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

Page 2

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

Page 3

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.

Page 4

American airlines and US airways merger

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.

Page 5

American airlines and US airways merger

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:

Page 6

American airlines and US airways merger

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

Page 7

American airlines and US airways merger

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:

Page 8

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.

Page 9

American airlines and US airways merger

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

Page 10

American airlines and US airways merger

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.

Page 11

American airlines and US airways merger

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.

Page 12

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.

Page 13

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:

Page 14

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

Page 15

American airlines and US airways merger

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.

Page 16

American airlines and US airways merger

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:

Page 17

American airlines and US airways merger

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

Page 18

American airlines and US airways merger

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

Page 19

American airlines and US airways merger

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

Page 20

American airlines and US airways merger

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

Page 21

American airlines and US airways merger

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

Page 22

American airlines and US airways merger

iii.

iv.

Retirement and medical benefits

Total cash saving $2.0 billion per year

Page 23

American airlines and US airways merger

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.

Page 24

American airlines and US airways merger

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.

Page 25

American airlines and US airways merger

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.

Page 26

American airlines and US airways merger

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.

Page 27

American airlines and US airways merger

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.

Page 28

American airlines and US airways merger

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.

Page 29

American airlines and US airways merger

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.

Page 30

American airlines and US airways merger

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.

Page 31

American airlines and US airways merger

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

Page 32