US Airways Presents Merger Deal to American

By Paul Riegler on 7 December 2012
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Combined Airline Valued at $8.5 Billion

US Airways has made a formal merger proposal to AMR Corp., parent of American Airlines, and its creditors that values the combined airline at over $8 billion.  The deal, if consummated, would be enough to create a rival to the world’s two largest airlines, United Continental and Delta Air Lines, which have market capitalizations of $6.7 and $8.5 billion, respectively.

The offer was presented by US Airways last month at a meeting with AMR’s unsecured creditors committee, or UCC.  Under the terms of the agreement, American’s creditors would own 70% of the merged entity and US Airways shareholders would get 30%.

The two airlines have since entered into negotiations that could result in a merger agreement by the start of the year.  American is continuing to prepare a plan to emerge from bankruptcy proceedings as an independent entity, and the UCC, which holds tremendous decision-making power while American is in bankruptcy would need to weigh the merits of both outcomes.

Last week, American reached one of its final milestones in its Chapter 11 proceedings after the pilot’s union approved a new labor contract.  Pilots voted 74% to 26% to accept their first new contract in almost a decade.  The contract gave American voluntary agreements with all nine of its unions.  Combined with reductions in management and non-unioned positions, the company has been able to reduce labor costs by 17%, which translates into more than $1 billion in annual savings.“We are pleased our pilots supported and ratified this agreement, which is an important step forward in our restructuring,” said the airline in a prepared statement last week. “Today’s ratification gives us the certainty we need for American to successfully restructure, providing opportunity and growth for all of our people and stakeholders.”

With its labor costs better in hand, American is in a better position to both emerge as an independent airline and also to get a higher valuation in the event of a merger.  Company executives including AMR CEO Tom Horton have told creditors that they deserve more than the 70% offered by US Airways and some creditors believe that they should get closer to 80%.

Even a merger announcement next year would not mean that the deal is a sure thing.   United Airlines only announced a merger with Continental in 2010 after its planned merger with US Airways failed earlier that year.

Should the merger take place, the combined airline will retain the American Airlines name and will be headquartered in Dallas, Texas, according to multiple statements made by US Airways executives prior to the announcement.

Accura News

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