US Airways makes deals with 3 AMR unions

Associated Press + More

By DAVID KOENIG and JOSHUA FREED, Associated Press

DALLAS (AP) — US Airways made a bold move toward a merger with American Airlines on Friday. It'll either catapult a combined company to the top of the airline heap or further complicate American's already-messy bankruptcy reorganization.

US Airways made an end run around its larger rival and secured the support of American's three labor unions in its bid to force a merger.

The unions were angry with American over its plan to cut jobs and squeeze labor costs while under bankruptcy court protection. They think they can get kinder treatment from US Airways.

Executives at American's parent, AMR Corp., still control the bankruptcy process. But AMR's grip on its own future just got a little weaker.

All sides have their reasons for what they did Friday:

— The unions want leverage to fight back against American's plan to break their labor contracts. A hearing on the issue starts Monday.

— US Airways, which has been overlooked in other airline mergers, desperately wants to find a partner that will make it much bigger and more competitive.

— AMR wants to avoid outside interference as it tries to use the bankruptcy process to reduce debt and cut labor costs.

US Airways' gambit could take months to play out, and the nation's fifth-biggest airline has not yet made a formal bid for AMR.

But the timing raised eyebrows. The unions announced their support for the US Airways bid just three days before American was scheduled to begin making its case in court that its viability depends on breaking labor contracts with nearly 55,000 pilots, flight attendants and ground workers.

AMR filed for bankruptcy protection in November and has been negotiating for concessions from the unions since February but made little progress.

The outcome of this high-stakes fight could reshape the U.S. airline industry. A merger would produce an airline roughly equal to United Continental Holdings Inc. in revenue and passenger traffic, and slightly bigger than No. 2 Delta Air Lines Inc.

"We have a much smaller market presence than United or Delta, and because of that we're losing a great deal of business travel," said Scott Shankland, a leader of the Allied Pilots Association at American, in explaining why his group supports US Airways' bid for American. He fears that, left on its own, American will keep shrinking and need fewer pilots.

US Airways didn't detail terms of its agreements with American's unions. But it promised to save about 6,200 AMR jobs headed for elimination and to call the combined company American Airlines and base it in AMR's hometown of Fort Worth, Texas.

Consumers could be left with one less choice in travel. They've already seen familiar names disappear — Continental, Northwest, TWA, soon AirTran. That consolidation has helped the industry return to profitability, but it also has led to higher fares as airlines limit the number of flights.

Jamie Baker, an airline analyst for J.P. Morgan, estimated that combining US Airways and American would leave the four largest airlines, including Southwest, in control of close to 90 percent of the U.S. air travel market. In 2005, the top three plus Southwest controlled roughly half the market, he said.

Each of the players in Friday's drama has different goals and different levers to achieve what it wants:

— American's unions:

They're angry over AMR CEO Thomas Horton's turnaround plan. He aims to eliminate 14,000 jobs, including 13,000 held by union workers, and cut labor costs by $1.25 billion a year. Pilots are worried about a plan to outsource more flying to other airlines.

The unions can't force a merger on their own. But they sit on the creditors' committee in the bankruptcy case so they can work with other creditors to win support for a US Airways bid.

The judge gave AMR exclusive rights to offer a reorganization plan until Sept. 28, blocking the consideration of other plans, but creditors could ask the judge to end that advantage.

"The court can see that there's another potential offer on the table," said Helane Becker, an analyst with Dahlman Rose & Co.

— AMR:

Horton, the CEO, says he prefers that this company stay independent but would consider a merger after the bankruptcy process. He says it's too complicated to restructure in bankruptcy and work out a merger at the same time.

Bankruptcy law gives companies special tools to cut costs. American has already dropped some aircraft leases. But things really get tough Monday, when AMR lawyers go into federal court in New York and present their case for throwing out union labor contracts, including freezing pension plans, outsourcing jobs and shifting more flying to other airlines.

— US Airways:

Doug Parker, the CEO of the Tempe, Ariz.-based airline, said his company has "a unique opportunity" to merge with American and create a carrier big enough to compete effectively and profitably.

Parker is a longtime advocate of consolidation in the airline business, but his company has been left behind many times.

US Airways tried to merge with Delta when that airline was in bankruptcy in 2006. It was snubbed when the creditors' committee sided with Delta management.

Then US Airways courted United, but United instead tied up with Continental Airlines. It was a painful breakup. The Continental CEO, who now runs United, called US Airways "the ugly girl."

Hunter Keay, an analyst with Wolfe Trahan & Co., said US Airways learned from its failed pursuit in bankruptcy court of Delta.

Back then, US Airways waited too long, didn't get the support of Delta's employees, and announced it would shrink after completing the merger. It didn't make those mistakes with American, Keay said.

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Joshua Freed reported from Minneapolis.

Follow David Koenig at http://www.twitter.com/airlinewriter

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