General Lee
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DEALTALK-Time may be ripe for US Air-AMR merger
By Soyoung Kim and Nick Brown
NEW YORK, June 7 | Thu Jun 7, 2012 6:57pm EDT
NEW YORK, June 7 (Reuters) - Having sat out the mega-mergers last decade that created the world's top two airlines, bankrupt AMR Corp appears to be on a path toward an arranged marriage with smaller counterpart US Airways Group.
With US Airways proposing a merger for the American Airlines parent, and labor groups putting the screws on AMR to pursue the deal, AMR recently agreed - albeit begrudgingly - to explore consolidation options while it is still in Chapter 11 bankruptcy. That was a reversal of the airline's earlier commitment to exiting bankruptcy as an independent company.
The third-largest U.S. carrier has made it clear that willingness to explore a merger does not "in any way suggest" a deal will be pursued. But most Wall Street analysts, industry executives and bankers agree AMR will find it tough to prove to creditors that going it alone would outstrip merger benefits.
AMR's consolidation review is expected to include potential deals with smaller carriers such as JetBlue Airways and Alaska Air Group and will not be limited to US Airways, according to people familiar with the matter.
But a deal with US Airways, the No.5 U.S. carrier, is seen as having the best shot at getting the blessing of a complex web of various stakeholders at AMR -- including labor unions, global alliance partners and financial creditors -- as well as anti-trust regulators in the United States and Europe.
Such a deal, which will make the combined carrier the world's largest, would also be large enough to allow the carriers to reverse years of network marginalization and take on larger rivals United Continental and Delta Air Lines , especially in the U.S. East Coast networks.
"I don't know anybody who's looked at it from 30,000 feet that would tell you that they think the standalone scenario is superior," Robert Mann, an airline industry consultant, said on Wednesday.
"It has not competed well when it was going from No. 1 to No. 2 now to the third position, and I don't see how a standalone would solve that, especially with this 'shrink and then re-grow' strategy they are doing."
James Sprayregen, the attorney who steered United through bankruptcy in 2006, cautioned that it is "inherently difficult" to convince a merger-resistant company to explore an M&A deal.
He said, however, that "if you get a sufficient number of stakeholders who support M&A over a standalone, even with the difficulty, that can create a lot of momentum."
AMR filed for bankruptcy in November, citing an untenable labor cost structure. The company also grappled with losses of well-heeled corporate travelers while Delta and United expanded networks and market share through mergers. AMR was the largest airline until the 2008 merger of Delta and Northwest.
It has proposed a standalone restructuring deal that would reduce its annual labor costs by about $1.25 billion a year through job cuts, changes to benefits and updated work rules.But AMR's unions argue that no amount of labor concessions could solve the airline's growing revenue and network disparity with United and Delta. They've thrown their weight behind US Airways, saying synergies from a merger would save 6,200 jobs that would be doomed if AMR exits bankruptcy independently.
"What's best for our company, our people and our financial stakeholders will be determined by the facts in a disciplined manner and process. And this includes whether American will choose to pursue any combination down the road," AMR said in a statement.
CORNERSTONE STRATEGY
AMR executives believe building on its strong presence in selective international networks, such as its industry-leading Latin American routes and the networks connecting New York's JFK airport and London's Heathrow, are more important than the overall size of the airline.
The carrier has said its standalone plan would generate $3 billion in new revenue and savings by 2017. Around $1 billion in new revenues would come from adjusting its fleet to market demand and establishing extensive code-sharing agreements with other domestic carriers, such as JetBlue and Alaska, people close to the company say.
Some industry analysts said broad code-sharing agreements with other airlines could present other viable alternatives.
"The one scenario that I believe is more interesting than a transaction -- and it's only possible if they win relief from the pilots -- is to have certain, extensive code relationships with JetBlue and with Alaska," said Bill Swelbar, a research engineer at MIT's international center for air transportation.
But a full-on merger with either of the carriers is seen as a long shot. Both airlines have carved out strong identities as low cost carriers and have publicly stated their lack of interest in industry consolidation.
"Our plan is really about organic growth. It's our own planes, it's our own people," JetBlue said in a statement to Reuters on Thursday. Alaska did not have immediate comment.
BEFORE OR AFTER
The timing of a deal remains unclear, as US Airways would prefer a deal while AMR is in bankruptcy, while AMR would like to exit bankruptcy before consolidating. In addition to AMR's labor unions, a US Airways proposal would likely garner support from AMR's partners in the global oneworld alliance, including British Airways. Oneworld, the smallest of the world's three juggernaut airline pacts, would gain US Airways, which has proposed to jump ship from the Star Alliance under a merger.
