The Merger of American Airlines and US Airways
Order ID 8342176225 Subject Finance Topic case study Type Case Study Writer level University Style APA Sources / references 5 Language English(U.S.) Description / paper instructions
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American Airlines and US Airways Merger
Professor John D. Sullivan, PhD
Boston University of Massachusetts
Background
The New York Times reported on February 13, 2013 that US Airways and American Airlines agreed to merge to create the largest airline in the United States.
[1] To announce the merger of US Airways and American Airlines on the following day, The Onion ran a satirical piece reporting that “American Airlines, US Airways to Form World’s Largest Inconvenience.” [2] This emphasis highlights the almost unanimous belief that the level of service and quality of travel has significantly decreased in the last two decades.
Even though American had been in bankruptcy since 2011 and had suffered total losses of more than $12 billion since 2001, the transaction was unclear because the value was not appropriate even though both companies’ boards of directors had approved it. In the new company’s structure, shareholders with a 28% stake in the airline will be US Airways stockholders, while those with an equity stake of 72% will be American Airlines stockholders, creditors, employees, and unions. [3]
In the end, did the courts serve in the best interest of American Airlines creditors and shareholders? In other words, the price had to be reasonable with the appropriate benefits for US Airways shareholders, or the transaction would not be equitable for the shareholders. It is apparent that the U.S. was in desperate need of a partner during the bankruptcy process, but it is unclear as to the risks it could face as a result of the partnership.
on a worldwide scale
American Airlines and its subsequent subsidiaries, including its initial precursor, began operations in 1934 and by 1974 provided service to locations throughout North America, the Caribbean, Latin America, Europe, and Asia. For the most part, the company and its subsidiaries (which includes subsidiaries) each operated about 3,400 flights each day to 250 different cities and countries. They had a network fleet of 900 aircraft in all. Combined resources serve more than 800 destinations in over 150 countries and nearly 900 daily flights as part of the oneworld airline network. [4] American is also one of the world’s largest carriers of freight and mail.
A major area of competition in the domestic airline industry is the industry itself. By adopting this method, the majority of the U.S. carriers use a hub-and-spoke system to maximize route and aircraft utilization, which results in more routes and aircraft being utilized and higher revenue due to asset utilization strategies that rely on fixed assets. The United States operates on a business model that is based on five main distribution hubs: Dallas/Fort Worth, Chicago O’Hare, Miami, New York City, and Los Angeles. American Eagle is utilized outside of its primary target markets to access smaller or lesser served markets. Airlines compete on the basis of service level.
In the United States, the competition is usually between one or several airlines. Alaska Airlines, Delta Airlines, Frontier Airlines, Hawaiian Airlines, Jet Blue Airways, Southwest Airlines, Spirit Airlines, United Airlines, US Airways, Virgin America Airlines as well as some smaller regional carriers are all currently in competition with each other inside the United States.
In 2012, 2011, and 2010, flights to international destinations comprised approximately 40% of an airline’s total revenue. They have to deal with competing airlines, both private and public, as well as the state owned airlines. These days, you will likely be going to the Caribbean, Canada, Latin America, Europe, and Asia for your vacations. Following these new partnerships, the company has strengthened its connections with these carriers, including Air Berlin, Air Pacific, Air Tahiti Nui, Alaska Airlines, British Airways, Cape Air, Cathay Pacific, Dragonair, EL AL, Etihad Airways, EVA Air, Finnair, Gulf Air, Hainan Airlines, Hawaiian Airlines, Iberia, Japan Airlines, Jet Airways, JetStai Airways, LAN, Malaysia Airlines, Niki Airlines, Qantas Airways, Qatar Airways, Royal Jordanian, S7 Airlines, and WestJet. [5]
For domestic rates, carriers could establish their own fares, fees, and charges; however, the federal government still controlled certain international prices and charges.
