CEOs Doug Parker and Tom Horton speak to the "CBS This Morning" co-hosts about the merger of American Airlines and US Airways in their first network morning interview.
AMR Corp., parent of American Airlines, and US Airways Group will merge and keep Chicago O'Hare International Airport as a hub, the companies said Thursday.
The merged airlines, to be called American Airlines, would create the world's largest carrier, edging out Chicago-based United Airlines, assuming the $11 billion merger is approved by regulators and U.S. bankruptcy court, where American filed for Chapter 11 restructuring in 2011. The combination is expected to be completed in the third quarter of this year and save $1 billion by 2015.
The merger would likely end a wave of consolidation that has helped put major U.S. airlines on more sound financial footing. The widely expected deal has been more than a year in the making. U.S. fliers would be left with four major airlines, American, United, Delta Airlines and Southwest Airlines, which together would control about three-quarters of the U.S. market.
"We think this merger is the best strategic fit for both companies because it cures each other's ills," said Morningstar analyst Basili Alukos in a note to investors Thursday. US Airways, which he says "is essentially a small domestic carrier" gains a network to compete with the largest airlines, while American benefits from US Airways' "lean operating system and better access to the East Coast."
In Chicago, the two have little overlap. American is the No. 2 carrier in the region, with about 27 percent of the market, 500 flights per day and 9,300 Chicago-based employees. O'Hare is American's second-largest hub, after Dallas-Fort Worth, which will be the headquarters for the merged airline.
By contrast, US Airways flights account for just 2 percent of the seats flying out of Chicago's airports, and the carrier employs 170 here.
The combined airline would be run by US Airways CEO Doug Parker, while American's CEO, Tom Horton, becomes non executive chairman until next year.
The merger was unanimously approved by the boards of both companies. American said the combined airline would "have a robust global network and a strong financial foundation. The merger will offer benefits to both airlines' customers, communities, employees, investors and creditors."
American said customers of the merged airline would have access to more choices and increased service across the combined company's larger worldwide network and through an enhanced Oneworld Alliance, of which American Airlines is a founding member. The combined airline will offer more than 6,700 daily flights to 336 destinations in 56 countries.
"Our combined network will provide a significantly more attractive offering to customers, ensuring that we are always able to take them where they want to travel, when they want to go," Parker said.
However, consumer groups have been critical of the merger before its announcement.
"From a consumer standpoint ... individual traveler or corporate travel department -- there are few benefits to offset the negative impacts of this proposed merger that include reduced competition, higher fares and fees and diminished service to small and mid-size communities," said Business Travel Coalition Chairman Kevin Mitchell.
Charlie Leocha, director of the Consumer Travel Alliance, said the merger offered "no discernible consumer benefits."
"Antitrust regulations were created to protect consumers, not to facilitate industry consolidation," he said. "The claim that this merger will provide more destinations is hollow. Whatever new cities are added by a future (American Airlines-US Airways) network are subtracted from the current airline alliance network that US Airways enjoys with United. The net effect is that, overall, consumers are left with nothing new and no improvement to the status quo."
Airlines executives said they were not worried about getting antitrust approval from the U.S. Justice Department because the airlines are complementary and overlap on just a dozen of 900 routes.
Industry analyst Jeff Kauffman from Sterne Agee agreed. "The Justice Department could order assets sales if it finds the deal creates a monopoly in any area. We see this as unlikely given there is little overlap of the respective networks," he wrote in a note to clients.
In Chicago, travelers would be largely shielded from the merger's downsides, experts have said. The region's plethora of flights from O'Hare and Midway, as well as the presence of many discount airlines, should hold fares largely in check on most routes after the merger.
Route changes are most likely on a few overlapping routes from Chicago to US Airways hubs in Philadelphia, Phoenix and Charlotte, N.C., experts say.
"But most Chicagoans will still have at least four airlines competing for their business on the majority of routes -- and even more on routes such as Chicago to Los Angeles," said George Hobica, founder of Airfarewatchdog.com.
Customers can continue to book travel and track and manage flights and frequent-flyer activity through AA.com or USAirways.com and will continue as usual in the AAdvantage and Dividend Miles frequent flyer programs. At first, there are no changes to the frequent-flyer programs of either airline. Eventually, frequent-flyers will be able to earn and redeem miles on a larger network.
The merger is supported by American Airlines' unions, which separately negotiated contracts with US Airways in anticipation of a merger. "With a strong, proven leadership team focused on partnering with frontline employees, improving reliability and customer service, and expanding our network, the new American Airlines will return to a position of industry preeminence," said Dennis Tajer, spokesman for the Allied Pilots Association, the American Airlines pilot union.
The new carrier would be 2 percent larger than current No. 1 United Continental Holdings in traffic, as measured by the number of miles flown by paying passengers worldwide.
In a note to employees Thursday, United CEO Jeff Smisek said the newly merged airlines would be a "formidable competitor" but that consolidation is good for the airline industry.
"We, our co-workers, our customers and our shareholders have benefitted from the improved financial health that consolidation has brought to our industry," he wrote. "United is a much stronger carrier today than we were before we merged, and we haven't even finished harvesting all the synergies of our merger. Delta, which is two years ahead of us in the merger process, is performing very well as a result of their merger. I'm encouraged by the successes we've seen in the airline industry in recent years."
The merger of the two airlines does not appear to provide clarity toward American and United Airlines reaching agreement with Chicago about completing the runway expansion project at O'Hare International Airport that has dragged on for eight years.
Officials from both United and American have said the new runways covered under the existing expansion agreement are sufficient to handle demand for the foreseeable future, and there is no justification for the airlines to spend more money on expansion now.
The two largest airlines serving O'Hare have in the past vigorously opposed the city's financing plans for the expansion, saying the city is taking on too much debt through extensive bonding that would ultimately saddle the carriers with unacceptable costs. As a result, Chicago's plan to build the final runways and construct a massive western passenger terminal complex has been in an indefinite holding pattern.
In 2011, Transportation Secretary Ray LaHood brokered a deal for one new runway, on the south section of the airfield, by offering more in federal funds. Negotiations on completing the O'Hare expansion project, which once totaled $15 billion and was scaled back to less than $8 billion, were suspended until this year, with Chicago officials hoping to nail down an agreement by 2014.
But no formal negotiations have taken place between the two airlines and the Emanuel administration, sources said.
The prospects for United and American investing in O'Hare expansion in the immediate future appears unlikely. United is focused on smoothing out its recent merger with Continental Airlines. American, whose parent company, AMR, is still working to get out of bankruptcy, will be consumed with its new partnership with US Airways.
In the merged company, Horton would be board chairman through the first annual meeting of shareholders. After that, Parker would take over as chairman. The board would initially be made up of 12 members, three American Airlines representatives, including Tom Horton, four US Airways representatives, including Doug Parker, and five AMR creditor representatives.
Under the merger agreement, US Airways stockholders would receive one share of common stock of the combined airline for each share of US Airways common stock then held. American Airlines stakeholders, including labor unions, would own 72 percent of the merged airline, while US Airways stakeholders would own the rest.
Vicki Bryan, senior high yield bond analyst at Gimme Credit, said in a note to investors Thursday the merger is good news for everybody involved, even fliers after the combined airline gets passed integration issues.
"Under CEO Doug Parker, we expect American will 'straighten up and fly right,' " she wrote.
gkarp@tribune.com
Tribune reporter Jon Hilkevitch contributed.
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