Alliances allow airline members to cooperate on routes and connections, essentially expanding their networks.
Adding US Airways' Philadelphia hub and Charlotte, North Carolina, service to oneworld would net 33 new Eastern U.S. cities for British Airways, a unit of International Airlines Group, that AMR does not presently serve, JPMorgan analyst Jamie Baker said in a research note.
"Such a merger would not be detrimental to oneworld. In terms of the joint business agreement any consolidation that increases the choices for our customers would be welcomed," International Airlines Group said in an emailed statement to Reuters, when asked about a potential tie-up of AMR and US Airways.
A combination of US Airways and AMR is also likely to be the last remaining merger of legacy U.S. carriers that could clinch regulator approval, analysts say.
For instance, Delta and AMR overlap in 68 domestic markets -- as opposed to 13 markets between US Airways and AMR, meaning no deal is possible without massive carve-outs and union job cuts. Delta declined to comment on Thursday.
Ray Neidl, an airline analyst with Maxim Group, said he rates the probability of a US Airways-AMR merger at 90 percent, but says it may well happen after bankruptcy."(AMR) will have a new base of stockholders at that point, and maybe a new board of directors," Neidl said. "They can negotiate a merger from a position of strength."
AMR until September has the exclusive right to propose bankruptcy restructuring plans without outside intervention. To effect a merger during AMR's bankruptcy, US Air would have to wait for exclusivity to end, or lobby AMR's unsecured creditors' committee to ask the bankruptcy court to lift exclusivity.
JPMorgan analyst Baker in a research note said AMR's standalone restructuring scenario "does not necessarily assure the wheels of industry consolidation grind to a halt, though it could slow the process."
The Allied Pilots Association, which represents AMR's pilots unions, has told its members that clinching a merger with US Airways in bankruptcy is critical to ensure they have a role.
"A merger with US Airways that followed our exit from bankruptcy would be entirely on AMR management's terms and would not require APA's consent. We would barely constitute a speed bump in that post-bankruptcy scenario," the union said in a communication to members that was reviewed by Reuters.
"We have more control over our destiny if a merger is conducted while the airline is in restructuring."
Bye Bye---General Lee
By Soyoung Kim and Nick Brown
NEW YORK, June 7 | Thu Jun 7, 2012 6:57pm EDT
NEW YORK, June 7 (Reuters) - Having sat out the mega-mergers last decade that created the world's top two airlines, bankrupt AMR Corp appears to be on a path toward an arranged marriage with smaller counterpart US Airways Group.
With US Airways proposing a merger for the American Airlines parent, and labor groups putting the screws on AMR to pursue the deal, AMR recently agreed - albeit begrudgingly - to explore consolidation options while it is still in Chapter 11 bankruptcy. That was a reversal of the airline's earlier commitment to exiting bankruptcy as an independent company.
The third-largest U.S. carrier has made it clear that willingness to explore a merger does not "in any way suggest" a deal will be pursued. But most Wall Street analysts, industry executives and bankers agree AMR will find it tough to prove to creditors that going it alone would outstrip merger benefits.
AMR's consolidation review is expected to include potential deals with smaller carriers such as JetBlue Airways and Alaska Air Group and will not be limited to US Airways, according to people familiar with the matter.
But a deal with US Airways, the No.5 U.S. carrier, is seen as having the best shot at getting the blessing of a complex web of various stakeholders at AMR -- including labor unions, global alliance partners and financial creditors -- as well as anti-trust regulators in the United States and Europe.
Such a deal, which will make the combined carrier the world's largest, would also be large enough to allow the carriers to reverse years of network marginalization and take on larger rivals United Continental and Delta Air Lines , especially in the U.S. East Coast networks.
"I don't know anybody who's looked at it from 30,000 feet that would tell you that they think the standalone scenario is superior," Robert Mann, an airline industry consultant, said on Wednesday.
"It has not competed well when it was going from No. 1 to No. 2 now to the third position, and I don't see how a standalone would solve that, especially with this 'shrink and then re-grow' strategy they are doing."
James Sprayregen, the attorney who steered United through bankruptcy in 2006, cautioned that it is "inherently difficult" to convince a merger-resistant company to explore an M&A deal.
He said, however, that "if you get a sufficient number of stakeholders who support M&A over a standalone, even with the difficulty, that can create a lot of momentum."
