Look for American and US Airways to Get Closer

When is a merger not really a merger? We are apparently about to find out.

Two people, one involved in the negotiations, tell us we should expect to hear news, possibly as soon as tomorrow, about a deal between the American Airlines unit of AMR (AMR) and US Airways (U) that will bring the airlines about as close as they can get without uttering that nasty "m" word that makes those darn feds so jumpy and hard to deal with.

But the timing is not set in stone. "Share price is everything here," the person involved in the negotiations said this morning in describing the timetable for the announcement. "It all depends on the close today." Representatives of AMR and US Airways weren't immediately available for comment. AMR shares added 3 11/16, or 5.7%, to close at 69, while US Airways rose 1, or 1.8%, to finish at 55 3/8.

According to the inside source and a third person outside the companies, the deal has already been delayed twice over the last month because of run-ups in both stocks that negated certain conditions in the agreement, making the deal less lucrative.

Oddly enough, one of the reasons AMR stock has been rising the last two weeks seems to have nothing to do with speculative buying surrounding these negotiations.

Rather, it seems the market is interested in a possible spinoff of Web travel site Travelocity.com from AMR's Sabre (TSG) unit. As we reported recently, the rousing response to priceline.com's (PCLN) IPO had people saying Sabre, which wholly owns Travelocity.com, was sitting on an extremely undervalued asset. AMR, in turn, owns 82% of Sabre.

Sabre shares have jumped some 11 points since we detailed the advantages of a possible sale of part or all of Travelocity.

According to our inside source, the hoopla surrounding the priceline.com/Travelocity discussion threw a monkey wrench in the US Airways/American talks, and at one point, US Airways backed off the discussions as a result.

While the deal between American and US Airways will come as a surprise to some, regular readers know a deal would represent a natural progression.

As long ago as two years, we talked about how we thought American and US Airways would eventually end up together. It made sense on too many fronts. One, US Airways had a hemmed-in feeder type of route system with nowhere to feed to, and American needed to play catch-up for years of no growth in shorter-haul markets. It needed more feed to support long-haul routes.

Two, last year's massive IT deal between Sabre and US Airways suggested the airlines were moving toward a much closer association than their rather minor frequent-flyer marketing agreement, which was announced last April.

And finally, there is Stephen Wolf, chairman of US Airways, and his track record, which has been consistent. Get in, restructure, make shareholders money, make himself money and get out.

What do we expect to be announced? Based on what our sources say, plus a dollop of common sense, we're expecting a major strengthening of the existing agreement between the two airlines. A movement toward domestic code-sharing on routes that do not overlap. Consortium deals on purchasing and aircraft deals. And equity involvement of some type seems likely, although we are hearing two scenarios, so we aren't sure what the announced deal will include.

Oh, and if you are wondering why American and US Airways might want to announce this news tomorrow? Simple. Rival (can we hear an appropriate boo and hiss from the peanut gallery?) Delta (DAL) is scheduled to report earnings tomorrow, and we expect them to be very strong.

Just a bit of competitive news-generating strategy going on here.

And people wonder why we love this sector so much.

American and Alaska

As if this weren't enough news for one day, a deal between American and Alaska Airlines (ALK) is again on the front burner, according to two people inside the companies and a third close to the negotiations.

Two key former American employees have been hired in the last few months at Alaska. One took over pilot scheduling, while the other person is the new chief of flight standards. There have been rumors circulating for the last few weeks that American made Alaska an offer, but we cannot confirm this.

Our sources do confirm there have been American folks at Alaska doing due diligence on and off over the last few months. And there is no doubt that nerves among Alaska employees we talk to seem to be jangled.

America West but Not United

Finally, while it appears that America West (AWA) has apparently chased the folks who write the checks at UAL (UAL) at United Airlines away, we should not be surprised to hear about some movement on a possible TWA(TWA)-America West deal in the near future, according to insiders at both companies.

>To order reprints of this article, click here: Reprints