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American airlines and US airways merger
Strategic Management II
Group 10
Saurabh Arora 12P166
Vaibhav Gupta 12P172
Varun Gopal 12P174
Varun Gupta 12P175
Vignesh Patil 12P177
American airlines and US airways merger
Table of Contents
Introduction...........................................................................................................................................3
American airlines...............................................................................................................................3
US airways.........................................................................................................................................4
AA-US combination............................................................................................................................4
Current situation...................................................................................................................................6
Revenue share:..................................................................................................................................6
Market share.....................................................................................................................................7
Post- merger......................................................................................................................................7
Change in market share:................................................................................................................8
Change in revenue share:..............................................................................................................8
Change in competition in strategic alliances:................................................................................9
Cost and network synergies:........................................................................................................10
Network Overview...............................................................................................................................10
Transition items and the synergies of merger.....................................................................................17
Cost Synergies.................................................................................................................................19
Labour integration...............................................................................................................................20
History.............................................................................................................................................20
Historic 4 way Pilot MOU.................................................................................................................20
APFA Acknowledgement Letter.......................................................................................................21
TWU Acknowledgement Letter........................................................................................................21
New American.....................................................................................................................................21
Stakeholders:...................................................................................................................................22
Investors:.........................................................................................................................................22
Cost structure..............................................................................................................................22
Operational efficiency..................................................................................................................24
Capital structure..........................................................................................................................25
High value customers:.....................................................................................................................26
Global network............................................................................................................................26
Customer experiences.................................................................................................................28
Deal Structure......................................................................................................................................29
Issues in deal.......................................................................................................................................29
Antitrust issues................................................................................................................................29
Leadership Structure of new entity.....................................................................................................30
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American airlines and US airways merger
Conclusion...........................................................................................................................................31
References...........................................................................................................................................32
Introduction
American airlines
American Airlines, Inc. (AA) is a foremost U.S. airline owned by AMR Corporation,
headquartered in Fort Worth, Texas. It operates an extensive international and domestic
network, with planned flights throughout North America, the Caribbean, South America,
Europe, and Asia/Pacific. Dallas/ Fort Worth International Airport is the airline's largest hub,
with American Airlines and AMR's regional carrier American Eagle accounting for about 85%
of the traffic and 83% of the landing fees at the airport and drifting to more destinations
than from its other hubs. The airline operates on continuation bases at Tulsa (TUL) and Fort
Worth Alliance (AFW); the latter was announced to close by December 2012.
AA hubs listed by Flights (August 15, 2012)
Rank Airport Flights
1 Dallas/Fort Worth, Texas 764
2 Chicago-O'Hare, Illinois 501
3 Miami, Florida 294
4 Los Angeles, California 159
5 New York-LaGuardia, New York 102
6 New York-JFK, New York 86
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American airlines and US airways merger
US airways
US Airways is a major U.S. airline owned by the US Airways Group, headquartered in Tempe,
Arizona. It operates a widespread international and domestic network, with 198
destinations all over North America, South America, Europe, and the Middle East. The airline
is an affiliate of the Star Alliance Network and utilizes a fleet of 346 mainline jet aircraft and
285 regional jet and turbo-prop aircraft. The carrier operates the US Airways Shuttle, a US
Airways brand which provides hourly service between Boston, New York and Washington.
D.C. Regional airline service is considered as US Airways Express, operated by contract and
secondary airline companies. As of January 2013, US Airways employed 32,213 people
universal and operated 3,028 daily flights (1,210 US Airways Mainline, 1,818 US Airways
Express)
US Airways also have network deficiency with delta and united. They are cost advantage
driven by lower labour cost. The Airlines focus is more in cities where they has superior
service offerings. US Airlines is #1 in their hub cities.
AA-US combination
There was a apparent need for merger of these airlines both from consumer point of view
and stakeholders. This merger will not only create the world’s premier airlines but also:
Combined network can compete more effectively with United, Delta, and others.
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o Impossible to accomplish without merger as this route is till now followed by
other players. Also the market is quite saturated and has turned into a sero
sum game for all players involved.
o Significantly strengthen one world alliance: Oneworld Alliance is one of the
world's three largest global airline alliances. Its objective of the alliance is to
be the first-choice airline alliance for the world's frequent international
travellers. This mergers will help these airlines to consolidate the flyers to this
alliance to newly merged airlines
o Enormous value creation: the merger due to increased synergies in terms of
operation synergies, financial synergies will lead to huge saving for all stake
holders involved.
o Value oriented leadership: The merger will lead to consolidation of values of
both these companies and will lead to well defined guidelines for value
oriented leadership.
