American Airlines / US Airways merger wins court approval

May 2013 | DEALFRONT | BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

In a move that has been defined as a ‘watershed event’ for the AMR Corporation, the proposed merger of American Airlines and US Airways won the approval of a Manhattan bankruptcy court in late March. The merger, which needs to be ratified by antimonopoly authorities, is expected to close in the third quarter of 2012, creating the world’s largest airline by passenger numbers, with a market value of approximately $11bn.

In order to win the approval of both the court and the company’s creditors, however, AMR must still submit a formal restructuring plan incorporating the merger.

Despite the amalgamation of the airlines winning the approval of Judge Sean Lane, the $20m severance package of Tom Horton, chief executive officer of AMR, has not been approved. Judge Lane, who is due to issue a written decision explaining his reasoning, noted that while “the merger is a terrific result” he felt that approving Mr Horton’s severance package “is just not appropriate”. The severance package is due to be paid – half in cash and half in stock – following the closure of the merger. US government officials have been critical of the severance package, claiming that it violates bankruptcy laws. Accordingly, the draft of the merger agreement may now have to be amended to remove any reference to the severance package. Judge Lane also indicated that he is unsure if Mr Horton’s package required his approval, or if it would be more appropriate for the package to be included in the formal restructuring plan due to be submitted by AMR.

AMR and US Airways said in a joint statement “Judge Lane’s approval of the merger agreement today allows us to continue progressing forward with our planned merger and we are gratified to know that he considers the merger an ‘excellent result’ for stakeholders”. Under the terms of the agreement, and somewhat bucking the trend of other recent airline bankruptcies, AMR’s creditors will recover 100 percent of what they are owed. Equity holders in the old AMR will also take 3.5 percent of the new company. Stephen Karotkin of Weil, Gothsal & Manges LLP, acting on behalf of AMR, noted that the agreed payments to creditors and bondholders are “unprecedented involving a Chapter 11 case of legacy airlines”. AMR’s equity holders and other creditors will control the remaining 72 percent of the company which US Airways does not own.

The approval of the merger, originally announced in February, is a significant step for AMR which entered Chapter 11 protection in November 2011 in order to drastically reduce its operating and labour costs. The group had laboured in vain for many years, trying to negotiate cost savings from its unionised workforce. The Allied Pilots’ Association – the American Airlines pilots’ union which was a key advocate of the merger – has welcomed the deal. AMR was the last major US airline to undergo bankruptcy proceedings, after its contemporaries all underwent the procedure throughout the last decade.

In an attempt to keep a lid on costs, the airlines, which will operate under the American Airlines name, plan to combine systems, maintenance facilities and gates at some airports. They also intend to continue operating all of their existing hubs and serving their established routes. The new AMR will also run only one management team. Doug Parker, chief executive of US Airways, will serve as chief executive of the new company. Mr Horton will remain as non-executive chairman until the company’s first annual meeting of shareholders in spring 2014. Following that meeting he will leave the company, with Mr Parker replacing him as chairman.

According to Mr Parker, the agreed merger would not have been possible without AMR undergoing extensive restructuring, and the bankruptcy filing and restructuring has drastically cut the group’s costs. In 2012 AMR made an operating profit of $107m on revenue of $24.9bn for the year. However, the group reported a net loss of $1.88bn following restructuring costs.

Richard Summerfield