A merger of bankrupt American Airlines and US Airways would generate at least USD$1.2 billion a year in new value beyond the benefit that could be passed to employees of the combined carrier, the president of US Airways said on Wednesday.
Speaking about US Airways’ first-quarter earnings, Scott Kirby said a merger of his carrier and American parent AMR would generate more savings and revenue improvements than AMR’s plan could produce on its own.
“There is a tremendous amount of value created by merging US Airways and AMR, and we can and should use a portion of that to give employees more than AMR can on a stand-alone basis,” Kirby said.
US Airways has not made a bid for AMR but said it hopes to start merger talks with its reluctant rival, which is restructuring in Chapter 11.
AMR so far has shunned interest from US Airways, which has already won the support of AMR unions. The unions say that casting their lot with US Airways than with AMR alone can save more jobs.
An AMR spokesman declined to comment on Kirby’s estimates. The company’s CEO, Tom Horton, has said US Airways’ interest would not alter AMR’s efforts to formulate its own, stand-alone restructuring plan in bankruptcy.
At a hearing on Wednesday in US bankruptcy court in Manhattan, AMR’s financial adviser, Rothschild managing director David Resnick, said the company needs its own plan against which to measure alternatives such as merger offers.
“In my view, it makes no sense to put all your eggs in one basket, to pursue one alternative without looking at an array of options,” Resnick said during testimony. “The base case against which to compare alternatives is a stand-alone plan. Then, from there, you can compare other options.”
But Resnick acknowledged that AMR might ultimately consider a merger because the company has a fiduciary duty to seek maximum recovery for its creditors.
THE FATE OF EMPLOYEE CONTRACTS
The merger debate has assumed greater importance as AMR and its unions fight over a company business plan that contemplates cutting 13,000 union jobs. The plan seeks USD$1.25 billion in annual savings from AMR’s workforce, including USD$990 million a year from its unions.
AMR has asked the bankruptcy court for permission to abandon its current agreements altogether and unilaterally impose interim terms as negotiations for long-term deals continue. That request is the subject of a court-hearing this week in which a handful of witnesses, including Resnick and AMR restructuring chief Bev Goulet have testified.
For its request to be approved, AMR must show that it explored alternatives to avoid abandoning union deals. Unions argue the company has not sufficiently explored the alternative of a merger.
US Airways said it could avert 6,200 of AMR’s proposed job cuts and still derive USD$1.2 billion in improvements.
Kirby said the US Airways plan would “generate significant cost savings even though we wouldn’t shrink the combined airline.”
Savings would come from reducing or eliminating facility space and management headcount. He said other savings could be achieved by combining computer systems and through the improved purchasing power of a larger airline.
US Airways on Wednesday reported net profit of USD$48 million in the quarter, compared with a net loss of USD$114 million a year earlier.
LONG WAY TO GO
AMR’s bankruptcy hearing is expected to last at least until the end of the week, but resolution could be weeks away.
When the hearing ends, the company and its unions will have two weeks to negotiate consensual deals. If the period lapses without new deals, the unions will have a chance to present their case in court in May. Judge Lane would then be expected to issue a ruling in June.
AMR witnesses have generally said the company’s business plan, focused on beefing up its international presence and updating its aircraft fleet, will not make it profitable unless augmented by major concessions.
Resnick testified that without a cost-effective structure, AMR may not gain the high credit ratings and access to capital markets that it needs to finance its business plan.
Resnick has said the proposed staff cuts are the “absolute minimum” necessary to make AMR viable after bankruptcy, an opinion that garnered ample attention from union lawyers during Resnick’s cross-examination.