American Airlines’ Bankruptcy Fuels Merger Talk


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By Chris Isidore, CNNMoney

NEW YORK — American Airlines’ bankruptcy has many in the industry questioning if a merger is in its future.

US Airways, whose management has a history of making bids for larger airlines that are in bankruptcy, confirmed that it has hired investment advisors to weigh the opportunities presented by American’s parent AMR Corp. bankruptcy reorganization.

US Airways CEO Doug Parker told analysts last week that there isn’t as much need for airline industry consolidation today than there has been in the past, but he said US Airways was “always interested” in studying such opportunities.

Delta Air Lines hired its own investment advisors at Blackstone Group to study a bid for AMR according to a report in the Wall Street Journal, although neither Delta nor Blackstone would comment on it.

The threat of a merger is one of the factors hanging over the head of American’s unions as they start negotiations on the company’s proposal to slash 13,000 jobs at the airline out of its staff of 88,000 announced Tuesday.

Jim Little, president of the Transport Workers Union, which represents 26,000 ground workers at AMR, said that his members are worried about the possibility of a merger, saying it would be an “agonizing process.”

Little said AMR CEO Tom Horton’s assurances that he wants to stay independent are of limited comfort to employees.

“That may be out of his control in this process,” said Little.

Horton tried to dismiss the threat of a hostile bid for AMR.

“There will be a lot of M&A speculation. There always has been, there always will be in these situations,” Horton said Tuesday during a press conference. But he said such deals during bankruptcy process are rare.

In fact, hostile bids have generally fallen short in the airline industry. US Airways’ bid for the then bankrupt Delta was eventually dropped. And AMR has far more cash than most bankrupt companies — $4.1 billion of cash on hand at the time of its filing on Nov. 29.

“American went into bankruptcy with a huge cash pile to allow them to manage their bankruptcy,” said Jim Corridore, airline equity analyst with Standard & Poor’s. “I don’t see why they would want to partner up.”

Ray Neidl, airline analyst with Maxim Group, said that given its current cost disadvantage, AMR isn’t a very attractive property for takeover. He said if the turnaround efforts fail, it is likely to be sold off in pieces or be forced to liquidate.

“They’ve got one chance. This is it,” he said. “If they don’t succeed, there’s probably no chance for American.”

However Neidl said the $2 billion in annual cost cuts laid out by management Tuesday could make the airline competitive again and thus make it an attractive merger target.

“We do expect there to be a suitor for the carrier once they straighten out their cost structure,” he said. And he said that despite management’s stated desire to remain a stand alone, Neidl believes they would consider the right deal at that time.

Other analysts agree that American would be ripe for a deal — assuming it wins approval of its turnaround plan in the bankruptcy process.

And bankruptcies and mergers frequently have gone together in the airline industry. America West purchased US Airways out of bankruptcy in 2005. That was followed by Delta’s purchase of Northwest Airlines in 2008 soon after each went through bankruptcy. United, which went through bankruptcy itself, purchased Continental to form United Continental last year.

American, which formerly was the world’s largest airline, has fallen to No. 3 as its rivals got hitched and it stood on the sidelines. Its last deal was its purchase of bankrupt TWA in 2001.

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