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American, US Airways to Merge

Deal Would Create Largest Air Carrier

The parent company of bankrupt American Airlines and its dogged suitor, US Airways, will announce a merger today, creating the world’s largest air carrier and putting 86 percent of domestic air travel in the hands of four big airlines.

The merger plan was approved by the boards of both companies, ending months of negotiation that began with executives at AMR, the holding company for American, giving a frosty response to the initial overture from US Airways.

Described as the last mega airline merger in a decade of consolidation, the marriage will see the US Airways brand consigned to the dust bin of aviation history alongside Pan Am, TWA, Eastern Airlines, Northwest and Continental.

The agreement was first reported by other news organizations; a person familiar with the negotiations confirmed the deal to The Washington Post.

The merger rescues American from bankruptcy and marries the much smaller US Air into a partnership with the muscle to compete with Delta Air Lines and United Airlines, both of which have grown through recent mergers.

Together with Southwest Airlines, the big low-cost carrier, the foursome would dominate passenger travel in the United States.

The merger may lead to new competition at the one major airport where US Air and American have significant overlap: Reagan National Airport in Arlington, Va., just outside Washington. US Air and American together control almost 68 percent of the flights at National.

As for the affect on consumers, “I don’t think it’s going to impact air fares significantly,” said William S. Swelbar, a researcher at the MIT International Center for Air Transportation. “I think that we’re seeing a dynamic already where the airlines are passing on the increased cost of fuel and labor to the consumer. I’m not prepared to see egregious gouging by the airline industry just because of this merger.”

Analysts see the two airlines as a good match, with US Airways’ strength in the eastern part of the country and American’s greater influence in the West and with global destinations. But Swelbar said federal regulators may object to their domination at National.

“American and US Airways control the lion’s share of slots at National,” Swelbar said. “I expect that the regulators will force a combined American-US Airways to divest themselves of some of the slots, and competitors would be free to compete for those available slots.”

He said Southwest and Jet Blue are likely to show particular interest in grabbing more passenger share at National.

While airline consolidation may sound ominous to consumers who have benefited from competitive air fares, some analysts counter that the trend that had Delta swallowing Northwest Airlines, United merging with Continental, Southwest absorbing Air Tran and, now, American partnering with US Airways has stabilized a troubled industry.

“I think people are going to frame this as fares going up, and that’s bad for the public,” said Joshua Schank, president of the nonprofit Eno Center for Transportation. “But it has economic benefits for a country to be able to have a stable airline industry. That may outweigh the slight increase in fares, and, historically, fares are still low, and more people are flying.”

Though the new airline would operate under the American banner, the deal was a triumph for US Air, which forced American’s hand after the larger airline slipped into bankruptcy in November 2011. The merger will need to be approved by a New York bankruptcy judge and federal regulators.

As American’s management dug in its heels, seeking to emerge from bankruptcy before entertaining merger talks, they were outflanked by US Airways, which won over three key union groups at American.

With that union support as leverage, US Airways persuaded American’s creditors that a merger was the only way to compete with Delta and United. Those creditors pressured American’s board for the deal, and they will end up with 72 percent of the new airline, while US Airways shareholders get 28 percent.

“I don’t think, realistically, that either of these airlines was going to survive without merging,” Schank said. “American was in the worst position of the two, simply because they’re in bankruptcy and they’re having challenges with their unions negotiating their way out of bankruptcy.”

The final days of negotiation leading to Wednesday’s vote focused on finding a role in the new structure for American’s chairman, Tom Horton, according to someone familiar with the talks. They finally agreed that Horton would served a limited term as the combined airlines chairman, but that the task of running the airline would be given to the architect of the merger, US Airways chief executive Doug Parker.

With 950 planes and 94,000 employees, the new company would be based in Fort Worth, Texas. It would retain key hubs in Phoenix, Charlotte, N.C., Philadelphia, Chicago, Dallas-Fort Worth, Miami, New York and Los Angeles, with 6,500 daily flights.

Swelbar said that with just 14 percent of the market held by airlines other than the big four, this deal would be the last mega airline merger.

Still, Schank said, this merger’s thin profit margins could create stiff competition.

“If oil prices continue to go up, yes, we’re going to have to look for other ways to consolidate, reduce costs, increase fares,” he said. “I would expect that eventually we will get to the point where we’re talking about two or three carriers rather than four or five. The other big factor is the economy. If it remains where it’s been - good but not great - consolidation may be something they just have to do to survive.”

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