American and US Airways said to vote for merger

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Ending a yearlong courtship by US Airways, American Airlines agreed Wednesday to merge with the smaller carrier, paving the way for the creation of the nation's largest airline.

The boards of both companies met separately to approve the combination, according to two people with knowledge of the vote. A merger would bolster American's domestic footprint, strengthen its presence in the Northeast and give it a bigger network to attract business travelers and corporate accounts.

The merger, the details of which will be announced Thursday morning, would create a rival with the size and breadth to compete against United Airlines and Delta Air Lines, which have both grown through mergers of their own in recent years and are currently the biggest.

But while United and Delta went through bankruptcies and mergers over the past decade, American has been steadily losing ground while racking up more than $12 billion in losses since 2001. It was the last major airline to seek court protection to restructure its business when it filed for bankruptcy in November 2011.

The wave of big mergers in the industry has created healthier and more profitable airlines that are now better able to invest in new planes and products, including Wi-Fi, individual entertainment screens and more comfortable seats for business passengers.

But some consumer advocates said they worried that reducing the number of airlines would lead to higher fares over the long run and allow airlines to increase revenue by imposing new or higher fees.

The deal, which was finalized in recent days, could be formalized as American exits bankruptcy. W. Douglas Parker, the chairman and chief executive of US Airways, will take over as American's new chief executive. Thomas W. Horton, American's current chairman and chief executive, will be chairman, although his tenure could be limited.

The merger still needs to pass several steps. It must be approved by American's bankruptcy judge in New York. US Airways shareholders, who will also have to approve the deal, would hold 28 percent of the combined carrier.

In addition, it will be reviewed by the Department of Justice's antitrust division, although analysts expect regulators to clear the deal.

If approved, the nation's top four airlines - American, United, Delta and Southwest Airlines - would control nearly 70 percent of the domestic market.

The merger is a victory for Parker. Over the past year, he has convinced American's creditors that the carrier needed to expand its network to compete.

In April, he won the critical backing of American's three labor groups, which defied American's management and publicly endorsed a deal with US Airways.

The biggest challenge for the merged company, which will be called American Airlines, will be to integrate operations over the next couple of years. That is no easy task since airline mergers are often rocky - involving complex technological systems, big reservation networks as well as large labor groups with different corporate cultures that all need to be seamlessly combined.

United angered passengers last year after a series of merger-related computer and reservation mistakes and late and delayed flights.

Parker has done this before. In 2005, when he was the head of America West, he engineered a merger with the larger US Airways.

In this case, the merged American Airlines will still be based in Fort Worth, Texas, and have a combined 94,000 employees, 950 planes, 6,500 daily flights, eight major hubs and total sales of nearly $39 billion.

It would be the market leader on the East Coast, the Southwest and South America. But it would remain a smaller player in Europe, where United and Delta are stronger. The merger does little to bolster American's presence in Asia, where it trails far behind its rivals.

American has major hubs in Dallas, Miami, Chicago, Los Angeles and New York. US Airways has hubs in Phoenix, Philadelphia and Charlotte, N.C., and has a big presence at Ronald Reagan National Airport in Washington.

In reviewing previous mergers, federal regulators have not focused on the overall size of the combined airline but instead looked at whether a merger would decrease competition in individual cities. To do so, regulators examine specific routes, or city-pairs, and look at whether a merger reduces the number of airlines there.

The last time the Justice Department challenged a merger was the proposed combination of United Airlines and US Airways in 2001. It rejected that on the ground that it would reduce consumer choice and possibly lead to higher fares.

Since then, the department has allowed a wave of big mergers that have reshaped the industry, said Alison Smith, a former antitrust official and now a partner in the law firm McDermott Will & Emery.

American and US Airways have only about 12 overlapping routes, a figure that is unlikely to set off regulatory opposition, she said. One problem, however, could come up at National Airport, where the combined carriers hold a market share of about 60 percent. There, regulators might request that American give up some takeoff and landing rights before approving the merger.

Regulators sought similar concessions from United at Newark Liberty International Airport in New Jersey after its merger with Continental Airlines.

It is also unclear whether American needs all of its combined hubs. Analysts pointed out that Phoenix was at risk because of its proximity to Dallas, since it makes little sense to have two big hubs so close to each other.

Despite the increased concentration, consumers can still expect to find vibrant competition, said William S. Swelbar, a research engineer at the Massachusetts Institute of Technology's International Center for Air Transportation.

"We will have four very big, very vigorous competitors in the market," he said.

Travelers are better served by bigger airlines offering more connecting flights and more destinations, analysts said. Consumers today can easily compare fares and shop for the cheapest flight online, which keeps airfares in check.

But Kevin Mitchell, chairman of the Business Travel Coalition, disagreed. He said that consumers would see few benefits to offset the merger's negative impact - including "reduced competition, higher fares and fees and diminished service to small and midsize communities."

© 2013, The New York Times News Service

Story first published on: February 14, 2013 10:08 (IST)

Tags: American Airlines, US Airways


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