American, US Airways move one step closer to merger

The companies said Friday they have started confidential merger talks. But a deal is still far from reality.

“It does not mean we are merging — it simply means we have agreed to work together to discuss and analyze a potential merger,” US Airways CEO Doug Parker said in a letter to employees Friday.

Such a merger would put the combined airline on par with the world’s largest — United Continental Holdings Inc. — and the slightly smaller Delta Air Lines. Its position as the No. 1 or No. 2 airline in the world, based on how many miles its passengers fly, would depend on how many routes anti-trust regulators force the combined airline to abandon.

Many industry experts say the only way American and US Airways can compete with larger rivals is by merging their strengths. US Airways would gain American’s lucrative international routes while American’s larger hubs would be fed passengers from US Airways’ network in smaller U.S. cities.

For passengers, a merger would have no immediate impact. But a year or two into the combination, changes would ramp up: Frequent flier programs would merge, fares could rise, planes would take on American Airlines’ colors and glitches could surface as their reservation systems integrate.

Parker has been pushing for a merger since American’s parent company, AMR Corp., entered Chapter 11 bankruptcy protection on Nov. 29, 2011. American Airlines CEO Tom Horton has said his airline is weighing several options, including remaining independent or merging with one of several airlines, including US Airways Group Inc.

One wildcard: British Airways’ parent company International Consolidated Airlines Group, which confirmed Friday that it too had signed a non-disclosure agreement with American. Foreign investors are prohibited from owning more than 25 percent of a U.S. airline but a cash infusion from British Airways could help American remain independent or give Horton enough leverage so his leadership team can call the shots in a merger with US Airways.

AMR still has to work itself through the bankruptcy process. It has exclusive rights until Dec. 28 to present the court and its creditors with an exit plan. Government regulators would have to sign off on any merger and then the process of actually combining operations could take years.

US Airways previously said the combined airline would keep the American name and American’s participation in the OneWorld alliance, which includes British Airways, Cathay Pacific, Qantas and eight other carriers. If past mergers are any indication, frequent flier miles would ultimately be merged into American’s AAdvantage program.

In the past decade, the airline industry has seen the combinations of Delta with Northwest, United with Continental and Southwest Airlines Co. with AirTran. Further consolidation is likely to mean higher airfares for passengers. The price of a domestic round-trip flight has climbed nearly 20 percent, when adjusted for inflation, over the last 10 year according to the Bureau of Transportation Statistics.

American currently serves about 250 cities in more than 40 countries with 3,400 daily flights. US Airways has 200 destinations in 28 countries with 3,200 daily flights. There is some overlap. But by joining forces the combined airline becomes more attractive to companies seeking to fly employees around the globe with few connections.

US Airways passengers would gain access to American’s international destinations, particularly London and Latin America. American’s passengers would be able to better connect to smaller U.S. cities that US Airways serves.

The combined carrier would have considerable presence in New York, Philadelphia, Washington, Charlotte, N.C., Miami, Chicago, Dallas, Phoenix and Los Angeles. It is unclear how many of those cities will survive the merger. In past mergers, airline executives have promised not to close any hubs but have gone ahead and dramatically reduced service in once-key cities.

The two airlines currently have a combined 97,000 employees, although American has been quickly shrinking its payroll as it moves through restructuring in bankruptcy court. Past airline mergers have led to job losses.

US Airways has said that it would move its headquarters from Tempe, Ariz. to American’s in Fort Worth, Texas.

Nothing in the non-disclosure agreement with US Airways prevents American from discussing a merger with another airline. It just can’t disclose details of its US Airways merger talks with a third party. In a note to American Airlines managers Friday morning about US Airways, the airlines said “other parties have also signed confidentiality agreements.”

International Airlines Group, parent of British Airways and Spanish carrier Iberia, is one of those parties, British Airways spokeswoman Caroline Titmuss said Friday. The two airlines already have a joint business agreement for flights across the Atlantic Ocean and were founding members of the OneWorld frequent flier alliance.

The agreement with British Airways could be a sign that American is lining up the financing to remain independent, said Ray Neidl, an airline specialist with the Maxim Group.

American spokesman Bruce Hicks wouldn’t say if any other airlines had signed one.

The CEOs of JetBlue Airways Corp. and Alaska Air Group Inc. have both publically said they are not interested in a merger with American. JetBlue spokeswoman Alison Croyle said Friday that the airline has not signed a non-disclosure agreement with American.

Virgin America and Frontier Airlines, part of Republic Airways Holdings Inc., have also been discussed as merger partners but representatives from the airlines have declined to comment, saying it was just speculation.

Regardless, US Airways is the most-likely partner for a merger.

“I don’t think there’s really any other realistic prospect out there for American,” said Savanthi Syth, an airlines analyst with Raymond James.

The airlines warned in a joint press release that they will not “provide any further announcements regarding the status of any such discussions unless” a merger is ready to be announced or if the talks fall apart.

US Airways’ stock closed Friday at $10.66, up 2.5 percent. Shares in the company have more than doubled since AMR filed for bankruptcy, driven up by merger speculation.