The merger is supported by employees as it leads to huge benefits (both in long term
and short term). Some of the benefits are
o Job security: The merger clauses have assured of no job cuts for the
employees. Also since the airlines have huge growth targets in near future it
is unlikely to follow any job cut thereafter also.
o Great place to work: These airlines have been a great place to work for
employees till now and there is no reason for them not to follow the same.
o Financially stronger: The merger will lead to huge financial saving for new
airlines as it will save due to financial and operational synergies emerging out
of this merger.
o Better compensation and benefits: These airlines are looking forward for
expansion and retaining current employee’s base would be critical for these
companies. Hence employee can expect raise in their compensation and
benefits
o Change in leadership: The mergers will lead to change in top management as
the new airlines will have combined management with some new faces. This
will induct new streamlined processes.
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Superior recoveries
o $1.4 billion by synergies: The merger will lead to huge financial saving in tune
of $1.4 billion for new airlines as it will save due to financial and operational
synergies emerging out of this merger.
Better service to customers
o Comprehensive and global network: The new airlines will have combined
assets and airplanes of both airlines. Also free cash would be used to raise
new planes. This will lead to better services and a comprehensive global
network.
o Improved service to more cities: With the merger the new airlines can cater
to more cities as routes where AA and US were competing can be services by
just one plane and other can be operated in other routes.
o Stronger competitor than any other: The merger will make the combined
airline a big player in the market and will allow it to exert huge competitive
power.
Current situation
Revenue share:
Various factors to be considered in American Airlines Industry are:
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Mergers have increased profitability of many airlines in past and hence American airlines
lagging behind in share. This merger will help in removal of this hurdle and lead to huge
inorganic growth.
Merger of united-continental and delta-north west has dramatically changed the
industry scenario. Same can also be expected after this merger.
These mergers have created stronger and attractive networks that has reduced AA’s
share hence a merger was a need of the hour.
Market share
Following points needs key highlights in current market scenario:
Internal growth cannot outgo this change. To gain substantial market share inorganic
growth via mergers and acquisition is a must in this type of industry.
Others attractive networks and market share has drastically reduced revenue share of AA
and American Airlines was having huge disadvantage thereafter. As per estimates If same
scenario as in 2005 has been there in 2012, AA would have created $1.7 billion additional
revenue.
Post- merger
A comparative study of these airlines will tell us that AA and US airways are complimentary.
In areas where AA is strong where US airways is not, so this made them a lucrative
combination. This merged network has ability to outperform Delta and united strong
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network. Additional international and domestic flights capacity will increase profits to both
airlines.
Change in market share:
As can be analysed from above diagram that if US airways market is divided in three parts,
then merged entity of AA and US hold number one position in two segments and third
position in the rest of the market.
Change in revenue share:
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American airlines and US airways merger
Similarly merged entity will be number one in term of revenue where till now they have
secured number 3 and 5 respectively.
Change in competition in strategic alliances:
US network’s alliance with star to oneworld, will change and increase competitiveness of
one world. This will lead to huge increase in customer base of the merged entity as they will
be able to host flyers of star alliances in much better way.
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Cost and network synergies:
As can be analysed from the graph the synergies will be less than other airlines mergers in
terms of percentage points but in absolutes terms will be larger than recent acquisition that
have happened in past.
Network Overview
Merger of Delta-Southwest and United-Continental in the past changed the competitive
field dramatically. They strengthened the competition and created more robust networks
resulting in the loss of the market share of AA.
The following table shows the competitive position of American Airlines, Continental and
Delta before the mergers in 2006 and after the mergers in 2011.
Competitive Rankings
2006 2011
West Central East West Central East
AA 3 1 3 4 4 5
Continental 1 5 4 2 2 2
Delta 4 6 1 3 1 1
These mergers created shortfalls in the network that American Airlines was not able to
address on its own. It has become increasingly less relevant in East outside cornerstones. It
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lacks a domestic connecting hub present on the East Coast. It lacks presence in small and
medium cities. And also it was usurped in New York by its competitors in 2011 and had to
abandon the New York shuttle routes in 2011.
These challenges in the network resulted in:
Loss of high-yield corporate traffic
Loss of high worth travellers
Deterioration of the revenue performance in respect to competitors
Also similar network disadvantages were felt by US Airways post these mergers
This consolidation also resulted in the Unit Revenue Premium of AA getting diminished. If
the Relative RASM of American Airlines for 2012 had remained at the 2005 levels, AA would
have generated an addition of $1.7B in revenue. The following graph shows the American
Airlines Adjusted Consolidated RASM vs. Industry average.
