Why US Airways Wants a Deal with American

CHARLOTTE, N.C. TheStreet) -- AMR's ( AMR) bankruptcy filing is no doubt viewed as an opportunity by US Airways ( LCC), which has long seen a merger with a major carrier as the best way to assure its long-term survival.

US Airways CEO Doug Parker has said frequently that bankruptcy court is the best place to accomplish a merger, because a filing enables reductions in labor costs and reduction or elimination of lease costs for aircraft, airport space and office space.

In the past seven years, Parker has bid for four airlines, three of which were in bankruptcy. In 2004, as CEO of America West, he bid for bankrupt ATA . In 2005, he oversaw a merger with bankrupt US Airways.

In 2006, he bid for bankrupt Delta> ( DAL). In 2008, he sought a merger with United ( UAL), following a course set by predecessor Steven Wolf, who pursued United in 2000.

Now, in every corner of the airline industry, speculation abounds that Parker will make a move on American in bankruptcy court.

Here is an example of the intensity of the continuing speculation. In mid-October, Mike Cleary, president of the US Airline Pilots Association, which represents US Airways pilots, visited Dallas to meet with Eric Ferguson, a leader of the America Westpilots. Cleary sought to extend an olive branch in hopes of resolving a long-simmering seniority dispute between the two pilot groups at otherwise merged US Airways.

"News of Cleary being spotted at DFW almost immediately made its way onto the Web boards, which seemed to stoke the AA merger rumors for a few days thereafter," wrote Ferguson, in a message to the America West pilots. Despite a pleasant conversation, Ferguson noted, no resolution materialized. But that does not mean the dispute will impede a merger.

In fact, at US Airways, where the airline's history reflects a continuing series of mergers , most employees fully expect management to aggressively pursue American.

"The American bankruptcy, while unfortunate for American employees and for the company, presents an opportunity for US Airways," said Mike Flores, president of the US Airways chapter of the Association of Flight Attendants.

Flores noted that Parker's management team raised $8 billion to pursue the Delta merger. "I believe they would do it again," he said.

USAPA spokesman James Ray recalled that Bruce Lakefield, now chairman of the board of US Airways, is a former Lehman Brothers executive who presided over the merger with America West . The deal resulted partially from Lakefield's success in devising new methods to raise investment capital.

"It will be interesting to see if Lakefield can put another deal together," Ray said.

American intends to fund its restructuring with $4.1 billion in cash. But in a report issued Wednesday, Wolfe Trahan analyst Hunter Keay said $4.1 billion may not be enough.

"Given the likelihood of continuing cash burn throughout the course of the Chapter 11 process, the need for a debtor-in-possession loan at some point down the road should still be considered as a potential outcome," Keay wrote.

"We could easily see a DIP lender suggesting far more aggressive actions, up to and including a combination with another airline," Keay wrote. It could well be that such a lender would ally with a US Airways management that promises sweeping changes, and that can bring experience in managing a successful merger to the table.

Although American has said it wants to use bankruptcy to reduce costs, it seems clear that to compete with Delta and United, American must also boost revenue and economies of scale. Unlike previous merger partners Northwest and Continental, US Airways has little to offer internationally, but it could offer American a broader domestic footprint.

Key assets include a Charlotte, N.C. , hub that provides the only competition to Atlanta for gathering southeast passengers, and a strong presence at Washington Reagan National Airport, long a profit center. Significantly, American has minimal overlap with these two key operations.

US Airways' Phoenix hub connects passengers between the East and West, offering an opportunity for consolidation with American's bigger Dallas hub. US Airways' Philadelphia hub and American's hub at New York's Kennedy International both offer abundant trans-Atlantic service, providing an opportunity to build synergies between two airports. (Philadelphia has better connections; Kennedy has more local traffic.) Aviation consultant Sandy Rederer said that American also has "a lot of internal technology infrastructure that US Airways lacks."

As for the logistics of a pilot seniority integration, which some see as a potential impediment to a merger given the failure to integrate pilot groups at US Airways, Ray said USAPA was ready in 2008 to act to enable a merger with United.

"We have a great deal of respect and worked closely for years with the Allied Pilots Association," which represents American pilots, Ray said. "The most complicating thing we see is fact that Doug Parker hasn't finished the merger with America West, but I think a fair contract for all, pilots, at both USAPA and APA, could enable a deal."

-- Written by Ted Reed in Charlotte, N.C.

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