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MR, US Airways Announce Merger
By SUSAN CAREY And MIKE SPECTOR
American Airlines parent AMR Corp. AAMRQ +49.23% and US Airways Group Inc. LCC -7.03% approved a merger to create the world's largest airline.
The companies said Thursday they aim to complete the combination by the end of September, an ambitious schedule given the integration issues in other airline mergers. They targeted more than $1 billion in annual cost savings and other efficiencies by 2015, and expect roughly $40 billion in revenue each year.
WSJ's Mike Spector has details on the American Airlines/US Airways merger that creates the world's largest airline, valued at $11 billion. Photo: Getty Images.
The planned merger between US Airways and AMR presents an opportunity for investing in airlines stocks, but which ones? Barron's Sam Mamudi joins Markets Hub.
The proposed deal would leave three large U.S. network carriers facing off against low-cost airlines that have driven change across the industry.
US Airways Chief Executive Doug Parker will run the combined company, called American Airlines Group Inc., as CEO. AMR chief Tom Horton will serve as nonexecutive board chairman until the new company's first annual meeting next year.
AMR's creditors will own 72% of the company and leave some of that for existing shareholders. US Airways shareholders will own 28%.
AMR creditors will appoint five directors to the airline's new board; AMR, three, including Mr. Horton; and US Airways, four, including Mr. Parker. Mr. Parker will become chairman when Mr. Horton departs the company.
The new airline—which will have a market value of about $11 billion—will retain the American Airlines brand, aircraft paint design and headquarters in Fort Worth, Texas. But the plan represents a victory for US Airways' Mr. Parker, one of the most vociferous proponents for industry consolidation.
The chief executives said in a joint interview that they anticipate smooth sailing in their new roles, given their 25-year friendship.
Mr. Horton said Mr. Parker "will have traditional CEO duties in running the company." Mr. Horton will take on the normal functions of running the board as nonexecutive chairman. "I won't be bashful with my input," Mr. Horton said. "Neither will Doug. I think we'll work well together."
Mr. Parker said Mr. Horton was "kind enough" to stay on to help him with the transition, taking AMR out of bankruptcy protection, through antitrust scrutiny and into integration planning.
"It is helpful to me for Tom to stay around and help with the transition," Mr. Parker said. He added, however, that it is "extremely important that the company sees one leader eventually."
The two executives, both 51 years old, started their airline careers at American's finance department in the mid-1980s and stayed in touch, even though Mr. Parker left soon after and worked at other carriers.
Mr. Horton said there could be some job cuts as the new airline rationalizes management ranks. "We'll go about right sizing," he said.
The men said choices about top executives will be made jointly. "There are fantastic teams on both sides," Mr. Parker said. The two airlines have roughly 100,000 employees world-wide.
A bonus Mr. Horton will receive for leading AMR's restructuring was expected to be disclosed later Thursday, Mr. Horton said.
If the merger is approved by the bankruptcy judge overseeing AMR's restructuring and receives antitrust clearance from the U.S. Justice Departmentand other regulators, the new American would vault over United Continental Holdings Inc. UAL -2.35% and Delta Air Lines Inc. DAL -4.23% in traffic. The marriage, on the heels of two other big industry mergers since 2008, would leave three large U.S. network airlines, mirroring consolidation that has occurred in Europe.
The companies filed paperwork with the Justice Department to begin the antitrust clearance process Jan. 31. Messrs. Horton and Parker said during an investor call Thursday that they don't expect any roadblocks from regulators because only 12 of their 900 routes overlap. Mr. Horton said he didn't expect the airlines to have to adjust their routes further to win approval from regulators.
During a bankruptcy-court hearing Thursday, Stephen Karotkin, a bankruptcy lawyer for American, said the airline expects to file a motion seeking approval of the merger by the end of next week and appear for a hearing on the deal in the second half of March.
The deal could fully repay AMR's creditors, with interest, and carves out a 3.5% ownership stake for existing shareholders. Those shareholders could reap additional financial recoveries once the new airline's market value repays creditors.
Such a recovery is unusual in bankruptcies, where shareholders usually get wiped out. Jack Butler, a lawyer for AMR's official creditors committee, said his clients supported the merger and said the airline's existing shareholders could see between $350 million and $400 million in financial recoveries from the outset.
U.S. Bankruptcy Judge Sean Lane approved AMR's request to extend until April 15 the exclusive time period during which only the company can propose a reorganization plan to take the company out of Chapter 11 protection.
US Airways' Mr. Parker prevailed in persuading AMR to merge over Mr. Horton's initial resistance. Mr. Horton for months emphasized a desire to restructure first and consider mergers only after emerging from bankruptcy protection.
American Airlines Reborn
See an animation of airline mergers since the 1980s, a timeline of the developments in this merger, and an interactive map of the hubs for the combined airline.
American Airlines parent AMR Corp. and US Airways Group Thursday announced that their boards have approved a merger that would create the world's largest airline.
But Mr. Parker built momentum for a deal by winning over American's three labor unions and other AMR creditors who came to believe that the combination made more sense than AMR's stand-alone plan. A group of AMR bondholders—including J.P. Morgan Securities, JPM +0.88% Pentwater Capital Management LP and Litespeed Management LLC—threw their support behind the merger within the past month or so.
Some people close to Mr. Horton said his publicly stated objections to a deal amounted to brinkmanship. Last April, US Airways proposed a plan that gave 49.9% of the combined company to AMR creditors, along with some new debt but left US Airways in control.
"There was a little poker playing going on in the process," Mr. Horton said Thursday. "Once we got to the point where we had our house in order and could make a deal on the right terms, I think it clearly made sense for us, and made sense for US Airways."
US Airways will move into the Oneworld marketing alliance that American already leads. Mr. Parker said his company notified the rival Star Alliance group Thursday of the carrier's intention to leave that consortium.
The companies said they planned to take delivery of 600 new jets, reflecting an order made by American almost two years ago, and planned to retain their in-house commuter-airline units.
The CEOs stressed that the enlarged American will continue to maintain all eight domestic hubs and operate 6,700 daily flights to 336 destinations in 56 countries. Of the 336 destinations the pair serve, 62 US Airways cities aren't served by American, and 130 American cities aren't served by US Airways, Mr. Parker said. There is no overlap on international routes, he said, and US Airways' offering to Europe will nearly double the merged airline's destinations there. US Airways' strong East Coast network also will shore up the part of American's domestic route map that "wasn't particularly strong," he said.
Before they fully merge their fleets, American and US Airways will begin code-sharing, the practice of selling one airline's flights to passengers as if they were operated by the other airline. But that process won't begin until after the deal closes and has antitrust approval. The two intend to keep all eight of their domestic hubs.
AMR was advised by law firm Weil, Gotshal & Manges LLP and investment bank Rothschild, among others.
US Airways was advised by law firm Latham & Watkins and investment firms Barclays BARC.LN -2.15% PLC and Millstein & Co.
AMR's official creditors committee was counseled by law firm Skadden, Arps, Slate, Meagher & Flom and investment bank Moelis & Co. Some AMR bondholders received advice from Milbank, Tweed, Hadley & McCloy LLP and Houlihan Lokey.
—Doug Cameron and Joseph Checkler contributed to this article.
Write to Susan Carey at
susan.carey@wsj.com and Mike Spector at
mike.spector@wsj.com