* Deal will form world's biggest air carrier by traffic
* Combined company to carry American Airlines name
* Deal expected to yield $1 bln in annual savings by 2015
(Adds section on consumers, deal details, background)
By Soyoung Kim and Karen Jacobs
Feb 14 AMR Corp and US Airways Group
on Thursday sealed an $11 billion merger, but before
they can welcome their first passenger onboard they have to get
regulators to sign off and then integrate a web of intricate
Creating what will become the world's largest airline, with
6,700 daily passengers, will require AMR's American Airlines and
US Airways to unite two workforces totaling 113,000 and meld
together reservation and baggage handling systems, computer
networks, and terminals - a process that has complicated other
marriages in the airline industry.
"So far it's just been pushing paper," said Robert Mann,
head of R.W. Mann & Co of Port Washington, New York, which
provides industry consulting and analysis. "The next 18 to 24
months is the hard work of implementation."
Integrating the airlines' reservations systems is a big
challenge, said Basili Alukos, a Morningstar airline analyst. He
said the previous US Airways and America West merger was "one of
the worst" integrations in the industry, but that US Airways has
likely learned from that experience.
"It seems as if (American-US Airways) has the benefit of
history on its side," Alukos said, adding that the new American
can learn from the growing pains of Delta-Northwest and
United Continental Holdings Inc made a number of
changes following its 2010 merger. As it shifted to a single
reservations system and implemented other new processes,
United's on-time arrivals suffered and mishandled baggage rates
went up. United said in January that customer satisfaction
scores were improving.
US Airways Chief Executive Doug Parker, who will head the
newly merged company, said his experience with America West was
"Integrating airlines can be difficult sometimes, but we've
(already) done one at US Airways," he told Reuters. "We know
what to do and know what mistakes to avoid."
Labor integration could also be a challenge for the new
American, where union representation issues will need to be
"The good news is the people they have in the unions now are
trying to work with the company," said Darryl Jenkins, chairman
of the American Aviation Institute in Washington. "I think they
will be able to get through labor issues reasonably quickly
MIXED RESULTS FOR CONSUMERS
The tie-up is the fourth major merger in the U.S. airline
industry since 2008, when Delta Air Lines bought Northwest.
United and Continental merged in 2010, and Southwest Airlines
bought discount rival AirTran Holdings in 2011.
The merger could help speed up the recovery of the U.S.
airline industry as carriers will have more power to boost fares
as yet another competitor is eliminated.
"Wall Street has been enamored of consolidation from an
industry perspective because it will help control capacity,"
said George Hamlin, president of Hamlin Transportation
Leisure travelers are likely to feel the pinch of higher
fares and service cuts more than business passengers.
The tieup could be a net plus for corporate passengers, who
will have to pay higher prices but also will benefit as the
three biggest airlines compete to improve their services and
networks in hopes of winning more of these lucrative customers.
Competition for the business traveler has already ramped up,
especially in key cities such as New York, where Delta has
expanded at LaGuardia Airport and is upgrading facilities at
John F. Kennedy International Airport to better compete with
United's strong presence in Newark, New Jersey.
"The competition for corporate accounts has never been more
acute and aggressive," said Mann.
But U.S. leisure passengers could find bargains harder to
come by as the bigger airlines look to sell fewer lower-priced
seats, he added.
Morningstar's Alukos said he expects prices to rise overall
in wake of the merger. Leisure passengers in larger markets will
likely find more flight choices, but those in smaller cities
might not be so lucky.
"Those passengers in smaller markets will lose some service
or they will have to pay higher rates because there will be
fewer flights" as the big airlines continue to curb unprofitable
or less-traveled routes, Alukos said.
Still, for US Airways customers, the deal will bring a
broader choice of international flight destinations as the
combined carrier leverages its membership in the oneworld global
alliance. Its members include Asia's Cathay Pacific,
Japan Airlines as well as Australia's Qantas.
