AMR CEO says it's time to weigh merger options

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By DAVID KOENIG, Associated Press

DALLAS (AP) — The head of American Airlines says his company has done so much to fix its problems that it can consider potential mergers, and invitations will be going out soon.

Thomas Horton, the CEO of American and parent AMR Corp., said Tuesday that American has boosted revenue, reached cost-cutting deals with labor unions, and is well on its way to a successful restructuring after seven months under bankruptcy protection.

"It now makes sense to carefully evaluate a range of strategic options, including potential mergers," which "could make the new American even stronger," Horton said in a letter to employees. He said the company, working with its creditors, will soon reach out to "interested parties."

That wasn't Horton's attitude when AMR filed for Chapter 11 protection in November. For months, he insisted that the company should delay any merger talk until it got out of bankruptcy.

But US Airways has complicated Horton's job by pursuing American at every turn. It won the support of American's unhappy labor unions and appealed to AMR's creditors with this simple pitch: One big airline will be stronger than two smaller ones.

American is the nation's third-biggest airline, and US Airways ranks fifth in passenger traffic. Combined, they would be roughly the same size as United and bigger than Delta.

US Airways said it was pleased by Horton's comments.

"All we have asked for is a fair and balanced opportunity to present our plan versus others, and we are hopeful this is the beginning of such a process," said US Airways Group Inc. spokesman John McDonald.

Horton didn't say how many potential investors or merger partners he'll talk to, and he didn't name any.

Delta Air Lines Inc. and buyout firm TPG, which has invested in airlines before, have been rumored to be interested. Many airline analysts think Delta is too big for antitrust regulators to let it buy American. The same could be said of United Continental Holdings Inc., the world's biggest airline company.

Others such as Southwest, JetBlue and Alaska operate very differently from AMR and wouldn't expand American's international network. U.S. law prohibits foreign airlines from buying a controlling stake in a U.S. carrier.

"The only solution, really, long-term for American and US Airways is to merge," said Robert Herbst, an independent airline analyst.

AMR has been beset by high costs and shrinking market share. It stood still while competitors beefed up — Delta bought Northwest, United combined with Continental, and Southwest snatched up AirTran. AMR has lost more than $10 billion since 2001 and continues to lose money in bankruptcy.

But lately there have been encouraging signs. In each of the past two months, American posted better revenue per mile flown by each seat than its rivals. That shows American has been able to raise fares while still filling seats. Analysts say it has cut many unprofitable flights.

In the all-important corporate-travel business, American has signed up more accounts this year than in the first half of 2011, chief commercial officer Virasb Vahidi said this week, although he didn't give numbers.

American says it has the highest labor costs in the airline industry. In the past two months, it has received approval of cost-cutting contracts covering thousands of ground workers. It announced a tentative agreement with mechanics on Tuesday, and pilots are voting on a proposal that would give American more flexibility to use regional jets and partner with other U.S. airlines — benefits that Delta and United already enjoy.

Those labor contracts include raises, but they would give American and AMR creditors certainty about labor costs for several years. And that might be just enough to help AMR executives control the terms of any merger.

Officials at American's unions are openly hostile to AMR management. They claim that Horton and other executives are resisting a merger during bankruptcy so that they can get stock in the new company that emerges from Chapter 11 protection — stock that could be worth tens of millions of dollars. The CEOs of Northwest Airlines and United Airlines got compensation worth $27 million and $40 million after their companies emerged from Chapter 11 and went through mergers.

An AMR spokesman said compensation won't influence management's decision.

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AP Airlines Writers Scott Mayerowitz in New York and Joshua Freed in Minneapolis contributed to this report.

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

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