henry Harteveldt of Cambridge, Mass.-based Atmosphere Research Group. “There really is a risk.”

Business leaders often call Charlotte’s airport one of the city’s most valuable assets, and economic development officials say it has been crucial to luring companies such as Chiquita Brands International to relocate here. Charlotte Douglas is the world’s sixth-busiest when measured by takeoffs and landings. It’s US Airways’ largest hub, offering direct flights to more destinations than many airports at similarly-sized cities.

The Tempe, Ariz.-based carrier operates more than 600 daily flights from Charlotte.

So far, Charlotte officials seem sanguine about the airport’s prospects as a hub following a merger.

“I think it would be great for us,” said aviation director Jerry Orr, following a Charlotte Chamber Aviation Committee meeting last week. “A larger airline with a further reach presents great opportunities for us.”

Charlotte Chamber senior vice president Natalie English told the Observer that the Chamber is “intrigued with the merger discussions and the potential they bring to continuing to grow our economy.”

Seth Kaplan, with airline trade publication Airline Weekly, said keeping Charlotte as a hub would make sense for the merged airline. “Charlotte wouldn’t look a lot different except the planes would be painted a different color,” said Kaplan. He said the hub is a profit center for US Airways.

For passengers, a mixed bag

Whether a merged US Airways-American Airlines will be good for passengers is likely to be somewhat of a mixed bag.

Travelers used to flying on US Airways from Charlotte would gain a wide variety of new destinations on the merged airline, including more international routes. Business travelers especially could benefit, with more direct flights and a larger airline now at the center of the Oneworld international alliance.

But further industry consolidation is likely to drive ticket prices up. If US Airways and American merge, that would create four huge airlines with more than 69 percent of domestic market share. US-Airways-American would be the largest, with about 21 percent of the market, according to federal statistics.

“They’re not merging to try to lower fares,” Kaplan said.

That would likely have the biggest impact on occasional or leisure travelers, who are more price-sensitive. With Delta buying a 49 percent stake in Virgin Atlantic, competition on trans-Atlantic routes would be further diminished if US Airways and American merge, Kaplan said.

Other hub cities to feel hit

Some other major hub cities could have more to lose in a deal. Tempe, Ariz., would lose a corporate headquarters, along with the jobs and prestige that go with it. The North Scottsdale Chamber of Commerce commissioned a study last month that showed that area could lose more than 7,000 jobs, millions of dollars in tax revenue, and air service.

And in Philadelphia, US Airways’ second-busiest hub, the African American Chamber of Commerce has said it’s worried that a merger could result in cutbacks to service at Philadelphia International Airport if the airport shifts flying to American hubs, such as International in New York City.

Kaplan said that if Parker and his team take over the merged airline, as many analysts expect, they could cut back service at smaller American hubs. Parker’s whole strategy has been based on dominating its hub airports, and American isn’t No. 1 at some of its hubs, such as Chicago O’Hare and JFK. Smaller American hubs such as Los Angeles could be at risk of service reductions, he said.

“They’re very into the idea that if you can’t be No. 1 somewhere, you probably shouldn’t be there,” said Kaplan, of US Airways.

Parker likely to lead

Many analysts expect Parker’s executive team to take over the combined airline if the deal is done during bankruptcy. He’s done it before: In 2005, Parker led smaller America West to take over US Airways while the larger carrier was in bankruptcy proceedings and brought much of his management team with him.

“It is becoming increasingly apparent that AMR’s current leadership is losing control of its fate now that its workers and its creditors have become convinced that whatever happens, somebody else needs to run this company,” wrote analyst Vicki Bryan for independent bond rating agency Gimme Credit on Wednesday

Kaplan said that Parker could become CEO while American’s Horton became chairman of the company for a few years, similar to what happened with the leadership of Continental and United when those carriers merged.

“It would look a lot like an acquisition of American by US Airways,” Kaplan said.

Sustained union fights possible

Neither American nor US Airways is known for harmonious labor relations. Both have contentious, multi-year disputes running with some of their key unions.

For US Airways pilots and flight attendants, the merger could represent a path to the unified contracts and pay increases that have eluded them for more than seven years, since America West and US Airways merged.

However, Parker has also shown that he can run an airline for years without a new, unified contract, so a bungled merger could also result in ongoing labor strife.

American’s three key unions – of pilots, flight attendants, and ground workers – have all endorsed the idea of a merger led by Parker. They’ve also negotiated preliminary terms with Parker and US Airways.

Both American’s and US Airways’ pilot unions have been invited to join American’s unsecured creditors committee to help deliberate the potential merger. Some analysts see this as an even stronger signal that a merger is likely.

“We feel more confident than ever that the US Airways bid will be accepted, perhaps by Christmas,” wrote Bryan, of Gimme Credit.

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