AMR Corp, the bankrupt parent of American Airlines, is the prize in a likely bidding war by rival carriers, but any merger involving the third largest U.S. airline is expected to come on its own terms and timing.
US Airways Group LCC.N, Delta Airlines (DAL.N) and private equity firm TPG Capital TPG.UL are all exploring a potential deal, according to people familiar with the matter.
British Airways, meanwhile, is keen to protect its partnership with AMR in the international oneworld airline alliance and would be open to making a minority investment if needed to solidify that relationship, separate sources said.
Unwelcome bidding has little chance of success under bankruptcy law that grants AMR exclusive rights to submit a reorganization plan for up to 18 months. That makes it difficult for anyone to attempt a merger without AMR's blessing.
Instead, with no shortage of courtship from would-be suitors, American Airlines can probably afford to choose a partner of its own liking if it concludes it needs one at the end of the restructuring process, the sources said.
"Everyone's positioning themselves for when American Airlines does emerge from bankruptcy and everyone's covering their options. But just because you're building the battleship, doesn't mean you're going to succeed," said one of the sources.
AMR Chief Executive Tom Horton, who has long insisted the company is focused on thriving as a stand-alone carrier, said last month that "opportunists" could attempt a merger with AMR as it restructures.
The airline is currently focused on shedding costs and liabilities and has no desire to be acquired by a rival such as US Airways or Delta, people close to the company said.
What is more likely, and also preferred by AMR management, would be a partner that provides part of the capital to support its eventual emergence from bankruptcy and could validate the investment thesis in the newly restructured airline, the sources said.
That makes a private equity firm like TPG or its existing alliance partner British Airways a more realistic pairing for AMR, rather than its own U.S. rivals, they added.
"Tom Horton is a man of conviction and he likes things to be done his way," said a second source familiar with the situation.
"American may well merge with somebody, but American is going to do it on their terms. They've got 18 months to do what they want and they will come out much more nimble, much more fortified with a number of different options."
Adding weight to AMR's position against an unwanted takeover is the backing by the airline's creditor committee, where AMR's labor controls four of the nine seats.
"The labor group is going to favor status quo much more than looking to merge with Delta or US Airways," the source said. "If you think about what happens after a merger, it involves cutting redundancy, employees, planes and facilities."
Speculation on a possible airline merger involving AMR has been rampant since the airline filed for Chapter 11 protection from creditors in November.
A deal with Delta, the No. 2 U.S. carrier, is unlikely because of the high antitrust hurdles, experts say. American Airlines is the third largest U.S. airline.
A well-timed investment by BA in AMR, on the other hand, would fly better with AMR's management and labor and could also prevent AMR, an anchor member of oneworld, from leaving the alliance.
"This is a case where if AMR is taken somewhere else, I think the future of oneworld is really in doubt," said Robert Mann, an airline consultant at RW Mann & Co. "So this is as much a play to retain the vitality of oneworld as it is anything else."
"I think it would be an extension of their joint business arrangement," he said. "I think it makes perfect sense."
Both AMR and British Airways, a unit of International Airlines Group (ICAG.L), declined to comment.
"We don't comment on rumor or speculation," an IAG spokesperson said. "American is a key partner for IAG and we will support them as they go through Chapter 11."
U.S. law restricts foreign ownership of U.S. carriers to 25 percent, so a BA tie-up would fall well short of a merger, although several industry leaders such as United Continental Holdings (UAL.N) Chairman Glenn Tilton have long pressed Congress to lift the restriction.
AMR Chief Financial Officer Bella Goren said at a transportation conference last May that AMR's alliances have helped the carrier expand its global reach, but the global airline industry suffers because of foreign ownership restrictions.
"The fact remains that despite our progress, our industry remains more fragmented than it ought to be in this age of globalization," Goren said.
"We believe it is time for a serious conversation about this issue in the interest of creating a stronger, more successful global airline industry for the benefit of customers, employees and investors."
LABOR ISSUES AT US AIRWAYS
US Airways Chief Executive Doug Parker has long promoted consolidation as a means to slim down in an industry plagued by overcapacity, but it still has the challenge of having to integrate its own labor groups following its 2005 merger with America West Airlines.
People familiar with the industry agree that US Airways does need scale and American Airlines is seen as the only obvious dance partner for them, but without US Airways first integrating its separate labor houses, any merger wouldn't be appealing to American Airlines.
"They're long on desire but short on ability," said one of the sources.
Meanwhile, American Airlines has long expressed confidence in its prospects as a stand-alone airline, although its two biggest rivals -- United and Delta -- were formed from mergers that so far are successful.
That tone is likely to change once American manages to shed some of its high labor costs and pension liabilities through the Chapter 11 process, which had been a key issue deterring its previous merger considerations, according to people familiar with the matter.
Over the long term, a newly restructured AMR could consider a number of different combinations with rivals ranging from US Airways, JetBlue Airways (JBLU.O) and Alaska Air Group (ALK.N) to a financial tie-up with British Airways, the sources said.
JetBlue Airways, for example, would be attractive to American due to its strong presence at New York's JFK airport, as well as its fleet of brand-new planes, the sources said.
(Reporting by Soyoung Kim in New York and Kyle Peterson in Chicago, additional reporting by Greg Roumeliotis in New York and Rhys Jones in London; Editing by Phil Berlowitz)