New routes are expected, particularly in Asia, starting with
Dallas-Forth Worth to Seoul later this year, Horton said.
Far from being secret, as most mergers are, the US
Airways-American deal is one of the most telegraphed in history.
The deal was seen as an inevitability for so long that some
labor unions have already struck deals with the two airlines on
what will take place following a combination.
The all-stock deal gives creditors of the bankrupt American
Airlines parent control of the combined airline, and is subject
to approvals from U.S. and European regulators and the U.S.
At a press conference on Thursday at the Dallas-Forth Worth
airport, Parker and AMR CEO Tom Horton said that there would be
minimal job losses, mostly at the management level because the
two airlines are "complementary."
Parker said the two airlines share only 12 of 900 routes
with American, and that he expects no issues with regulatory
authorities. To preserve competition, U.S. antitrust regulators
typically require airlines to sell overlapping routes before
approving a merger.
The tie-up with American marks a comeback for Parker, 51,
perhaps the most vocal proponent of industry consolidation but
who repeatedly got passed over as a marriage partner as rivals
merged in recent years.
US Air's management team, led by Parker, will assume
operational control of the airline, while AMR creditors will
wind up owning 72 percent of the combined carrier and take five
seats on the 12-member board.
US Airways will have four seats on the board. The remaining
seats will be filled by AMR representatives.
Tom Horton, who became AMR's CEO when it filed for
bankruptcy, will serve as chairman of the combined airline
through the first annual meeting of shareholders, after which
Parker will take over.
"It has been the most successful airline restructuring in
history, and we had been very focused from the outset on
creating the most value for our owners," Horton told Reuters.
The new combined airline, which will carry the American
Airlines name, will be 2 percent larger than current No. 1
United Continental in terms of traffic - the number of miles
flown by paying passengers worldwide, and will be based in
Dallas-Fort Worth, Texas.
The new, larger American Airlines would return to the
leadership position among U.S. carriers that it ceded in recent
years as high labor costs made it difficult to compete with
A combined American-US Airways would have revenue of about
$39 billion, based on 2012 figures, ahead of United Continental,
which had revenue of about $37 billion.
US Airways stockholders will receive one share of common
stock of the combined airline for each US Airways share, the
companies said in a statement.
US Airways shareholders will get 28 percent of the equity of
the combined airline. The remaining 72 percent will be issuable
to stakeholders of AMR and its debtor subsidiaries, American's
labor unions and current AMR employees.
Jack Butler, an attorney for AMR's creditors' committee
called the deal "unprecedented." In US Bankruptcy Court in
Manhattan on Thursday, Butler said that AMR shareholders would
get 3.5 percent of the reorganized equity, which he forecast as
between $350 million and $400 million. It's rare for
shareholders to get any recovery after a bankruptcy.
The two companies said they expect $1.2 billion in one-time
transition costs, spread over the next three years.
Annual savings from the merger should grow to more than $1
billion by 2015, the companies said.
Rothschild is financial adviser to American Airlines. Weil,
Gotshal & Manges LLP, Jones Day, Paul Hastings, Debevoise &
Plimpton LLP and K&L Gates LLP are providing legal counsel.
Barclays and Millstein & Co are financial advisers to US
Airways, while Latham & Watkins LLP, O'Melveny & Myers,
Cadwalader, Wickersham & Taft LLP, and Dechert LLP are serving
as legal counsel.
Moelis & Co and Mesirow Financial are financial advisers to
the unsecured creditors. Skadden, Arps, Slate, Meagher & Flom
LLP and Togut, Segal & Segal LLP are the creditors' legal
US Airways shares closed Thursday down 4.6 percent at
(Additional reporting by Sagarika Jaisinghani in Bangalore,
Patricia Kranz and Nick Brown in New York and Marice Richter in
Dallas; Writing by Patricia Kranz; Editing by Edward Tobin, John
Wallace, Gary Crosse and Tim Dobbyn)