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Friday, December 07, 2012 3:43:36 PM
By MIKE SPECTOR And JACK NICAS
US Airways Group Inc. LCC +1.35% last month sent a merger proposal to American Airlines parent AMR Corp. AAMRQ +6.47% and its creditors suggesting US Airways CEO Doug Parker run a combined airline that could be worth more than $8 billion, said people close to the discussions.
The proposal, sent in mid-November, suggests an all-stock deal that gives American's creditors 70% of the new airline and US Airways shareholders 30%, the people said.
Representatives for American, the No. 3 U.S. airline by traffic, and its creditors committee have been studying the proposal for several weeks. American's creditors committee represents the company's three labor unions, trustees for bondholders and others, and can frustrate restructuring plans should the airline pursue a path it doesn't support.
American, meanwhile, is pursuing a plan to emerge from bankruptcy proceedings as an independent airline. Still, the US Airways proposal was serious enough for American and the creditors to continue negotiating toward a possible deal, people close to the discussions said.
On Friday, Fort Worth, Texas-based AMR crossed off the final major task on its Chapter 11 to-do list as unionized pilots approved a new labor contract. The resolution of years of contentious negotiations could give American a clearer grasp on labor costs.
More than 7,400 pilots voted 74% to 26 % to accept their first new contract since 2003. More than 96% of eligible pilots voted.
With the pilots contract, AMR has secured voluntary agreements with all nine of its unions and reduced ranks in other, nonunionized work groups and management for a 17% reduction in labor costs, or more than $1 billion in annual savings.
"We are pleased our pilots supported and ratified this agreement, which is an important step forward in our restructuring," AMR said in a statement. "Today's ratification gives us the certainty we need for American to successfully restructure, providing opportunity and growth for all of our people and stakeholders."
Creditors of American aren't currently concentrating on who leads a combined or independent airline, instead focusing on which deal gives them the best financial benefits, said a person familiar with their thinking. Still, they are cognizant that American's unions, especially its pilots, have been dissatisfied with current management.
A group of American bondholders in November assured the carrier's pilots that they would only support a stand-alone restructuring for American if the company installed a new board that selects a management team best for shareholders.
US Airways' merger proposal didn't specify values for either airline, the people said. But a marriage of the two could create an airline big enough to rival the world's two largest carriers by traffic, United Continental Holdings Inc. UAL -0.07% and Delta Air Lines Inc., DAL +1.00% which have market capitalizations of roughly $6.7 billion and $8.5 billion, respectively.
US Airways values itself at around $2.5 billion, taking into account the airline's current market capitalization and shares that would be issued from convertible securities, according to people familiar with the Tempe, Ariz.-based airline's thinking. Taking into account US Airways' proposed 70-30 ownership split, American could be worth roughly $5.83 billion and the combined carrier about $8.33 billion.
AMR Chief Executive Tom Horton told creditors they deserve more than 70% of a combined airline during a meeting in mid-November, and creditors agree, with some even suggesting they should get closer to 80%, according to people familiar with the discussions.
A larger share for American creditors would value American higher. People close to American believe the airline could be increasingly valuable with lower labor costs and additional revenues that could come from changes to labor contracts dealing with how pilots fly, among other things.
The discussions among American, its creditors and US Airways are expected to continue into next year, and the dynamics of the negotiations haven't changed much since mid-November, said people close to the process.
With a US Airways merger, American remains concerned about unexpected costs that could emerge when integrating the two airlines' workforces, according to people familiar with airline's thinking. Creditors, meanwhile, likely will want to see more details of American's stand-alone restructuring plan to compare it with US Airways' proposal. Both have some doubts about US Airways' current value, people familiar with the matter say.
AMR filed for bankruptcy protection in November 2011, citing uncompetitive costs. Under some pressure from creditors, American at the end of August started discussing a possible merger with US Airways, a rival in hot pursuit of a marriage all year.
US Airways has publicly promoted the benefits of a merger all year, telling investors it could reap $1.2 billion in additional revenue and cost savings and even negotiating tentative deals with American's three labor unions on how they'd be treated in a marriage. American has expressed doubts about those financial benefits during merger discussions, people familiar with the matter have said.
http://online.wsj.com/article/SB10001424127887324001104578165442108841724.html
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