After the mergers of Delta-Southwest and United-Continental, they also gained significantly
in corporate travel revenue shares. This can be attributed to many factors:
A vast and comprehensive depth and breadth of the network of United and Delta
allowed them to gain high yield business travellers.
The majority of this additional share came at the expense of lost sales of American
Airlines.
This loss was estimated at $522 Million in high yield business in the span of 1 year.
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Below graph shows the Rolling 12-Month Revenue Share of all the agencies.
The alliances of Delta and United rendered the depth and scope of AA uncompetitive. These
arose because AA was not able to fully connect the customers all over the East Coast which
was caused due to it facing Structural Issues because of the lack of having a hub on the East
Coast. Since it is not possible for American Airlines to fix these issues on its own hence
merger is a good solution.
The following chart shows the depth and scope of AA compared to others and also how the
situation would be after the merger takes place.
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American airlines and US airways merger
The situation is the same in Charleston:
Hence to resolve this issue of low connectivity along the East Coast, US Airways will be able
to help AA since it has a strong presence compared to American Airlines. The following map
will illustrate how the merger will be able to create a comprehensive network that will be
able to challenge the likes of Delta, Continental etc.
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American airlines and US airways merger
The merger will help in providing a solution to the network problems being faced. This can
be attributed to the following reasons:
The networks of US Airways and American Airlines are perfectly complementary and
together form a strong and comprehensive network.
The vast and comprehensive network will help in attracting customers not only from
the corporate base but also travellers etc.
This merger will enable them to work with their already present hubs individually as
well as help them in strengthening in relation to the other mergers.
The industry will become much more competitive with the presence of just 4 major
players: American, Delta, United and Southwest.
It will also help in improving the overall footprint of Oneworld in the US.
Last but not the least it will provide an increment in synergies which will help in
generating additional revenues to the tune of $1.4 Billion.
Perfectly Complementary domestic networks of AA and US Airways:
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American airlines and US airways merger
The enhanced global network as a result of the alliance:
Another important gain from the merger will be the dominance of AA on the New York
shuttle route. These shuttle routes are amongst the 2 most important routes in
consideration for corporate accounts. Delta presently is using shuttle against American
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Airlines to gain an upper hand in New York corporate deals and its international presence
against US Airways to gain shuttle corporate deals.
The merger will also enable it to have a larger local passenger base in Chicago than what
currently exists for United. The overall operations of United will still be larger because of its
international routes, but with a strong foothold in the domestic market, the combined
alliance will be able to compete effectively for international business in Chicago with United.
The combined merger will also create opportunities for new routes to connect small and
medium cities in the East and Midwest to complementary hubs.
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The merger will also enhance the value of Oneworld by adding more dots to the map. Since
JFK airport is not a 500 flight per day hub, oneworld does not participate in most of the
connecting routes.
Transition items and the synergies of merger
How much exactly does the AA-US merger create in recurring synergies?
The annual run rate of the recurring synergies amounts to $1.4 Billion. The estimate while
being conservative is still very achievable and sustainable.
The synergies can be classified into:
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Labour Related which comes up to $0.36 Billion
Cost Related which comes up to $0.64 Billion
Network Related which comes up to $1.12 Billion
Total Expected annual synergy comes up to $1.4 Billion
What are the key benefits of Transition?
