American and US Airways to become the world's largest airline
Leaders of the deal between American Airlines and US Airways decided early on that they would only proceed as long as they had the backing of American employees. The two sides believe they would receive regulatory backing for a merger. The new company is to be called American Airlines and based out of Fort Worth, Texas.
In this file photo, a US Airways jet takes off as an American Airlines jet is prepped for takeoff at Sky Harbor International Airport in Phoenix. The merger of US Airways and American Airlines has given birth to a mega airline with more passengers than any other in the world.
AP Photo/Matt York, File
US Airways听Group Inc has spent years looking for a merger partner only to be turned away and labeled the "ugly girl" amid a wave of U.S. airline industry consolidation.
It finally saw an opportunity in the fall of 2011, when rumors swirled that American听Airlines was in trouble.
Still,听US Airways听was caught off guard when American's parent听AMR听Corp filed for bankruptcy in November that year.听US Airways听executives had estimated that American听had enough cash to sustain operations at least through May of 2012, according to people familiar with the situation.
Chief Executive Doug听Parker听quickly mobilized a team to devise a strategy to move on American, a much larger rival. Within about a month,听Jim Millstein, a restructuring executive formerly with the U.S. Treasury, and听Barclays听were brought in as financial advisers, and听Latham & Watkins听LP was hired as legal counsel .
Parker听wanted to act fast because he felt that American听would try to exit bankruptcy quickly, the sources said. But after听US Airways' hostile bid for Delta Air Lines had failed in early 2007, the last thing听Parker听wanted was to appear overly aggressive.
In the face of听AMR听CEO Tom Horton's initial resistance, the听US Airways听team spent several months wooing American's creditors and labor unions, hoping to persuade them to put pressure on management to come to the table.
In April last year, American's three largest unions voiced support for a听US Airways听takeover. And in May,听AMR's official unsecured creditors committee convinced Horton to explore a merger as an alternative to an independent restructuring plan.
Parker听"recognized who effectively would be the arbiters of this deal and he put together a campaign to bring them over to his side," said听Robert Mann, an airline consultant in Port Washington,听New York.
A person familiar with the discussions said听Parker听and US Airways President Scott Kirby decided early in the process that they would only proceed if they had the support of American听employees. "That was a lesson learned from Delta. If we don't have them, it won't happen. And they led the way," the person said.
On Wednesday, the boards of听AMR听and听US Airways听approved the $11 billion merger, and an announcement is expected early on Thursday.听
Stars aligned听
A big point in听Parker's favor was the fact that American听has had difficult labor relations for more than a decade. The pilots union rejected a new concessionary contract last August, in part due to fears that approval would be seen as a vote of confidence in听AMR听management and undermine the case for听US Airways.
The pilots grudgingly approved the contract a few months later, but only after听AMR's influential bondholders assured the union that they would not support any restructuring plan unless American听remakes its board and management team.
"There's a toxic employee situation at听AMR听because frankly the employees don't trust their management," said听Michael Boyd, an听Evergreen,听Colorado-based aviation consultant whose firm has worked with听Parker.
"From that perspective, you've got labor unions on both sides of this who really would like to see Doug听Parker听run this larger airline."
Meanwhile, the mega airline mergers in 2008 and 2010 that created today's Delta Air Lines and听United Continental听Holdings Inc, were increasingly marginalizing both American听and听US Airways.
Wall Street analysts and investors were almost unanimous in saying that a marriage was the best shot at reversing the fortunes of the two airlines, seen as too small to compete effectively against a Delta or United, and too large to be as nimble as the smaller carriers like JetBlue.
Reflecting investor enthusiasm about the prospects of a merger, shares of听US Airways听have risen 57 percent since the spring of 2012, when the airline reached agreement with American's main labor unions to support a potential merger.
While a combination would still need approval from U.S. regulators, both听US Airways听and American听believe that would not be a problem since Delta-Northwest听and United-Continental mergers were approved.
According to some antitrust experts,听US Airways听and American听would likely be allowed to combined if they agreed to divest assets in some cities to preserve competition.听
Five-way talks in Dallas听
While the support for a deal grew among American听employees and creditors, it remained a tough sell to听AMR听management, which wanted to emerge out of bankruptcy as an independent company and consider any deals on its own terms.
Under an agreement with creditors, American听entered into merger talks with听US Airways听last summer, but the American听executives spent several months talking up the risk of integrating different unions, while talking down the benefits of combination, people familiar with the situation said.
It took five-party discussions in听Dallas听to change the tide. These talks took away much of the year-end holidays for the two airlines' executives, the pilots unions on each side, and听AMR's creditors committee.
They spent the month of December trying to negotiate a joint labor contract that would cover both unions in the event of a merger. A tipping point came shortly after Christmas, which resulted in a memorandum of understanding on Dec. 28.
That labor deal provided a clear picture for how the unions would be integrated, and was instrumental in convincing the American听board in January that revenue and cost benefits from a merger would outweigh a standalone restructuring, sources said.
"Getting that done, that was really a joint effort, and a good one of US Air and听AMR听working together," said a person familiar with the negotiations.
"That whole process, people could see more clearly the possibilities as opposed to obstacles to not to do a deal. That might have been the catalyst moment for the听AMR听board," the person said.
American had听Rothschild听and Weil Gotshal & Manges LLP as financial and legal advisers. Law firm Skadden, Arps, Slate, Meagher & Flom LLP and investment bank Moelis & Co advised American's creditors committee.
Jury is out听
Now comes the hard part. The combined carrier is to be branded American听Airlines, based in听Fort Worth,听Texas, where American听is currently based, and will be part of the oneworld global airline alliance, of which American听is an anchor member.
It remains to be seen whether the new American听will replicate the success of Delta, which has expanded its network and upgraded its facilities to attract new customers and improve earnings since its merger with听Northwest.听United Continental, on the other hand, has struggled to overcome disruptive technology changes that alienated customers.
The new company will have to meld employee groups from the two carriers, and prove that $1 billion in merger synergies can be achieved.
The tie-up is a reversal of fortunes for听Parker, 51. As the longest-serving CEO of a major U.S. airline, he kick-started the industry's consolidation wave when his听America West Holdings听bought听US Airways听out of bankruptcy in 2005.
But the mega-mergers that followed and fundamentally transformed the industry had eluded him until听AMR.
In 2010, Continental CEO Jeff Smisek noted that United had first courted听US Airways听as a merger partner but then reversed course and ended up with Continental.
"I didn't want him to marry the ugly girl," Smisek said at the time, referring to听US Airways. "I wanted him to marry the pretty one, and I'm much prettier."
Smisek later sent听Parker听an apology, saying that he was "carried away in the moment."
Parker听could yet have his revenge - by joining forces with American,听US Airways听would surpass both听United Continental听and Delta to become the world's largest airline by revenue and passenger traffic.