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Published: Friday, 2/15/2013

American Airlines, US Airways announce they'll merge, create world's biggest airline

Merger could mean higher airfares, more destinations

ASSOCIATED PRESS

DALLAS — American Airlines and US Airways agreed today to merge in an $11 billion deal that would create the world's biggest airline.

The combined carrier will be called American Airlines and be based in Fort Worth. It expects to have $40 billion in annual revenue and offer more than 6,700 daily flights to 336 destinations in 56 countries.

Travelers on American and US Airways won't notice immediate changes. It likely will be months before the frequent-flier programs are combined and years before the two airlines are fully integrated.

The deal is a coup for smaller US Airways Group Inc., and was driven by the persistence of its CEO, Doug Parker, who will run the combined airline. Parker sought a merger almost as soon as American parent AMR Corp. filed for bankruptcy protection in November 2011.

As Parker pushed ahead, creditors forced AMR's management to consider the value of a merger compared with a plan for an independent American. Eventually they concluded that the best return for stakeholders, and the best chance to compete with bigger rivals United Airlines and Delta Air Lines, came from a merger.

The deal also caps turbulent decade of bankruptcies and consolidation for the U.S. airline industry.

Since 2008, Delta gobbled up Northwest, United absorbed Continental and Southwest bought AirTran Airways. If this latest merger goes through, American, United, Delta and Southwest will control about three-quarters of U.S. airline traffic.

The rapid consolidation has allowed the surviving airlines to offer bigger route networks that appeal to high-paying business travelers. And it has allowed them to limit the supply of seats, which helps prop up fares and airline profits.

That concerns some consumer advocates, but Parker sought to assure travelers that the merger helps them too — by creating a bigger rival to United and Delta.

"There are two very large airlines right now and this creates a third," Parker said in an interview. "It provides good competition to those two."

Most airline mergers have resulted in a reduction of flights and shrinkage at some hubs, but 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. Many airline mergers have resulted in some hubs being downgraded, as happened to Cincinnati after Delta bought Northwest.

"Hopefully the service will be better with two airlines united to do what one hasn't successfully done so far," said Mary Gorman, 63, who was at Miami International Airport on Thursday for a flight home to Virginia Beach after a cruise with her husband. "If the service is better, I don't mind paying more for a ticket."

While Parker becomes CEO of the combined company, AMR CEO Tom Horton will serve as chairman until its first shareholder meeting, likely in mid-2014. Parker becomes chairman after Horton leaves.

The boards of both companies approved the deal Wednesday. Executives said they were confident that antitrust regulators would approve the merger. It also needs approval by AMR's bankruptcy judge. The deal is expected to close in this year's third quarter as part of American's emergence from Chapter 11 protection.

AMR creditors will own 72 percent of the new company, with the remaining 28 percent will going to US Airways shareholders. The creditors' portion includes a 23.6 percent share for American employees and unions, plus a small stake for existing shareholders of American's parent AMR Corp.

The airlines said they expect $1.05 billion in combined benefits from the merger. They expect the bigger airline to lure corporate travelers away from competitors, contributing to $900 million in additional revenue. They also anticipate cost savings of roughly $150 million.

The savings would have been higher, but the company expects to pay out $400 million per year in raises for workers. 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 combined airline also expects to spend $1.2 billion on one-time transition costs over the next three years.

It will stay in the "oneworld" airline alliance, where it is partners with British Airways and other overseas airlines. Those alliances make it easier for international travelers to plan trips that include multiple airlines.

The companies had negotiated since August, when creditors pushed AMR to conduct merger talks so they could decide which earned them a better return: a merger or an independent American.

The new American would have more than 900 planes and about 95,000 employees, not counting regional affiliates. It will be slightly bigger than United Airlines by passenger traffic, not counting regional affiliate airlines.

Delta and United's size have allowed them to get more than their share of business travelers, 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 would get more business travelers, 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. But some analysts noted that the new American will still be weak on routes to Asia.

"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 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.

AMR shareholders are poised to get a 3.5 percent stake in the new airline. That's unusual because stockholders typically get wiped out in a Chapter 11 proceeding.

Horton said AMR's bankruptcy creditors might be repaid in full. He said 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."

Iit will be several months — if not years — before passengers see any significant impact.

Passengers with existing tickets on American or US Airways — and members of both frequent flier programs — shouldn't fret. No changes will come anytime soon.

American's parent company, AMR Corp., is still under bankruptcy protection and will need the court to approve the deal. US Airways shareholders will also have to vote for a merger. Then the Department of Transportation and the Justice Department must sign off. Finally, once a deal closes, the new company could operate two separate airlines for a number of years.

When the airlines finally do merge, here's what passengers can expect:

AIRFARE

During the past five years, the airline industry has seen the combinations of Delta with Northwest, United with Continental and Southwest Airlines Co. with AirTran. Further consolidation is likely to raise airfares. The price of a domestic round-trip flight has climbed more than 11 percent since 2009, when adjusted for inflation, according to the Bureau of Transportation Statistics.

The merger will give a combined American and US Airways Group Inc. the ability to increase fares. United, Delta and Southwest would be likely to follow. Although it could also pave the way for further expansion by discount airlines such as Spirit Airlines Inc. and Allegiant Travel Co.

FREQUENT FLIER MILES

Your miles will be safe. After the merge is approved, the two airlines will likely combine the miles into one program and elite status from one airline will likely be honored on the other. That puts the occasional traveler closer to rewards.

The merged carrier will continue American's participation in the OneWorld alliance, which was founded by American, British Airways, Cathay Pacific and Qantas. Today, it has 12 airlines including Finnair, Royal Jordanian and Japan Airlines. US Airways will leave the Star Alliance, which includes rival United Airlines, Lufthansa, Air Canada and 24 other airlines. Alliances allow passengers to earn and redeem miles on partner airlines.

DESTINATIONS

A key reason for merging is to link both airlines' networks, creating a system on par with Delta Air Lines and United, part of United Continental Holdings Inc.

There is little overlap between the two airlines' existing routes. The combined carrier will offer more than 6,700 daily flights to 336 destinations in 56 countries, making it more attractive to companies seeking to fly employees around the globe with few connections.

US Airways passengers will gain access to American's international destinations, particularly London and Latin America. American's passengers will be able to better connect to smaller U.S. cities that US Airways serves.

The combined carrier will have considerable presence in New York, Philadelphia, Washington, Charlotte, N.C., Miami, Chicago, Dallas, Phoenix and Los Angeles. It is unclear how many of those cities will keep their levels of service. In past mergers, airlines have promised not to close any hubs but have gone ahead and dramatically reduced service in once-key cities.

PASSENGER CONFUSION

The merger of two airlines often means confusion and hassle for customers. Which terminal or ticket counter do they go to for check in? If there is a problem with a ticket, which company should they call? For a while, United and Continental were issuing two confirmation numbers for each ticket so either airline's staff could make changes. Problems with the integration of their frequent flier programs angered many loyal road warriors and computer glitches caused repeated flight delays. It could be months, if not years, until all American and US Airways planes get a uniform paint job.

"These things are never as seamless as they seem," said Thomas Lawton, a professor of business administration at Dartmouth College's Tuck School of business. "There will probably be some initial teething problems."



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