American Airlines–US Airways merger
Content
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 Conclusion ............................................................................................................................................. 31 References ............................................................................................................................................ 32
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American airlines and US airways merger
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 1 2 3 4 5 6 Airport Dallas/Fort Worth, Texas Chicago-O'Hare, Illinois Miami, Florida Los Angeles, California Flights 764 501 294 159
New York-LaGuardia, New York 102 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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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.
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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:
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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
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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:
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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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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 West AA Continental Delta 3 1 4 Central 1 5 6 East 3 4 1 West 4 2 3 2011 Central 4 2 1 East 5 2 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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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.
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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.
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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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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.
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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:
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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 $350 Million Flier benefit programme Fleet Optimization $310 Million
Increased passenger Loyalty
Optimum
utilization
of
fleet
which
correlates to lower costs and higher revenue Other Passenger related costs $120 Million $ (80 Million) Hub-to-hub flying of regional jets
Total Network Synergies
$ 1.12 Billion
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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 Reasons benefits
Overlapping Airports Purchasing
$ 210 Million
Overlapping facilities and Airport services
$ 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 Synergies Labour
Cost $ 640 Million
$ (360 Million)
Managing the combining of US and AA workforces
Harmonization Net Synergies Cost $ 280 Million
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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
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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
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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
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American airlines and US airways merger
iii.
iv.
Retirement and medical benefits Total cash saving $2.0 billion per year
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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.
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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.
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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.
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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.
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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.
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American airlines and US airways merger
Deal Structure
Under 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 Title 06/10/13 Final S-4 Proxy Statement (as mailed to US Airways shareholders) 04/17/13 02/14/13 02/14/13 02/14/13 Merger-Related Information for Investors (FAQ's) American Airlines And US Airways To Create A Premier Global Carrier -- The New American Airlines NewAmericanArriving.com AMR Merger Investor Presentation
Issues in deal
Antitrust issues
The 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. 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.
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American airlines and US airways merger
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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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.
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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-merger2B9117378 http://www.reuters.com/article/2013/03/27/us-americanairlines-usair-courtidUSBRE92Q17L20130327 http://www.gao.gov/products/GAO-13-403T
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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 Conclusion ............................................................................................................................................. 31 References ............................................................................................................................................ 32
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American airlines and US airways merger
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 1 2 3 4 5 6 Airport Dallas/Fort Worth, Texas Chicago-O'Hare, Illinois Miami, Florida Los Angeles, California Flights 764 501 294 159
New York-LaGuardia, New York 102 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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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.
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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:
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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
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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:
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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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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 West AA Continental Delta 3 1 4 Central 1 5 6 East 3 4 1 West 4 2 3 2011 Central 4 2 1 East 5 2 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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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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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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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 $350 Million Flier benefit programme Fleet Optimization $310 Million
Increased passenger Loyalty
Optimum
utilization
of
fleet
which
correlates to lower costs and higher revenue Other Passenger related costs $120 Million $ (80 Million) Hub-to-hub flying of regional jets
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 Reasons benefits
Overlapping Airports Purchasing
$ 210 Million
Overlapping facilities and Airport services
$ 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 Synergies Labour
Cost $ 640 Million
$ (360 Million)
Managing the combining of US and AA workforces
Harmonization Net Synergies Cost $ 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 Structure
Under 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 Title 06/10/13 Final S-4 Proxy Statement (as mailed to US Airways shareholders) 04/17/13 02/14/13 02/14/13 02/14/13 Merger-Related Information for Investors (FAQ's) American Airlines And US Airways To Create A Premier Global Carrier -- The New American Airlines NewAmericanArriving.com AMR Merger Investor Presentation
Issues in deal
Antitrust issues
The 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. 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.
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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-merger2B9117378 http://www.reuters.com/article/2013/03/27/us-americanairlines-usair-courtidUSBRE92Q17L20130327 http://www.gao.gov/products/GAO-13-403T
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