Despite a decade of prosperity and profitability that resulted from deregulation of the U.S. banking system after the end of the age of the U.S. banking system, the United States began to fall behind after 2008, and as of November 29, 2011, the United States sought bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York (Case No. 11-15463-SHL). Due to “debtor in possession” financing, the business will continue to exist for the time being. Bankruptcy has triggered an automatic default on the majority of the company’s debt obligations, while providing protections for the company’s assets during this time period. The bankruptcy code shields both existing assets and provides the company with a chance to continue operations after it emerges from bankruptcy. The court considers several critical vendors, including employees, taxing authorities, insurance providers, independent contractors, joint venture partners, and other vendors. [6]
Performance on the American financial markets in the recent years has been subpar. The company’s 2012 revenue was $24.8 billion, but it lost $1.9 billion. For 2011, total revenues were $24 billion, with American losing $2 billion on that sum. The previous year, total revenues were $22.2 billion, and American lost $469 million on that sum. In 2010, revenues of $19.9 billion were generated in the United States, while only a loss of $1.5 billion was incurred. [7]
the U.S. national airline
While US Airways can trace its routes all the way back to the airlines that emerged following World War II, the company as it exists today is the result of a number of mergers and acquisitions, including deregulation of the industry following the administration of US President Ronald Reagan. The US Airways Group is based in Tempe, Arizona, and operates US Airways, Piedmont Airlines, MSC, and Airways Assurance Limited (AAL). “MSC and AAL support our airline subsidiaries in areas such as procurement of aviation fuel and insurance.” —The 2012 Annual Report or SEC form 10K [8]
US Airways Group, which was formed in Delaware in 1982, is the present company. Even after the implementation of economies of scale from mergers with other competitors, US Airways was still forced to undergo bankruptcy, which had never occurred previously due to deregulation. As of September 27, 2005, after emerging from bankruptcy protection, US Airways Group merged with America West Holdings Corporation to form the surviving corporation, now known as US Airways Group. [9]
The fifth largest airline in the US based on revenue per domestic passenger miles and available seat miles is currently operated by US Airways. US Airways operates under a hub and spoke system with major hubs in Charlotte, Philadelphia, and Phoenix. Ronald Reagan Washington National Airport serves as a second major focus. Air Canada’s 3,000 daily flights serve 198 domestic, Canadian, Mexican, European, Middle Eastern, Caribbean, and South American destinations. The company offers seasonal and regularly scheduled service to over 130 airports, with overlapping service to over 100 airports for the airline’s US Airways Express carriers.
In the past three years, US Airways has earned $856 million in operating income on $13.8 billion in total revenues. They did so in 2012 by making $426 million in operating income on $13.1 billion in total revenues, and in 2011 by earning $781 million in operating income on $11.9 billion in total revenues.
[10] (Figure 3)
US Airways completed its transaction with Delta Airlines at the end of 2011. The airline made a major change by returning to its hub and spoke system. US Airways operates a shuttle service that connects LaGuardia in New York with Washington National in Washington D.C.
US Airways operated approximately 340 mainline aircraft as of December 2012. The number of smaller regional jets and turboprops operated by US Airways Express was 238 and 44, respectively.
Similarly, US Airways, too, concluded that the industry was extremely competitive. To keep prices low, several destinations had various discount and promotion strategies that were intended to attract people when business volumes were lower during the year. For some routes, US Airways operated a significantly greater number of flights in the eastern United States than most other airlines, with significantly shorter trip durations. As a result, the firm believed that it could be more vulnerable to competition such as trains and automobiles in times of economic recession or customer expenditure changes.
