Can US Airways, After 7 Years of Practice, Pull Off an AMR Merger?

CHARLOTTE, N.C. ( TheStreet) -- Can US Airways ( LCC) pull this off?

As the carrier seemingly moves closer to a merger with AMR ( AAMRQ.PK), it seems likely that the question will be among the airline industry's principal concerns in 2013. Many observers expect the effort to receive a go-ahead at AMR's board meeting on Jan. 9.
US Airways today flies an Allegheny-themed A319.

The question of US Airways' merger capability has been raised before, most notably at the May 19, 2005, media conference in Tempe, Ariz., where the merger of America West and US Airways was announced, and Arizona Republic reporter Dawn Gilbertson asked CEO Doug Parker whether America West had "the bandwidth" to take over the bigger carrier.

Seven and a half years later, the record shows that Parker's affirmative answer was justified. US Airways is more profitable today than it has ever been, its bold 2005 deal started a wave of industry consolidation, and its three principal airport operations, at Charlotte, Philadelphia and Washington National, all perform better than they did before the merger. President Scott Kirby has said that Charlotte and Washington National are two of the four most profitable airline operations in the country.

Now the same tight America West management team, which absorbed no new principal members after the merger, is once again closing in on a deal with a bigger, older, more prestigious airline, one with a far different corporate culture, that has stumbled into bankruptcy. The difference is that this time the team has already proven that it knows how to take full advantage of the improvements that AMR management, like US Airways management before it, made in bankruptcy.

In effect, US Airways would secure the payoff it has been seeking for initiating the series of mergers that followed the Sept. 11, 2001, terrorist attacks.

Before the 2005 deal, conventional industry wisdom had it that major mergers were doomed to fail. American's mergers with Reno and TWA and AirCal cost plenty but added nothing. USAir's merger with Piedmont was widely viewed as a lesson in what not to do. Further back, Pan Am/National abjectly failed to combine two cultures with absolutely nothing in common.

After America West re-opened the door, Delta ( DAL) followed it through, teaming up with Northwest in 2008. Delta today is viewed as the leading U.S. airline, largely as a result of the Northwest deal.

This is not to say that mergers are easy, even if Delta made it look that way. Every recent merger involving legacy carriers has encountered problems.

Delta, for instance, had had the worst on-time record among major carriers in 2010. Delta shares, which traded near $11 when the merger was announced in April 2008, spent almost all of 2009 trading in the single digits and fell as low as $3.51 in March 2009. Analysts kept saying, "They need more time."

The 2010 merger between United ( UAL)and Continental has so far gone badly. Labor integration has been clumsy, computer and other systems integration has been disastrous, and on-time performance collapsed, although it has recovered recently. Now, some analysts are saying that 2013 is the year when United will put the problems behind it.

As for the America West/US Airways merger, it started out well. The initial days were filled with exuberance. CEO Parker was greeted at US Airways as a hero, and he built on the feeling by embracing the carrier's heritage. As a result, US Airways today flies four aircraft with colors from predecessors including Allegheny (pictured). Because of route synergies and rising demand, revenue per available seat mile surged right after the merger was put into place.

Nevertheless, in 2007 US Airways' on-time performance was the worst in the industry, largely because of a March 2007 computer meltdown resulting from the effort to merge two computer systems. The carrier moved quickly to fix operations, finished first among peers in on-time in 2008, and has generally performed well since then.

Of course, the merger's signature failure has involved pilot seniority integration. It is important to remember that a divisive 2007 arbitrator's ruling was not the airline's fault. In fact, management has sought to stay as far as possible from the ruling, a tar baby that gums up anyone who touches it. The dispute's financial impact on the airline, however, has been limited: Parker has said that the combined cost of the failure to merge pilot and flight attendant contracts has been between $10 million and $15 million annually.

In my view, the America West people have learned from the mistakes that every recent acquirer, themselves included, have made. After pursuing mergers since 2004, when they went after ATA, they are ready to close out the final cycle of post-deregulation consolidation.

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

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