America Airline, US Airways Merges To Create United States Largest Airline

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American-Airlines-mergerAmerican Airlines parent company AMR Corp and US Airways announced Thursday that their boards have approved a merger agreement to create the largest US airline.

The combined company, which will have an implied equity value of approximately $11 billion, will become a fully operating entity following American’s pending bankruptcy proceeding, according to a news release.

The companies expect the deal to result in combined synergies of more than $1 billion. Following American’s emergence from bankruptcy and the execution of the deal, US Airways will hold approximately 28 percent of the company, with American interests holding the rest, the news release said.

The deal follows a spate of earlier US airline mergers that have reshaped the sector and improved profitability. The added heft gives American a better chance of competing with fellow airline giants United and Delta in terms of offering more destinations in an efficient manner.

“The combined airline will have the scale, breadth and capabilities to compete more effectively and profitably in the global marketplace,” said US Airways chief executive Doug Parker. “Our combined network will provide a significantly more attractive offering to customers.”

The combined airline will offer more than 6,700 daily flights to 336 destinations in 56 countries, the news release said. The new airline will be the largest US airline in terms of revenue.

The companies touted the deal for strengthening the combined company’s competitive presence in the US Northeast, the western part of the US and Latin America. Some observers have said the deal still leaves American with a relatively weak position in Europe and Asia compared with some competitors.

Within the $1 billion in synergies, about $900 million comes from network efficiencies resulting from the combined carriers improved schedule and connectivity. The companies expect one-time transaction costs related to the merger of approximately $1.2 billion.

Antitrust regulators and a US bankruptcy court must first give their approval before the merger can go forward, as American has been under bankruptcy protection since November 2011.

The idea of an American-US Airways tie-up has been floated since American went into bankruptcy protection.

Under the transaction, US Airways chief executive Parker will become chief executive of the newly formed company, while American chief executive Tom Horton will serve as chairman of the board through the middle of 2014 before stepping down, sources familiar with the matter said.

Horton said the deal “provides enhanced potential for full recovery for our creditors.” Holders of existing shares of American parent AMR will receive an aggregate initial distribution of 3.5 percent of the common stock of combined airline, the news release said.

“This looks like the end of a surprisingly successful round of US industry restructuring,” said Richard Aboulafia, an analyst with the Teal Group Corp.

Projections for 2013 show that the US airline industry in terms of absolute profit would be the healthiest worldwide, said John Thomas, airlines specialist at LEK Consulting.

American has continued to operate under court supervision even as it sought to slash costs by renegotiating wage and benefit deals with its unions.

Prospects of a merger strengthened when union leaders publicly endorsed it in April, and talks moved ahead when the two firms signed a non-disclosure agreement to exchange confidential information in August.

The news release noted that the merger enjoys the support of several leading unions from the two companies, including pilots associations and representatives of flight attendants.

 Merger is a strain on Teeming Customers, says Aviation Experts

The creation of the world’s largest airline likely means higher airfares down the road.

After months of dating, bankrupt American Airlines parent AMR and US Airways officially tied the knot on Valentine’s Day.

While the $11 billion deal should offer customers more options for getting where they want to go, it will also result in passengers paying more for their flights, experts said.

Following a barrage of high-profile mergers in the industry, the number of major carriers has been whittled down to just four — United, Delta, Southwest and now American.

Together, they control about three-quarters of the U.S. market, which critics say gives the industry less incentive to keep prices low.

“You have one less airline to dig its feet in and say ‘no’ to a fare hike,” said Rick Seaney, CEO of FareCompare.com. “In the long term, that’s going to drive up prices.”

Some industry watchers, though, argue that there is still sufficient competition and that mergers have given the airlines more money to improve service for customers.

The latest airline marriage will create a carrier with a bulked-up network and more trans-Atlantic flights, as well as a bigger combined presence at New York airports.

“For the New York frequent flier, this is a good thing, because a larger American means more places they can earn their miles and more places they can redeem them,” said Hudson Crossing travel industry analyst Henry Harteveldt.

The two airlines overlap on only about a dozen out of 900 routes, meaning there’s little need to shave redundant services.

Together, they will have 6,700 daily flights to 336 destinations and will maintain all their current hubs, expanding service at some of them, the companies said.

Consumers shouldn’t expect any major changes right away. The deal still needs bankruptcy court and regulatory approval, and isn’t expected to close before the fall. Customers will still be able to book and manage their flights at AA.com and USAirways.com.

Both airlines’ frequent flier programs will remain the same for now, the companies said.

In past mergers, airlines have eventually melded their frequent flier programs — giving a bump to customers with points in both.