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US Airways, American boards approve $11 billion merger

Bios of the CEOs

US Airways Group Inc. Chairman and CEO Doug Parker, 51, and American Airlines CEO Tom Horton, 51, worked alongside one another early in their careers.

Parker held a number of financial management positions with American Airlines from 1986 to 1991. He then worked for four years at Northwest Airlines as vice president and assistant treasurer, and then as vice president of financial planning and analysis. He joined America West Airlines in 1995 as chief financial officer and became president in 2000. He was elected chairman, president and CEO of America West in September 2001. Parker engineered America West’s 2005 merger with US Airways.

Married with three children, Parker earned bachelor of arts degree in economics from Albion College in 1984 and an MBA from Vanderbilt University in 1986.

Horton joined AMR in 1985 after two years at an accounting firm. He rose through the finance department and was named chief financial officer in 2000. He left in 2002 for the same job at AT&T, then returned to AMR in 2006. He was named president in 2010, and then CEO and chairman on Nov. 28, 2011, the day before AMR filed for bankruptcy protection.

Married with two children, Horton earned a bachelor’s degree from Baylor University and MBA from Southern Methodist University.

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Updated: March 15, 2013 1:41PM



American Airlines and US Airways announced early Thursday they have agreed to merge in an $11 billion deal to create the world’s biggest airline.

The combined carrier will be called American Airlines but run by US Airways CEO Doug Parker.

The boards of the two airlines unanimously approved the deal late Wednesday.

The merger would reduce the number of major U.S. airlines to four: the new American, United, Delta and Southwest.

The new American would have more than 900 planes, 3,200 daily flights and about 95,000 employees, not counting regional affiliates. It will be slightly bigger than United Airlines by passenger traffic, not counting regional affiliate airlines.

The deal is a coup for smaller US Airways Group Inc., which pushed for a merger almost as soon as American parent AMR Corp. filed for bankruptcy protection in November 2011.

While Parker runs the company, AMR CEO Tom Horton will serve as chairman until its first shareholder meeting, likely in mid-2014.

AMR interests including creditors will own 72 percent of the new company and US Airways shareholders 28 percent.

The companies said merging would create savings of more than $1 billion a year. The merger will be part of AMR’s plan for exiting bankruptcy protection.

The airlines said they expect $1 billion in combined savings.

The companies had negotiated since August, when creditors pushed AMR to conduct merger talks so they could decide which earned them a better return: a merger or an independent American.

The deal would need approval by AMR’s bankruptcy judge and antitrust regulators, who have permitted three other big airline mergers to go ahead since 2008.

The rapid consolidation has allowed the surviving airlines to offer bigger route networks that appeal to high-paying business travelers. And it has allowed them to limit the supply of seats, which helps prop up fares and airline profits.

Since 2008, Delta gobbled up Northwest, United absorbed Continental and Southwest bought AirTran Airways. If this latest merger goes through, American, United, Delta and Southwest will control about three-quarters of U.S. airline traffic.

The rapid consolidation has allowed the surviving airlines to offer bigger route networks that appeal to high-paying business travelers. And it has allowed them to limit the supply of seats, which helps prop up fares and airline profits.

Word of an American-US Airways merger raised new concern among passenger advocates. Charles Leocha of the Consumer Travel Alliance said that with just four big airlines instead of five, it will be easier to raise fares. “The benefits of this deal will go only to the corporations, not to consumers,” he said.

But industry officials say there will still be plenty of competition. A recent study by PricewaterhouseCoopers found that adjusting for inflation, domestic U.S. airfares fell 1 percent between 2004 and 2011, a period that included several airline mergers.

Travelers on American and US Airways won’t notice immediate changes. It likely will be months before the frequent-flier programs are merged, and possibly years before the two airlines are fully combined.

When that happens, American’s presence will grow in key East Coast markets including New York’s LaGuardia Airport and Washington’s Reagan National Airport. The merger will add US Airways hubs in Charlotte, Philadelphia and Phoenix to American’s in Dallas-Fort Worth, Chicago, Miami, New York and Los Angeles.

US Airways executives told the Chicago Sun-Times last July that Chicago would benefit more than any other market if the airlines combined. Their merged networks would offer improved service through 539 daily departures with nonstop flights to 114 destinations around the world from Illinois.

