US Airways Group Inc. (LCC:US) moved closer to a possible merger with bankrupt American Airlines by signing a pact to swap private financial and operations data, a step already taken by potential investor British Airways.
The U.S. airlines will work “in close collaboration” with American’s unsecured creditors committee in the process, the carriers said in a statement today. The panel has a voice in major decisions during the bankruptcy, in which American has sought to restructure while keeping its independence.
Merging airline parent AMR Corp. (AAMRQ:US) with US Airways would catapult the combined company past United Continental Holdings Inc. (UAL:US) as the world’s largest airline. US Airways Chief Executive Officer Doug Parker has advocated a deal as the surest way of creating a broader route network with more hubs capable of competing with United and No. 2 Delta Air Lines Inc.
“US Airways has been going through that agreement and making sure none of the terms were showstoppers for them,” Fred Lowrance, an Avondale Partners LLC analyst, said in an interview. “My best guess is they spend the next three to seven weeks getting the data they need from AMR and putting that proposal together.”
American filed for bankruptcy on Nov. 29 as it headed toward a fourth straight annual loss, and US Airways began pursuing a merger in January. The potential suitor has secured the support of American’s unions and has sought the backing of the larger airline’s creditors.
“We are pleased to be working directly with American to study a potential merger and we consider this very good news,” Parker told US Airways employees in a message. “It does not mean we are merging -- it simply means we have agreed to work together to discuss and analyze a potential merger.”
US Airways climbed 2.5 percent to $10.66 at the close in New York trading. The Tempe, Arizona-based company’s shares have more than doubled this year amid speculation of a merger with AMR.
AMR’s 6.25 percent convertible notes due in October 2014 rose 2.53 cents to 62.50 cents on the dollar today, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
US Airways isn’t American’s only strategic option. The airline said it also had signed confidentiality agreements with companies it didn’t identify.
“This will be an objective, thorough, fact-based process,” the Fort Worth, Texas-based airline told managers in a memo today. “As part of the process, other parties have also signed confidentiality agreements, which permit for the confidential exchange of information and discussion between American and those parties.”
British Airways parent International Consolidated Airlines Group SA (IAG) is among companies that have signed an agreement, Laura Goodes, a spokeswoman, said in a telephone interview today.
IAG Chief Executive Officer Willie Walsh has previously said his company would consider buying a stake, she noted. U.S. law bars foreign ownership of a majority interest in domestic airlines.
“It probably makes sense to have British Airways at the table,” said Bob McAdoo, a Los Angeles-based analyst at Imperial Capital LLC. “They see that if American comes out a stronger carrier, that’s clearly in British Airways’ interest because they are both members of the Oneworld alliance.”
While American CEO Tom Horton initially said he wanted to emerge from bankruptcy on a stand-alone basis before considering combinations, the carrier agreed with its creditors committee in May to consider alternatives sooner.
“American management would not be doing this if they had any leverage and if the creditors committee wasn’t telling them what they had to do,” Lowrance said. “This makes it clear that management is not driving this process. It is being driven by the terrible labor relations that have gotten the unsecured creditors committee pushing for alternatives to the stand-alone plan.”
American will ask its bankruptcy judge Sept. 4 to grant a revised request to throw out its existing pilots contract and impose cost cuts as the airline works to reduce industry-leading labor expenses. The pilots rejected a final labor proposal from their employer this month, and a union spokesman said the vote reflected opposition to Horton’s leadership.
While the carrier had won concessions from its flight attendants, baggage handlers and other airport ground workers, pilots are considered a bellwether work group in labor talks because they are the airline industry’s highest-paid union employees.
The confidentiality agreement “is a step in the right direction,” said Tom Hoban, a spokesman for the Allied Pilots Association, which has supported a merger along with AMR’s other unions. “It’s going to allow US Airways to submit a competing plan of reorganization. There are 55,000 front-line employees who made it clear this is what they favor, along with a change in leadership.”
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