Bloomberg News

US Airways Said to Develop AMR Merger Plan to Lift Revenue

February 01, 2012

(Updates with analyst’s comment in fourth paragraph.)

Jan. 20 (Bloomberg) -- US Airways Group Inc. is studying a potential merger with bankrupt AMR Corp. that would fix a weak domestic route system at American Airlines and boost revenue, two people familiar with the matter said.

President Scott Kirby is leading US Airways’ analysis of how to combine the airlines, said the people, who asked not to be identified because the matter is private. Any bid may still be close to a year away, because AMR now holds the exclusive right to file a reorganization plan, the people said.

American has pared its flight network to the point that some corporate travelers have gone elsewhere, leaving the money- losing carrier unable to support most of its hub airports, one person said. That deficiency could be solved by blending American, the third-largest U.S. airline, with No. 5 US Airways, the people said.

“Unsecured creditors would get a better return out of a merged airline than American trying to go it alone,” said Jeff Straebler, an independent airline analyst based in Stamford, Connecticut.

The combination would hold about a 20 percent domestic market share, basically putting it on equal footing with United Continental Holdings Inc., Delta Air Lines Inc. and Southwest Airlines Co., Straebler said in an interview. Those carriers rank first, second and fourth in the U.S. by traffic.

Evolving Plan

A merger attempt is likely, though Tempe, Arizona-based US Airways is still weighing options, the people said. The shape of any plan would evolve as Fort Worth, Texas-based AMR settles issues such as pensions and labor contracts in court, one person said.

Traffic to American’s hubs would grow by funneling in travelers from US Airways, the person said. In turn, a stronger domestic system would feed into American’s routes across the Atlantic and to Latin America, said the person, who declined to give financial details because the numbers are preliminary.

A US Airways spokeswoman, Michelle Mohr, declined to comment, as did Sean Collins, an American spokesman.

TPG Capital and Delta also are evaluating possible bids for American, people familiar with the matter have said. TPG and Delta have said they aren’t commenting about any interest in AMR, which filed for Chapter 11 protection in U.S. Bankruptcy Court in Manhattan on Nov. 29 after posting annual losses starting in 2008.

No Contacts

US Airways hasn’t discussed its interest with AMR’s executives, one person said. Nor has it spoken with TPG about American, the person said.

TPG founder David Bonderman led a group that invested more than $200 million in America West Airlines Inc. as it exited bankruptcy in 1994, taking a 33.5 percent stake and controlling a majority of its board. That carrier later became America West Holdings Corp., a US Airways predecessor.

US Airways rose 1.9 percent to $6.38 at the close in New York. AMR’s 8.625 percent notes due in October 2021 fell 0.25 cent to 106.5 cents on the dollar at 3:26 p.m., according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority.

US Airways has been the airline most often cited by analysts as a potential American partner. It has hired Millstein & Co. and Barclays Plc as advisers, according to people familiar with the matter. The airline hasn’t confirmed the arrangement.

Three Survivors

A tie-up with American would shrink the U.S. industry to three major full-service carriers, increasing the survivors’ power to raise fares. It would surpass Delta as the second- biggest U.S. airline and fulfill US Airways Chief Executive Officer Doug Parker’s call for industry consolidation.

The current US Airways was created in 2005 when Parker, then CEO of America West Holdings, orchestrated a merger to bring the old US Airways out of bankruptcy. He failed in three additional merger attempts since 2006, including a hostile bid for Delta when that company was in Chapter 11.

American’s passenger revenue for each seat flown a mile, an industry benchmark, trailed that of US Airways, United Continental and Delta through 2011’s first three quarters, according to data compiled by Bloomberg.

American’s hubs include Dallas-Fort Worth, Miami, New York and Chicago, while US Airways has major operations in cities such as Charlotte, North Carolina; Philadelphia; and Phoenix.

--Editors: Ed Dufner, James Langford

To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net


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