Travel experts agreed. BestFares.com Chief Executive Officer Tom Parsons has said Chicago-area travelers will see benefits, and prices shouldn’t spike here.

“This will probably give folks in Chicago under the name of American more options, especially to the eastern part of the United States, and also probably more non-stops to the Caribbean right now,” Parsons said.

“You’ll have more one-stop service out of Chicago into Europe. You’ll either be able to fly non-stop or one-stop to a ton more cities than you did before.”

Business travelers and other frequent fliers who want to stay on the same airline to build up brand loyalty to get upgrades and perks will be happier with the deal, because it will give them more opportunities to earn miles everywhere they fly, except maybe Asia, he said, where United and Delta will remain the biggest U.S. players.

Just five years ago, American was the world’s biggest airline. It boasted a history reaching back 80 years to the beginning of air travel. It had popularized the frequent-flier program and developed the modern system of pricing airline tickets to match demand.

But years of heavy losses drove AMR into bankruptcy protection. The company blamed bloated labor costs; its unions accused executives of mismanagement. AMR lost more than $12 billion between 2001 and 2010. It has lost another $2.8 billion since it filed for bankruptcy protection in November 2011 — a period in which US Airways earned about $650 million.

The merger is an impressive achievement for Parker and his management team at US Airways, based in Tempe, Ariz. Just a few years ago, they were running a mid-sized carrier called America West Airlines when they bought the old US Airways out of bankruptcy.

US Airways is only half the size of American and is less familiar around the world, but he prevailed by driving a wedge between American’s management and its union workers and by convincing American’s creditors that a merger made business sense.

Despite its smaller size, US Airways has prospered in the last several years, earning a record profit of $637 million last year.

“They’ve done an absolutely terrific job with what they have,” said Bill Swelbar, an airline-industry researcher at MIT and board member of Hawaiian Airlines’ parent company.

Parker began pursuing a merger almost as soon as AMR filed for Chapter 11. He found willing partners in American’s three labor unions, who have long fought with management at their own company over pay, work rules and executive bonuses. American suffered strikes by pilots and flight attendants in the 1990s. Bad feelings hardened in the early 2000s, when union workers took pay cuts to keep the company out of bankruptcy while AMR gave bonuses to management employees after the stock price rose.

AMR’s Horton professed no interest in thinking about a merger until his company was out of bankruptcy court, but his creditors pressured him to reconsider. Some of them, along with Wall Street analysts, called for new management at AMR.

Bob Herbst, a financial analyst who studies airlines, said AMR has failed to adapt to changes in the industry since consolidation began in the middle of the last decade. He said AMR was fixated on gaining market share rather than on profitability.

American placed 14th out of 15 airlines in government rankings for on-time performance in 2012 (US Airways was fifth). Only United had a higher rate of complaints than American (but US Airways was barely better than American).

“They are continually at the bottom in on-time and customer service, and they’re losing more money than anyone else,” Herbst said. “American’s management is leaving because that’s what needs to happen.”

AMR, however, has made measurable progress under Horton, who became CEO the day before the company filed for bankruptcy protection. The company earned operating profits in the second and third quarters of 2012, and its revenue for every seat flown one mile — an arcane-sounding statistic but one that is closely watched in the airline business — rose faster than at its rivals for much of the year. With leverage from bankruptcy laws, AMR won new union contracts with lower costs.

“I’m a big fan of Tom’s; he’s done a great job,” said Mike Derchin, an analyst with CRT Capital Group. “He restructured the balance sheet, made the company more efficient and got a pilots’ contract. He positioned the company for the future.”

That performance may also have gotten a better deal for Horton’s creditors. US Airways’ initial proposal called for AMR creditors to get only 49 percent of the stock in the combined company, according to people familiar with the talks. Instead, they’ll get 72 percent, although they might have to share some of that with shareholders, said the people familiar with the deal.

In recent weeks, AMR won bankruptcy court approval to buy hundreds of new planes from Boeing and Airbus, an important step to reduce fuel costs and offer a more comfortable experience for passengers. American even unveiled a new logo and paint job for its planes, although the reviews were mixed.

Contributing: Business Reporter Francine Knowles



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