US Airways also feared that the failure to complete the merger could have a negative impact on their business. US Airways must pay a termination fee of $55 million or up to $195 million under certain circumstances as outlined in the Merger Agreement if the deal is not completed. While the agreement was still in place, the company was forbidden from negotiating with other airlines for any other strategic options. Even if the two companies merged, the associated costs would be added regardless. Administrative expenses are ones that are typical with a deal of this size. Finally, the management team would require
US Airways Group, Inc. Assets (in millions) 2012 2011 Assets Current Assets Cash $2,276 $1,947 Investments $100 $0 Accounts Rec. $298 $327 Materials & Supplies $300 $235 Prepaid Expenses $608 $540 Total Current Assets $3,582 $3,049 Property & Equipment Flight Equipment $5,188 $4,591 Ground Property $1,005 $907 Less Depr.\Amort ($1,733) ($1,501) $4,460 $3,997 Equipment Deposits $244 $153 Total Property & Equip $4,704 $4,150 Other Assets Other Intangibles, net $539 $543 Restricted Cash $336 $365 Other Assets $235 $228 Total Other Assets $1,110 $1,136 Total Assets $9,396 $8,335
Exhibit 2
US Airways Group, Inc. Liabilities & Equity (in millions) 2012 2011 Liabilities Current Liabilities Current Maturities $417 $436 Accounts Payable $366 $386 Air Traffic Liability $1,054 $910 Accrued Comp $258 $176 Accrued Taxes $181 $163 Other Accrued Exp. $1,027 $1,089 Total Current Liabilities $3,303 $3,160 Non Current Liabilities Long Term Debt\Cap Leases $4,376 $4,130 Deferred gains\credits $290 $307 Post Retirement Benefits $172 $160 Employee Benefits\Other $465 $428 Total noncurrent Liabilities $5,303 $5,025 Total Liabilities $8,606 $8,185 Shareholder Equity Common Stock $2 $2 Paid in Capital $2,134 $2,122 Other Income\Loss ($7) $2 Accumulated Deficit ($1,339) ($1,976) Total Equity $790 $150 Liabilities & Equity $9,396 $8,335
Exhibit 3
US Airways Group, Inc. Consolidated Statements of Operations (in millions) 2012 2011 Operating Revenue Passenger $8,979 $8,501 Express Passenger $3,326 $3,061 Cargo $155 $170 Other $1,371 $1,323 Total Revenue $13,831 $13,055 Operating Expenses Aircraft Fuel $3,489 $3,400 Salaries $2,488 $2,272 Express Expenses $3,162 $3,127 Aircraft Rent $643 $646 Aircraft Maint $672 $679 Other Rent\Landing Fees $556 $555 Selling Expenses $466 $454 Special Items, Net $34 $24 Deprec.\Amort $245 $237 Other $1,220 $1,235 Total Operating Expenses $12,975 $12,629 Operating Income $856 $426 Nonoperating Income Interest Income $2 $4 Interest Expense, net ($343) ($327) Other, net $122 ($13) Total Nonoperating Inc. ($219) ($336) Earnings Before Tax $637 $90
Exhibit 4
US Airways Credit Ratings as of December 2012 S&P Fitch Moody’s US Airways Group B- B- B3 US Airways B- B- * *This credit agency does not rate this category for US Airways Source: 2012 Annual Report 10K, p. 71
Exhibit 5
AMERICAN AIRLINES, INC. DEBTORS AND DEBTORS IN POSSESSION CONSOLIDATED BALANCE SHEETS (in millions, except shares and par value) December 31, 2012 2011 Assets Current Assets Cash $474 $280 Short-term investments 3,408 3,714 Restricted cash and short-term investments 850 738 Receivables, net 1,105 883 Inventories, net 550 583 Fuel derivative contracts 65 97 Other current assets 559 401 Total current assets 7,011 6,696 Equipment and Property Flight equipment, at cost 17,687 17,890 Less accumulated depreciation 7,502 6,981 10,185 10,909 Purchase deposits for flight equipment 710 746 Other equipment and property, at cost 4,993 5,012 Less accumulated depreciation 2,912 2,904 2,081 2,108 12,976 13,763 Equipment and Property Under Capital Leases Flight equipment 287 641 Other equipment and property 200 199 487 840 Less accumulated amortization 205 448 282 392 Other Assets International slots and route authorities 708 708 Domestic slots, net 161 183 Other assets 2,126 1,847 2,995 2,738 Total Assets $23,264 $23,589 Exhibit 6
