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US Airways Seeks Merger Redemption in AMR After Failures

August 08, 2012

US Airways Seeks Merger Redemption in AMR After Three Failures

US Airways Group Inc. airplanes at Reagan National Airport in Washington. Photographer: Andrew Harrer/Bloomberg

Doug Parker was snubbed three times as a merger partner in deal-making that produced the world’s biggest airlines. Taking over AMR Corp. (AAMRQ:US) may be his last chance to break into the top tier of U.S. carriers.

US Airways Group Inc. (LCC:US)’s chief executive officer engineered the 2005 merger creating the company in its current form, ushering in a round of consolidation that reshaped the industry. With fewer competitors, the largest carriers have mostly stayed profitable even with higher fuel prices.

Now, AMR’s bankruptcy gives him an opening to orchestrate a deal to vault US Airways past its rivals to claim the No. 1 spot in global traffic. Falling short again would leave the Tempe, Arizona-based airline mired in fifth place among U.S. peers, with few prospects to improve that status.

“What history proves in this industry is jogging in place normally results in road kill,” said Jeff Kauffman, a Sterne Agee & Leach Inc. analyst in New York. “I think Doug recognizes that very well.”

With AMR’s American Airlines resisting a merger and holding exclusive rights until year’s end to submit a formal restructuring plan, the 50-year-old CEO is wooing labor groups and bondholders at his intended target.

Labor Signal

American’s pilots rejected the airline’s final contract offer today, a “strong statement” that the union favors a merger with US Airways, according to Fred Lowrance, an Avondale Partners LLC analyst in Nashville, Tennessee. Mechanics and stock clerks ratified a new labor agreement.

Parker got a labor boost of his own today when US Airways flight attendants reached a contract agreement to unify the workforce, almost seven years after the merger between the former US Airways and America West Holdings Corp. Attendants from the predecessor carriers had been under separate accords.

While Parker has said US Airways doesn’t need to combine to be successful, he also confronts weaknesses that only a merger can remedy. His largest competitors have trans-Pacific routes, hubs in the four largest U.S. metro areas and leading roles in their airline alliances. US Airways doesn’t have any of those.

“They can survive, but I don’t think his goal is just to survive. It’s to flourish,” said Hunter Keay, a Wolfe Trahan & Co. analyst in New York who has a buy rating on US Airways. “That’d be structurally difficult for them to do.”

Bigger Rivals

Parker’s chief competitors are all larger, thanks to mergers that eluded him. A bid to acquire Delta Air Lines Inc. (DAL:US) in bankruptcy failed in 2007. The next year, Delta bought Northwest Airlines Corp. and became the world’s biggest carrier.

Talks with United Airlines in 2008 and 2010 collapsed, with the second go-round followed days later by United’s agreement to merge with Continental Airlines Inc. to take the top spot in the industry. Jeff Smisek, then Continental’s CEO and now chief of the combined United Continental Holdings Inc. (UAL:US), said he swooped in because he didn’t want United to “marry the ugly girl.”

Optimism about Parker’s AMR prospects has helped US Airways more than double this year, to $10.40 today, leading gains among U.S. airlines. AMR’s 6.25 percent convertible notes due October 2014 have more than tripled to 63 cents on the dollar since the company’s Nov. 29 bankruptcy filing.

Delta Lessons

Parker’s and President Scott Kirby’s pursuit of Fort Worth, Texas-based American relies on lessons learned from their Delta effort. They marshaled union and bondholder support early instead of opening with a hostile approach. And they will need that backing because AMR, like Delta, is fighting back.

“American is not going to determine its strategic future based on the urgent need of another company to make a deal,” CEO Tom Horton said in a July 19 interview. “It was unfortunate that US Airways sought to disrupt our restructuring.”

Parker, a former co-worker of Horton’s at American, declined to be interviewed. The history he seeks to repeat is his success in putting together the airline he now runs.

He became America West CEO 10 days before the Sept. 11 attacks in 2001. In 2005, he took over the larger US Airways, which had filed for bankruptcy twice in two years. He helped garner almost $1.57 billion in financing from a group that included Airbus SAS, ACE Aviation Holdings Inc. (ACE) and PAR Capital Management Inc.

US Airways has trimmed operating costs to stay profitable at its hubs in Philadelphia, Phoenix and Charlotte, North Carolina. Parker led US Airways to record second-quarter profit of $321 million, excluding some costs, and an 8.6 percent pretax margin that beat United, Delta and AMR.

‘Difficult Hand’

“He’s played a difficult hand pretty well,” said Philip Baggaley, a Standard & Poor’s credit analyst in New York. “He started with America West, which was a small low-cost carrier without a great future, and combined that with US Airways, which was headed for liquidation. Over time, he’s built that into a pretty profitable carrier.”

That still hasn’t been enough to reward long-term investors. Since the 2005 bankruptcy exit and America West merger, US Airways’ shares have tumbled 48 percent (LCC:US), exceeding the 37 percent drop in the Bloomberg U.S. Airlines Index. Jet fuel has risen 37 percent in that span.

A US Airways-American combination would pass United as the world’s biggest airline by traffic. Delta is No. 2. American is in third place in the U.S., followed by Southwest Airlines Co. (LUV:US), which bought AirTran Holdings Inc. in 2011.

‘Equal Footprint’

“Size matters, and the ability to put an extra three passengers on a plane can make a difference between making and losing money,” said Sterne Agee’s Kauffman, who has an outperform rating (LCC:US) on US Airways. “I’d rather be a carrier of equivalent size to the big guys in the business with an equal footprint than a distant No. 3 or No. 5.”

Parker wants to merge with AMR, which has run up four straight annual losses (AMR:US), while it’s in Chapter 11. An airline in court protection can void or rework contracts for jet leases, facilities and services, and redo union accords to cut the labor expenses that vie with fuel as the industry’s biggest cost.

He has said he would keep the American name, following his pattern in the US Airways deal, and hubs that include New York, Chicago, Los Angeles and Dallas-Fort Worth. That would shore up a US Airways network reaching fewer corporate fliers willing to pay the highest fares.

Shifting to AMR’s Oneworld airline marketing group also would let Parker work with partners from a position of strength. US Airways was excluded when fellow Star Alliance members United, Deutsche Lufthansa AG (LHA) and Air Canada won an antitrust exemption in 2009 to coordinate trans-Atlantic flights.

‘Problem Growing’

“US Airways would have a problem growing much other than maybe a few long, thin routes from their hubs overseas using newer long-range planes,” S&P’s Baggaley said. “They need more access to big domestic markets and to faster-growing regions across the Pacific and in Latin America.”

Missing out on AMR still would leave Parker with a legacy of being among the first airline executives to recognize, and act on, the need for fewer carriers and tighter controls on expansion, Wolfe Trahan’s Keay said.

“I don’t think by any stretch of the imagination that if he doesn’t execute a merger, he’ll look back on his career with any remorse,” Keay said. “History may prove he, in fact, was probably the single most important agent of change in this industry post-deregulation.”

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

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


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