Whither American Airlines? Merger With US Airways Not Only Option

By Jonathan Spira on 10 January 2013
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As AA Moves Closer to Emerging from Bankruptcy, New Possibilities Appear on Horizon

AA check-in counters at JFK

AA check-in counters at JFK

If there’s one thing that’s certain in any merger, it’s that nothing is certain.  History is filled with the detritus of failed mergers, ranging from AT&T and T-Mobile USA to United Airlines and US Airways.  Of course, even a consummated merger isn’t always cause for celebration: just look at Time Warner and AOL or Sprint and Nextel.

In both the airline world as well as the world of M&A, the current focus is on American Airlines and US Airways.  Four legacy carriers have already undergone mergers (United with Continental, and Delta with Northwest), forming the two behemoths in the industry.  US Airways wants to merge with American, even though some aspects of its 2005 merger with America West have yet to be completed.

It’s important to note that there has been no announcement of a merger between the two airlines, despite the fact that some observers have positioned this as a done deal.  Even if a merger is eventually announced, its closing is not guaranteed.

Last week, Tom Horton, CEO of American Airlines’ parent company AMR, told employees that the airline was just a “matter of weeks” away from completing its evaluation of a proposed merger with US Airways.  He did not give any indication as to which way the airline plans to go.

Several things have happened since then which may be of interest to Kremlin – ahem… AA-US – watchers.

Just days ago, American announced a codeshare agreement with Qatar Airways, the state-owned flag carrier of Qatar.  The agreement covers Qatar’s flights from the U.S. to Doha, both carriers’ flights operating out of European gateways such as London and Paris, American’s domestic flights in the U.S., and Qatar’s flights departing from Doha.

One day earlier, American announced a significant expansion of its codeshare agreement with Air Berlin, a carrier that is 29% owned by Etihad Airways, the state-owned flag carrier of the Emirate of Abu Dhabi.  The announcement covered 43 AA flights in the U.S., as well as Air Berlin’s Berlin-Chicago and Düsseldorf-Chicago routes.

Both Qatar and Etihad, as well as Dubai-based Emirates, the largest airline in the Middle East, are looking to expand, and have the money to do so.  It would be impossible for one of them to purchase majority control of American due to foreign ownership restrictions, but that doesn’t preclude the possibility of taking a sizable stake in the company and give it a cash infusion.  Emirates has already gone on record stating it would like a “deeper relationship” with American and forged a partnership with Australian airline Qantas back in September, a change that resulted in the end of Qantas’ 17-year-long partnership with British Airways, a member of the oneworld alliance along with Qantas and American and a joint-venture partner with American.

Emirates clearly has worldwide ambitions and has already been talking to Qantas about expanding the new relationship.

Early in the week, American’s bondholders, who hold over $2 billion in debt backed by the airline, signed confidentiality agreements that allow them to examine non-public information relating to the potential merger.  The bondholders form a substantial component of the company’s creditors and could strongly influence the course American takes.

The boards of the pilot unions at both American and US Airways, as well as the American Airlines flight attendants union, have approved Memorandums of Understanding, essentially a plan for combining contracts and seniority lists should the airlines merge.   The plans are confidential and would still have to be ratified by US Airways’ pilots and flight attendants.  Still, in contrast to late December, when the head of the AA pilot union warned that a merger was unlikely absent an MOU from his group, this will pave the way for a merger should other pieces fall into place.

The most interesting tidbit came out earlier this week, when it was disclosed that American believes that the company has increased in value during bankruptcy proceedings and may now support the formation of an equity committee that could potentially recover some value for shareholders.

It’s important to remember that the equity holders are still the owners of the company (at least for the time being) and must approve a merger.  In addition, this weighs heavily on potential valuations of the airline.  US Airways believes it is worth $3 billion and American $5 billion.  American thinks US is worth $2 billion and that its own value is between $6 and $7 billion.  The fact that AA has appreciated in value since filing for bankruptcy puts the two sides even further apart.

The formation of an Equity Committee could also be part of a strategy to gain approval from the stakeholders by essentially sweetening the pot in exchange for their votes.

Finally, American’s board of directors met yesterday, but from all appearances, didn’t make any decisions on the merger.  Investors have been bidding up US Airways’ stock price but no one really knows how close – or far – the two sides are at this time.  The two sides have been talking about a potential merger since last summer but open items still include price, management (i.e. who would run the combined company), and the percentage of each side’s ownership.

Not much has been heard from IAG, British Airways’ parent, whose CEO has gone on record saying that the company might step in if needed, and there may be other investors and groups that also might have an interest in one of America’s most storied airlines.

For now, all that can be done is stay tuned for more information.


Accura News

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