AMERICAN AIRLINES, INC. DEBTORS AND DEBTORS IN POSSESSION CONSOLIDATED BALANCE SHEETS (in millions, except shares and par value) December 31, 2012 2011 Liabilities and Stockholders’ Equity (Deficit) Current Liabilities Accounts payable $1,212 $981 Accrued salaries and wages 631 489 Accrued liabilities 1,379 1,306 Air traffic liability 4,524 4,223 Payable to affiliates 2,753 2,644 Current maturities of long-term debt 1,388 1,518 Current obligations under capital leases 31 — Total current liabilities 11,918 11,161 Long-Term Debt, net 6,762 6,729 Obligations Under Capital Leases, net 381 — Other Liabilities and Credits Deferred gains 223 110 Pension and postretirement benefits 6,780 9,204 Other liabilities and deferred credits 1,468 1,470 8,471 10,784 Liabilities Subject to Compromise 5,694 3,952 Stockholder’s Equity (Deficit) Common stock – $1 par value, net — — Additional paid-in capital 4,469 4,455 Accumulated other comprehensive loss (3,088) (4,075) Accumulated deficit (11,343) (9,417) (9,962) (9,037) Total Liabilities and Stockholder’s Equity (Deficit) $23,264 $23,589
Exhibit 7
AMERICAN AIRLINES, INC. DEBTORS AND DEBTORS IN POSSESSION CONSOLIDATED STATEMENTS OF OPERATIONS (In millions) Year Ended December 31, 2012 2011 Revenues Passenger – American Airlines $18,743 $17,947 – Regional Affiliates 2,914 2,724 Cargo 669 703 Other revenues 2,499 2,583 Total operating revenues 24,825 23,957 Expenses Aircraft fuel 8,717 7,434 Wages, salaries and benefits 6,242 6,385 Regional payments to AMR Eagle 1,142 2,418 Other rentals and landing fees 1,286 1,305 Maintenance, materials and repairs 1,133 1,020 Commissions, booking fees and credit card expense 1,050 1,062 Depreciation and amortization 999 950 Aircraft rentals 550 673 Food service 535 518 Special charges 386 725 Other operating expenses 2,744 2,637 Total operating expenses 24,784 25,127 Operating Income (Loss) 41.00 (1,170) Other Income (Expense) Interest income (25) 25 Interest expense (662) (689) Interest capitalized 50 40 Related party (13) (14) Miscellaneous – net 243 (41) (357) (679) Income (Loss) (316) (1,849) Reorganization Items, Net (2,179) (116) Income (Loss) Before Income Taxes (2,495) (1,965) Income tax (benefit) (569) — Net Earnings (Loss) $(1,926) $(1,965) ©2013 John D Sullivan, PhD, Boston University All Rights Reserved. This case is intended as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner. This case was compiled from published sources. publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner. This case was compiled from published sources.
[1]Mouawad, Jad. And Ed. Sorkin, Andrew Ross. “American and US Airways Announce Deal for $11 Billion Merger” The New York Times February 13, 2013
[2]http://theonion.com/articles/american-airlines-us-airways-merge-to-form-worlds,31302/ Accessed April 8, 2013
[3]Mouawad, Jad. And Ed. Sorkin, Andrew Ross. “American and US Airways Announce Deal for $11 Billion Merger” The New York Times February 13, 2013
[4] American Airlines. Securities and Exchange Annual Report Form 10K Filed February 13, 2013 p. 5
[5] Ibid, p. 6
[6] Ibid, p. 5
[7] American Airlines. Securities and Exchange Annual Report Form 10K Filed February 13, 2013 p. 36
[8] US Airways Group, Inc. Securities and Exchange Annual Report Form.10K Fiscal Year End December 2012. p. 5
[9] Ibid, p. 5
[10] US Airways Group, Inc. Securities and Exchange Annual Report Form.10K Fiscal Year End December 2012. p. 79
[11]American Airlines US Airways presentation. “Creating a Premier Global Partner” February 14, 2013