Both the airlines have different networks. While the networks are complementary,
redundancy is avoided, helping the merged entity close up on the competition
The merger has resulted in an improved cost structure by improving efficiency and
elimination of redundancy
The merger works well for employees as it results in improved job security,
advancement opportunities and Industry-standard compensation and benefits
Network Synergies
Recurring network synergies annually amount to $1.12 Billion
Network Synergies Estimated
annual benefits
Reasons
Connectivity in Network $420 Million Improved connectivity and Schedules for
passengers
Corporate and Frequent
Flier benefit programme
$350 Million Increased passenger Loyalty
Fleet Optimization $310 Million Optimum utilization of fleet which correlates
to lower costs and higher revenue
Other $120 Million Hub-to-hub flying of regional jets
Passenger related costs $ (80 Million)
Total Network Synergies $ 1.12 Billion
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Significant value can be tapped through new hub connectivity and aircraft reassignment
Cost Synergies
A conservative estimate of the recurring cost synergies amounts to $0.64 Billion
Cost synergies are due to optimization of overlapping airports, better purchasing and
distribution, usage of interlinked Information Systems and Corporate efficiencies
Larger scale for improvements in costs for facilities and station services for
overlapping airports
Other Potential incremental efficiency costs that are not captured
Cost synergies are offset by $360 Million costs for harmonizing US and AA labour
workforces
Cost Synergies Estimated annual
benefits
Reasons
Overlapping
Airports
$ 210 Million Overlapping facilities and Airport services
Purchasing $ 130 Million Improved purchasing power and moving to less
expensive contracts
IT and Corporate $ 300 Million Transition from one IT platform to another and
Corporate synergies
Total Cost
Synergies
$ 640 Million
Labour
Harmonization
$ (360 Million) Managing the combining of US and AA workforces
Net Cost
Synergies
$ 280 Million
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Transition related costs related to the merger are less than $ 1 Billion
The merger related costs are One Time
They will be completed in 3 years
DL estimates the 1 time costs to be around $600 Million
Labour integration
History
US Airlines had preliminary meetings with APA, APFA and TWU in March 2002
US Airlines completed binding Conditional Labour Agreements with the above in a
month
In November, AA and UCC asked labour risk mitigation to resolve uncertainty
around the labour integration process
AA, US and UCC began joint negotiations with labour groups in mid December
Historic 4 way Pilot MOU
All AA and US pilots agreed to be bound by the 6 year existing CBA which was
modified by the US CLA. Profit sharing was eliminated and increments $78 Million in
value
After the closure of the merger US pilots will move to the AA CBA, waive all CIC
provisions in their current contracts, receive $40 Million
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The arrangements are made to protect AA and US pilots. US pilots fly US Aircrafts
and AA pilots will fly AA Aircrafts
Seniority integration to be completed post merger based on McCaskill Bond
Legislation
APFA Acknowledgement Letter
Clarification regarding the “me-too” language is not triggered by the merger or the 4
way pilot deal
Clarification that certain pay raises in standalone and CLA are not multiplicative
TWU Acknowledgement Letter
Moves all TWU workgroups onto AA CBAs
Clarification regarding the “me-too” language is not triggered by the merger or the 4
way pilot deal
Commits TWU to seniority integration based on date of hire with US IAM workforce
To In source approximately 1000 standalone jobs that were to be outsourced
Summary
A new paradigm for Management-Labour partnership in the Airline Industry
6 year deals with all AA labour groups are completed
Vast majority of the employees of US and AA support the merger
New American
American Airlines is be retained as name of the merged entity. This entity will enjoy several benefits like of
Lower cost structure and attractive balance sheet
Comprehensive and expanded global network, most attractive network to customers.
Industry leaders in east and central America
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Stakeholders:
Investors:
Cost structure
Lowest non labour cost. Non labour saving of $4.3 billion over five years. Reduced
management headcount by 15% and cost by 17%
i.
ii.
$1.1 billion in average cost saving
Highly competitive labour cost
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iii.
iv.
Retirement and medical benefits
Total cash saving $2.0 billion per year
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Operational efficiency
Flexible to adapt market changes
v.
1. Better growth CAGR
Tap opportunities by broader portfolio
Due to breaded portfolio New airlines will be able to avail various tax opportunities.
Ability to outsource
The new entity will have considerable influence and negotiation power in its ability
to outsource some aspect of work.
Fleet to be replaced by inefficient aircraft (MD80s, 767s) to efficient one (737s and
787s). More earning improvement can be generated by this move.
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Capital structure
Lowest leverage
The combined entity will have a low leverage. This can be come handy in raising new
low cost capital for the new entity.
Better liquidity and financial resilience to bear market volatile.
Due to low liquidity the new entity will be resilient to market volatilities and will
have a better liquidity position in the market.
Eliminated $2.5 billion of taxes resulting earning of $1.3 billion in interest and
principals.
As mentioned above also this merger due to operation and financial synergies will
lead to huge jump in income for shareholders.
Net debt level will be reduced by 30%
The net debt of entity will be reduced by 30%
vi.
Highest liquidity in the industry, resulting new investments, future growth and
maintain flexibility to adapt changes.
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High liquidity will fuel near term growth expansion for the merged entity as will help
to be more flexible to market volatilities
Increase in profitability and EBIT margins
vii.
High value customers:
Global network
Hubs in high density of these customers. 139 of fortune 500 companies are located in AA
network.
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i.
International network. Growth is focused on most attractive markets like Asia and
Latin south.
Diversification of presence in these regions.
Building American’s brand leading positions.
Strong ties in Europe and Asia.
ii.
iii.
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Customer experiences
Up gradation in product and services: The merger will allow for the merged entity to
offer all three classes of service.
Better connectivity
This will be result of operational efficiency emerging due to the merger.