AMR filed for bankruptcy in November, citing an untenable labor cost structure. The company also grappled with losses of well-heeled corporate travelers while Delta and United expanded networks and market share through mergers. AMR was the largest airline until the 2008 merger of Delta and Northwest.
It has proposed a standalone restructuring deal that would reduce its annual labor costs by about $1.25 billion a year through job cuts, changes to benefits and updated work rules.But AMR's unions argue that no amount of labor concessions could solve the airline's growing revenue and network disparity with United and Delta. They've thrown their weight behind US Airways, saying synergies from a merger would save 6,200 jobs that would be doomed if AMR exits bankruptcy independently.
"What's best for our company, our people and our financial stakeholders will be determined by the facts in a disciplined manner and process. And this includes whether American will choose to pursue any combination down the road," AMR said in a statement.
CORNERSTONE STRATEGY
AMR executives believe building on its strong presence in selective international networks, such as its industry-leading Latin American routes and the networks connecting New York's JFK airport and London's Heathrow, are more important than the overall size of the airline.
The carrier has said its standalone plan would generate $3 billion in new revenue and savings by 2017. Around $1 billion in new revenues would come from adjusting its fleet to market demand and establishing extensive code-sharing agreements with other domestic carriers, such as JetBlue and Alaska, people close to the company say.
Some industry analysts said broad code-sharing agreements with other airlines could present other viable alternatives.
"The one scenario that I believe is more interesting than a transaction -- and it's only possible if they win relief from the pilots -- is to have certain, extensive code relationships with JetBlue and with Alaska," said Bill Swelbar, a research engineer at MIT's international center for air transportation.
But a full-on merger with either of the carriers is seen as a long shot. Both airlines have carved out strong identities as low cost carriers and have publicly stated their lack of interest in industry consolidation.
"Our plan is really about organic growth. It's our own planes, it's our own people," JetBlue said in a statement to Reuters on Thursday. Alaska did not have immediate comment.
BEFORE OR AFTER
The timing of a deal remains unclear, as US Airways would prefer a deal while AMR is in bankruptcy, while AMR would like to exit bankruptcy before consolidating. In addition to AMR's labor unions, a US Airways proposal would likely garner support from AMR's partners in the global oneworld alliance, including British Airways. Oneworld, the smallest of the world's three juggernaut airline pacts, would gain US Airways, which has proposed to jump ship from the Star Alliance under a merger.
Alliances allow airline members to cooperate on routes and connections, essentially expanding their networks.
Adding US Airways' Philadelphia hub and Charlotte, North Carolina, service to oneworld would net 33 new Eastern U.S. cities for British Airways, a unit of International Airlines Group, that AMR does not presently serve, JPMorgan analyst Jamie Baker said in a research note.
"Such a merger would not be detrimental to oneworld. In terms of the joint business agreement any consolidation that increases the choices for our customers would be welcomed," International Airlines Group said in an emailed statement to Reuters, when asked about a potential tie-up of AMR and US Airways.
A combination of US Airways and AMR is also likely to be the last remaining merger of legacy U.S. carriers that could clinch regulator approval, analysts say.
For instance, Delta and AMR overlap in 68 domestic markets -- as opposed to 13 markets between US Airways and AMR, meaning no deal is possible without massive carve-outs and union job cuts. Delta declined to comment on Thursday.
Ray Neidl, an airline analyst with Maxim Group, said he rates the probability of a US Airways-AMR merger at 90 percent, but says it may well happen after bankruptcy."(AMR) will have a new base of stockholders at that point, and maybe a new board of directors," Neidl said. "They can negotiate a merger from a position of strength."
AMR until September has the exclusive right to propose bankruptcy restructuring plans without outside intervention. To effect a merger during AMR's bankruptcy, US Air would have to wait for exclusivity to end, or lobby AMR's unsecured creditors' committee to ask the bankruptcy court to lift exclusivity.
JPMorgan analyst Baker in a research note said AMR's standalone restructuring scenario "does not necessarily assure the wheels of industry consolidation grind to a halt, though it could slow the process."
The Allied Pilots Association, which represents AMR's pilots unions, has told its members that clinching a merger with US Airways in bankruptcy is critical to ensure they have a role.
"A merger with US Airways that followed our exit from bankruptcy would be entirely on AMR management's terms and would not require APA's consent. We would barely constitute a speed bump in that post-bankruptcy scenario," the union said in a communication to members that was reviewed by Reuters.
"We have more control over our destiny if a merger is conducted while the airline is in restructuring."
Bye Bye---General Lee
