| NEW YORK, July 27
NEW YORK, July 27 An aggressive campaign
beginning this year has p ositioned US Airways Group as
the clear favorite to merge with AMR Corp, winning
backing from the reluctant rival's labor unions, alliance
partners and most of Wall Street.
Now comes the hard part.
In the coming months, the bankrupt parent of American
Airlines plans to review a range of potential merger partners,
including US Airways, to determine if any combination would
deliver better returns for creditors than a standalone
The process began in earnest on Friday, when the company
said it had begun sending non-disclosure agreements to potential
But differing views on some of the grittier questions
surrounding a merger - like its timing, and how the new
airline's equity would be split between the companies'
shareholders - mean a difficult road ahead for US Airways Chief
Executive Doug Parker and his takeover effort.
Adding another level of uncertainty, the list of companies
American is considering for a merger is not limited to US
Airways, according to people familiar with the matter. It also
includes JetBlue Airways Corp, Alaska Air Group
, Republic Airways', Frontier Airlines and
Virgin America, the people said.
AMR went bankrupt in November, dogged by high labor costs.
Creditors generally agree that a combination with US Airways
would generate additional revenues, reduce costs and make the
combined carrier more competitive against larger rivals United
Continental and Delta Air Lines, themselves the
products of mergers.
But with numerous diverse constituencies, including members
of AMR's creditors' committee, having a say in how a deal would
get done, disputes could arise over how much a restructured
carrier would be worth and how to split up the spoils from a
merger among AMR's creditors.
AMR's nearly $24 billion of 2011 annual revenue dwarfs that
of US Airways, and both carriers acknowledge that American's
post-bankruptcy shareholders - which will likely consist of
unsecured bankruptcy creditors to be paid off in the form of
equity - would hold the majority of stock in a merged entity. US
Airways had $13.2 billion in annual revenues last year.
US Airways estimates the combined airline's equity would
split about 65 percent to 35 percent in favor of American
creditors, according to people familiar with the matter. That
split is based on the revenue and earnings contributions from
the two companies and assumes an all-stock deal.
American, on the other hand, sees the equity split closer to
75-25 or even higher, separate people familiar with the matter
said. As US Airways has a market capitalization of nearly $ 2
billion, a 75-25 equity split would imply a roughly $6 billion
equity value for American post-restructuring.
The people asked not to be identified because the estimates
are preliminary and based on publicly available data, and the
companies have yet to conduct detailed due diligence on each
other. US Airways and AMR both declined to comment.
US Airways' equity stake could rise if it offered to pay off
some AMR creditors, such as retirees or trade vendors, in cash
rather than equity. But the merged company would also carry more
debt on its balance sheet in that scenario, because US Airways
would have raised debt to pay off the creditors.
AMR's plan calls for unsecured creditors to be paid off only
in stock of the reorganized company, at some amount less than
par, said Jack Butler, the lead attorney for American's
creditors committee, in court testimony.
BEFORE OR AFTER
Debate is also brewing over whether a merger should be the
basis for AMR's plan of reorganization, or if AMR should exit
independently and then negotiate a merger.
The airline would prefer to leave Chapter 11 protection as a
standalone entity, then consider a merger. But, at the behest of
its creditors, it has agreed to give consolidation a fair shake
while still under Chapter 11 protection.
AMR believes it would have more leverage to negotiate a deal
upon emergence, while US Airways believes a deal in bankruptcy
would give American creditors a better equity split, according
to people familiar with the matter.
"What we're suggesting is bringing the two companies
together before they exit bankruptcy is the right model," US
Airways' Parker told Reuters last week. "How it's structured is
less important than getting it done."
If American waits until after exit, as the larger airline,
it would most likely acquire US Airways and pay a premium for a
deal, said a person familiar with US Airways' thinking.
But that scenario may not be as attractive to creditors as a
deal in which US Airways plays the role of acquirer, said one
industry banker not involved in the situation.
"From the position of AMR creditors, it would be much better
for them to basically sell to US Air," the banker said. "The
higher the price that American pays (for US Airways), the lower
its overall ownership will be, because it will have to give away
more shares to US Air shareholders."
People close to American brushed off that notion, saying any
deal premium would go to the smaller shareholder faction - in
this case, US Airways - regardless of whether a merger comes
before or after bankruptcy.
The people also noted that US Airways has pledged certain
concessions to American's labor unions in the event of a merger,
which would come at the expense of the rest of American's
US Airways President Scott Kirby said in April that his
company's plan would cut from labor only the amount necessary to
bring the company in line with industry standards - about $800
million. That's less than the $1.06 billion in labor cuts
contemplated in AMR's latest standalone offer.
US Airways is seeking $240 million in cuts from unionized
pilots, while AMR would cut $315 million from that group.
That could be a factor for creditors who care only about
financial recoveries, said one of the people close to American.
"All of that (labor concessions) comes out of the pocket of
the American Airlines creditors," the person said. "It's an
extraordinarily complex dynamic and it's going to be ruled by