AMR, US Airways, announce merger plans; AMR creditors to be made whole

By Paul Deckelman

New York, Feb. 14 - Bankrupt airline giant AMR Corp. and its smaller, but more solvent industry peer U.S. Airways Group, Inc., announced plans Thursday for a merger of the two companies, vindicating months of speculation by bond market participants and other investors that such a combination would eventually happen.

Under the terms of the agreement, American Airlines parent AMR's creditors and other stakeholders would own 72% of the combined company, with U.S. Air shareholders getting the remaining 28%. AMR's creditors are expected to be made whole under the agreement, with AMR's president and chief executive officer, Thomas Horton, saying on a morning conference call with analysts following the official announcement that the goal was to give the creditors "par plus accrued [interest]."

The official announcement of the deal said that so-called "double dip" creditors - i.e. the holders of prepetition unsecured claims as to which both AMR and American Airlines are obligors, either directly or indirectly - will receive shares of mandatorily convertible preferred stock equal to the full amount of their claims. These shares will convert into common stock of the combined airline at 30-day intervals during the 120-day period following the effective date of the restructuring plan, based on a formula tied to the market price of the common stock of the combined airline.

So-called "single dip" creditors - those holders of prepetition unsecured claims that are not guaranteed as the "double-dip" holders' claims are - will receive a combination of shares of the same class of mandatorily convertible preferred stock as the "double dip" creditors will receive, and shares of common stock of the combined airline.

AMR said that its labor unions and other employees will receive an aggregate of 23.6% of the common stock of the combined airline ultimately distributed to holders of prepetition unsecured claims against the debtors.

Horton also noted that even its existing shareholders will get a piece of the new company, something which usually doesn't happen in bankruptcy cases.

'Really quite extraordinary'

He said that AMR had reached accord with a group of its creditors on a support agreement that would provide for the current shareholders to get 3½% of the equity of the new company. He declared that "having the unsecured creditors fully satisfied and having equity created for the existing shareholders is, as you know, really quite extraordinary."

On top of that, he added, "once the unsecured creditors are fully satisfied - par plus accrued - any incremental value that gets created over a certain period, goes to the equity holders, over and above that 3½%. So it's really quite an interesting construct and has the potential to be quite a good deal for our creditors, but also our existing shareholders, which is very unusual."

Before any of this can happen, the deal must be approved by, among others, AMR's creditors and the U.S. Bankruptcy Court for the Southern District of New York, in Manhattan, where Fort Worth, Texas-based AMR sought protection from its bondholders and other creditors via a Chapter 11 filing on Nov. 29, 2011. With that filing, AMR became the latest and the largest of a series of U.S.-based airlines seeking to restructure their debt-bloated balance sheets and shed burdensome labor contracts and other obligations, a list that included such rivals as UAL Corp. Delta Air Lines, Inc. and the former Northwest Airlines Corp.

$1 billion of synergies

Horton further said on the conference call that the new company would operate "from a strong financial foundation, with the power of American's restructuring, enhanced by more than $1 billion in annual net synergies through this combination. Most of this amount will be coming from the revenue generated by our combined network and our more flexible fleet. That, coupled with our competitive cost structure, will drive sustainable profitability going forward."

When AMR entered into bankruptcy and for many months thereafter, Horton and other company executives said that their game plan was to restructure the former Number-1 U.S. air carrier's finances as quickly as possible, emerge from bankruptcy and continue operations as an independent company. Merger with Number-5 carrier U.S. Air was occasionally mentioned in the financial media.

Although AMR officially held Tempe, Ariz.-based U.S. Air and its hard-charging chairman and CEO, Douglas Parker - a strong proponent of continued airline industry consolidation - at arm's length, that position eventually softened - no doubt helped by the fact that Horton and Parker were long-time friends who, in fact, both began their airline industry careers over 25 years ago as young trainees in AMR's finance department.

Horton proclaimed that the "the AMR board's rigorous and extensive evaluation of alternatives concluded that with our own house in order [as a result of the bankruptcy restructuring], this merger is the best path forward to make the new American even stronger."

In terms of the number of domestic and international routes served, the number of passengers carried and the size of its fleet, the merger deal, creating a company with a market value of over $11 billion, with anticipated revenues of over $40 billion annually, jumps it over the previously larger rivals created by the mergers of UAL and the formerly independent Continental Airlines and the merger of Delta and the former Northwest several years ago.

Besides approval from the AMR creditors and the bankruptcy judge, the merger deal will require approval from U.S. Air's shareholders, as well as U.S. and international regulators. Horton and Parker said during their conference call that they doubted there would be any regulatory roadblocks, since there is relatively little overlap between the two companies' existing routes and service territories.

Horton will become chairman of the combined company and Parker the CEO. Corporate headquarter will remain in Fort Worth, AMR's base, with what is being termed a "significant corporate and operations presence" in Phoenix, currently U.S. Air's home turf. The combined company will be called American Airlines Holding Co. and its combined fleet will fly under the venerable and iconic American Airlines name.

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