The proposed $11 billion merger between American Airlines and US Airways would not only create the world’s largest airline, but also marks one of the rare times an established carrier has attempted a merger of this scale while still in Chapter 11 bankruptcy.
Although America West and US Airways combined in 2005 while the latter was still in Chapter 11, that $1.5 billion transaction is regarded as a sale rather than a true merger because America West and private equity firms bought US Airways out of bankruptcy.
The current merger comes with a set of novel challenges that the armies of attorneys hired by both airlines — who specialize in bankruptcy, antitrust, unions, mergers and acquisitions, and employee benefits law — are now sorting out.
“As a general proposition, the fact that [the merger] is being done inside the bankruptcy is very significant,” said Kristin Going, a bankruptcy attorney at Drinker Biddle & Reath, who represents Manufactures and Traders Trust Co. (better known as M&T Bank), one of the largest creditors of American Airlines’ parent company, AMR Corp.
“With that comes many different specific scenarios that haven’t really been dealt with before,” she said.
Negotiating a merger within Chapter 11 pushes a process that is typically private into the public sphere of bankruptcy court for all to see. The deal not only has to be approved by antitrust regulators, but the bankruptcy judge as well.
“The single biggest challenge ... is that bankruptcy is a fishbowl,” said Jack Butler, co-counsel for the creditors’ committee of AMR. “There are literally hundreds, if not thousands, of people involved in a Chapter 11 case. It’s scrutinized by the media, to whom various interest groups with different agendas advance their interests, and there are frequent public hearings in courtrooms.
“Mergers generally aren’t negotiated in those kinds of circumstances. Mergers often get finalized over a weekend, boards meet on Sunday afternoons and complex issues are worked out privately.”
Butler and Jay Goffman, attorneys at Skadden, Arps, Slate, Meagher & Flom, represent the nine largest unsecured creditors for AMR: the Allied Pilots Association, Transport Workers Union of America AFL-CIO, the Association of Professional Flight Attendants, M&T Bank, Wilmington Trust, the Bank of New York Mellon, the Pension Benefit Guaranty Corp., Hewlett Packard Enterprise Services and Boeing Capital Corp. The group, known as the unsecured creditors’ committee, nudged American Airlines — once adamant about resisting a merger until after exiting Chapter 11 — toward a deal, and continue to play a role rarely given to creditors in a merger.
“This is one of those unusual circumstances where it wasn’t just the debtor driving the process,” Goffman said. “The creditors’ committee also drove the process ... If you look for a precedent that shows the creditors’ committee has that kind of input, you won’t find it. This is a new way of doing business.”
If approved, the merger would give AMR creditors 72 percent ownership of the new airline; US Airways shareholders would get 28 percent.
Paul Denis, the lead antitrust attorney for US Airways, said adding the creditors’ committee to the mix is a “game changer.”
“The bankruptcy angle alters a critical dimension of the deal,” said Denis, a partner at Dechert. “Typically a deal is a bilateral negotiation, everyone is looking ahead to how the [Justice Department] or [Federal Trade Commission] will react to the deal. In this deal, it was a three-way negotiation — the merger parties and the [committee]. It’s a very different process getting the deal put together ... If you don’t put the deal together in a way that satisfies the creditors, you’re probably not going to get the deal done.”
Other aspects of the merger are also setting precedent. The unions representing pilots at both airlines — the US Airline Pilots Association at US Airways, and the Allied Pilots Association at American — reached a joint agreement ahead of the merger announcement. The agreement established that members of both pilots’ unions would receive the same pay and working conditions should the merger go forward.
Reaching such an agreement before the merger is “a unique feature you don’t see in most of the other mergers,” said Bob Siegel, an attorney representing US Airways in labor negotiations with the Airlines Pilots Association.
In previous airline mergers, labor contracts were kept separate until after the deals were completed, at which point the surviving union then negotiated a combined labor contract. The process can takes years, said Siegel, a partner at O’Melveny & Myers who handled contract negotiations in the US Airways-America West and United-Continental mergers, and labor litigation in the Delta-Northwest merger.
“It means the pilot groups are treated the same from day one, instead of starting with two different status quos,” Siegel said. “It created more predictability about cost structure from day one.”