American Airlines approves merger with US Airways

Video: American Airlines and U.S. Airways are expected to announce an $11 billion merger, creating the world's largest airline.

Bankrupt American Airlines and its dogged suitor, US Airways, announced a merger Thursday that would create the world’s largest air carrier and put 86 percent of domestic air travel in the hands of four big airlines.

The merger was approved by the boards of both airlines, ending months of negotiation that began with American giving a frosty response to the initial overture from US Airways.

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Described as the last airline mega-merger in a decade of consolidation, the marriage would see the US Airways brand consigned to the dustbin of aviation history, joining Pan Am, TWA, Eastern Air Lines, Northwest and Continental.

The agreement was first reported by other news organizations; a person familiar with the negotiations confirmed the deal to The Washington Post on Wednesday, and it was formally announced early Thursday.

The marriage would rescue American from bankruptcy and put the much smaller US Airways into a partnership with the muscle to compete against Delta Air Lines and United Airlines, both of which have grown through recent mergers.

Together with Southwest Airlines, the big low-cost carrier, the foursome would dominate passenger travel in the United States.

The merger may lead to new competition at the one major airport where US Airways and American have significant overlap: Reagan National Airport. Combined, they control almost 68 percent of the flights at National, a situation that could concern regulators.

As for the affect on consumers, “I don’t think it’s going to impact airfares significantly,” said William S. Swelbar, a researcher at the MIT International Center for Air Transportation. “I think that we’re seeing a dynamic already where the airlines are passing on the increased cost of fuel and labor to the consumer. I’m not prepared to see egregious gouging by the airline industry just because of this merger.”

Analysts see the two airlines as a good match, combining US Airways’ strength in the eastern part of the country and American’s greater influence in the West and global destinations. But Swelbar said federal regulators may object to their domination at National.

“American and US Airways control the lion’s share of slots at National,” Swelbar said. “I expect that the regulators will force a combined American-US Airways to divest themselves of some of the slots, and competitors would be free to compete for those available slots.”

He said Southwest and JetBlue are likely to show particular interest in grabbing more passenger share at National.

Airline consolidation may sound ominous to consumers who have benefited from competitive airfares, but some analysts say the trend that had Delta swallow Northwest Airlines, United merge with Continental, Southwest absorb Air Tran and, now, American agree to partner with US Airways has stabilized a troubled industry.

“I think people are going to frame this as fares going up and that’s bad for the public,” said Joshua Schank, president of the nonprofit Eno Center for Transportation. “But it has economic benefits for a country to be able to have a stable airline industry. That may outweigh the slight increase in fares, and, historically, fares are still low, and more people are flying.”

Although the new airline would operate under the American banner, the deal is a triumph for US Airways, which forced American’s hand after the larger airline slipped into bankruptcy in November 2011. The merger needs to be approved by a New York bankruptcy judge and federal regulators.

As American dug in its heels, seeking to emerge from bankruptcy before entertaining merger talks, it was outflanked by US Airways, which won over three key union groups at American.

With union support as leverage, US Airways convinced American’s creditors that a merger was the only way to compete with Delta and United. Those creditors pressured American’s board to make a deal, and they will end up with 72 percent of the new airline, while US Airways shareholders will get 28 percent.

“I don’t think, realistically, that either of these airlines was going to survive without merging,” Schank said. “American was in the worst position of the two, simply because they’re in bankruptcy and they’re having challenges with their unions negotiating their way out of bankruptcy.”

The final days of negotiation leading to Wednesday’s vote focused on finding a role in the new structure for American’s chairman, Tom Horton, according to someone familiar with the talks. It was finally agreed that Horton would serve a limited term as chairman of the new airline but that the task of running it would go to the architect of the merger, US Airways chief executive Doug Parker.

The new company, with 950 planes and 94,000 employees, would be based in Fort Worth. It would retain key hubs in Phoenix, Charlotte, Philadelphia, Chicago, Dallas-Fort Worth, Miami, New York and Los Angeles, with 6,500 daily flights.

Swelbar said that with just 14 percent of the market held by airlines other than the big four, this deal would be the last airline mega-merger.

Still, Schank said, thin profit margins could create stiff competition.

“If oil prices continue to go up, yes, we’re going to have to look for other ways to consolidate, reduce costs, increase fares,” he said. “I would expect that eventually we will get to the point where we’re talking about two or three carriers rather than four or five. The other big factor is the economy. If it remains where it’s been — good but not great — consolidation may be something they just have to do to survive.”

 
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