Comfortable total travel experience
Fleet and better facility.
Safety concerns for customers.
American will have youngest fleets of all in the industry.
iv.
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Deal StructureUnder the terms of the merger agreement, at the time of closing each outstanding share of common stock of US Airways would be exchanged for one newly issued share of common stock of AMR Corporation and stakeholders of AMR Corporation and its debtor subsidiaries will receive newly issued shares of AMR Corporation’s common stock.
As a result, US Airways shareholders will own 28 percent, and stakeholders of AMR Corporation and its debtor subsidiaries will own 72 percent, of the fully-diluted common stock of the merged company.
The merger is expected to be completed in the third quarter of 2013. The deal when discussed was assumed to be around $11 billion but as per current market share value has reached a value of $14.4 billion.
Key important dates in the merger are
Date Title06/10/13
Final S-4 Proxy Statement (as mailed to US Airways shareholders)
04/17/13
Merger-Related Information for Investors (FAQ's)
02/14/13
American Airlines And US Airways To Create A Premier Global Carrier -- The New American Airlines
02/14/13
NewAmericanArriving.com
02/14/13
AMR Merger Investor Presentation
Issues in deal
Antitrust issuesThe U.S. Justice Department is taking depositions as part of its probe into a planned merger of American Airlines and US Airways to ascertain weather the merger will create some antitrust issue or not.
The sticking point in deal is whether the airlines will agree to sell slots of take-off and landing rights so as to reduce their dominance at Reagan National Airport outside Washington, D.C. There may be a case that the department may give a go ahead to deal without acquisition of assets.
While US Airways and American overlap on only 12 nonstop routes, no other nonstop competitors exist on 7 of those 12. Analysis of 2011 and 2012 ticket data also shows that combining these airlines would result in a loss of one effective competitor in 1,665 airport-pair markets affecting more than 53 million passengers while creating a new effective competitor in 210 airport-pairs affecting 17.5 million passengers. However, the great majority of these markets also have other effective competitors.
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Also, U.S. Bankruptcy Judge Sean Lane declined to approve, a planned $19.9 million severance package for Tom Horton, AMR's outgoing chief executive.
Leadership Structure of new entity
W. Douglas Parker - Chief Executive Officer
Doug Parker is chairman and chief executive officer of US Airways Group, Inc. and US Airways, its principal subsidiary company.
Scott Kirby - President
Scott Kirby is president of US Airways Group, Inc. and US Airways, its principal subsidiary company.
Elise Eberwein - Executive Vice President, People and Communications
Elise Eberwein serves as executive vice president, people, communications and public affairs for US Airways Group, Inc. and US Airways, its principal subsidiary company.
Beverly Goulet - Chief Integration Officer
Beverly K. “Bev” Goulet was named Chief Restructuring Officer of American Airlines in December 2011
Robert Isom - Chief Operating Officer; Chief Executive Officer of US Airways post-close
Robert Isom serves as executive vice president and chief operating officer for US Airways Group, Inc. and US Airways, its principal subsidiary company.
Stephen L. Johnson - Executive Vice President, Corporate Affairs
Steve Johnson is executive vice president, corporate and government affairs for US Airways Group, Inc. and US Airways, its principal subsidiary company.
Derek Kerr - Chief Financial Officer
Derek Kerr is executive vice president and chief financial officer for US Airways Group, Inc. and US Airways, its principal subsidiary company.
Maya Leibman - Chief Information Officer
Maya is Senior Vice President – Technology and Chief Information Officer of American Airlines.
Will Ris - Senior Vice President, Government Affairs
Ris has been American Airlines’ principal government affairs executive since July 1996.
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Conclusion
With strategy working at each hub and each international region keeping pace with forecast
demand will be lucrative. American Airlines will be the preferred airline for investors. Best in
class profits, strong capital structure and operational efficiency will be preferred choice for
investors. Hubs in right places, renewal of fleets and leading product and services will make
American Airlines to be preferred choice for high value customers. This in whole will create
long term competitive advantage.
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References http://newamericanarriving.com/investors/key-materials/ www.wikipedia.com http://online.wsj.com/article/SB10001424127887324616604578302623840646606.html http://finance.yahoo.com/q/in?s=AAMRQ+Industry http://en.wikipedia.org/wiki/Chapter_11,_Title_11,_United_States_Code http://www.nbcnews.com/business/court-approves-american-airlines-us-airways-merger-
2B9117378 http://www.reuters.com/article/2013/03/27/us-americanairlines-usair-court-
idUSBRE92Q17L20130327 http://www.gao.gov/products/GAO-13-403T
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