American-US Airways Merger Negotiations: Major Issues Yet to be Overcome

By Jonathan Spira on 26 January 2013
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Past Attempts to Merge Recall That Nothing Is Final Until the Fat Lady Signs or Sings

An American 737 at JFK in the airline's new livery

An American 737 at JFK in the airline’s new livery

Reuters is reporting that American Airlines and US Airways are in the final stages of negotiating a merger, although the two issues that have yet to be resolved are somewhat thorny.

Reuters cites four sources that report that the final price and the merged company’s management structure have yet to be resolved.  If the two sides come to terms, a merger could be announced within two weeks, the people said.

The two open issues, however, are fraught with contention and have been sticking points since the beginning.

Even if a merger is announced, that does not necessarily mean that the deal will close, something that AT&T and T-Mobile as well as United Airlines and US Airways all discovered after announcing their own respective mergers.  In April 2007, the two airlines called off their $4.3 billion deal after the U.S. Department of Justice said it would sue to block the acquisition, saying it would reduce competition, raise fares, and harm consumers.

Airlines that have merged have not found it to be all smooth sailing.

On its earnings call on Thursday, United CEO Jeff Smisek called 2012 “the toughest year of our merger integration” and said, “We are absolutely not satisfied with the financial results we produced last year.”  United merged with Continental in 2010.

United’s passenger revenue per available seat mile rose just 1.7% in 2012 thanks to lost revenue and costs relating to the merger, something its chief operating officer, Jim Compton, termed “dis-synergies.”  During the same year, Delta PRASM rose 7%, American PRASM rose 5.8%, and US Airways PRASM rose 3.9%.

Earlier mergers that occurred, Delta with Northwest and US Airways with America West, also encountered problems early on.  Delta, which merged with Northwest in 2008, had the worst on-time performance record among major airlines in 2010.  Delta’s stock price, which was close to $11 when the merger was announced, traded well below that in 2009 and hit a low of $3.51 in March of that year.

US Airways’ on-time performance was the industry’s worst in 2007, in part thanks to problems relating to merging the two airlines’ IT systems.  The company’s inability to complete pilot seniority integration continues to be an embarrassment eight years after the merger.

The board of American’s parent company, AMR, has not made a final decision about the potential merger and reportedly still considers its own restructuring plan, which has the airline emerging from bankruptcy as a standalone entity, as viable.  The board plans to meet for two days at the beginning of the week to discuss the latest developments in the negotiations with US Airways.

AMR filed for bankruptcy protection in November 2011, citing high labor and aircraft lease costs.  It continues to work on its own restructuring plan and has already rejected one merger proposal from US Airways.  The current merger offer calls from US Airways calls for its CEO, Doug Parker, to run the combined airline and for AMR creditors to own 70% of the company, with the remainder going to US Airways’ shareholders.

(Photo: Accura Media Group)

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