6 Key Items to Watch in the US Airways/AMR Merger

CHARLOTTE, N.C. ( TheStreet) -- The merger between US Airways ( LCC) and bankrupt American ( AAMRQ.PK), put together with a non-disclosure agreement in place, has nevertheless been one of the most closely reported airline mergers in history.

In fact, so much is known about this merger that the announcement, which we and scads of other reporters expect on Thursday, will be as anti-climactic as Hawaiian's ( HA) monthly announcement that it had the best on-time performance record of any airline.

The suspense quotient fell early, when two of the top three most sensitive merger issues, involving the new company's name and headquarters, were settled because US Airways CEO Doug Parker declared that he would keep American's name and Dallas headquarters. That left the third major sensitivity: Who runs the new company? AMR CEO Tom Horton has fought to stay in the loop, the sources all say.

But it has always been hard to imagine that Horton would oversee or become a critical part of the America West team that successfully put together the 2005 merger with US Airways and then spent the next seven years creating a strong airline from two weak ones while simultaneously pursuing mergers with Delta ( DAL) and United ( UAL) before finally finding the right formula by which to take over a Big Three airline.

The most amazing story here replicates the story of Frank Lorenzo in the 1980s, when a small group running a tiny, marginal western airline called Texas International crafted a path of mergers and takeovers that, within a decade, had them running the biggest airline company in the world.

This is not to say that Parker resembles Lorenzo: I have covered them both, and he does not. But I have to wonder what Lorenzo is thinking today, as he sees his growth pattern replicated, his use of bankruptcy court now accepted airline industry practice and the Newark hub he assembled now the most profitable hub in the U.S. airline industry.

Perhaps he is thinking: Getting to the top is one thing and staying there is another thing altogether. Actually, after writing this I spoke with Lorenzo, so you can see exactly what he thinks in our companion story.

That said, here are six things to watch for as the American West team works to put together the newly created world's largest airline.

Labor Integration

As Lorenzo perhaps came to realize, this is a key to any airline merger. After the 2005 merger, Parker was greeted as a hero by many US Airways employees, but over time the perception diminished as contract talks lagged. Today, of three major US Airways unions, only the International Association of Machinists has signed a post-merger contract. It is, in fact, negotiating a second contract.

"Right now, I would imagine most American Airlines employees are open-minded and excited about a new management team and see Doug Parker and his crew as sort of white knights," said James Ray, spokesman for the US Airline Pilots Association. "So this is a time when Mr. Parker's leadership team should go out of its way to ensure it take cares of employees and motivate employees, because ultimately, it is the employees who can assure that this airline succeeds."

Parker's engaging personality led to an internal communications strategy that frequently places him in employee meetings. The strategy worked for America West but was probably taxed a bit when the airline expanded. Can it still work at the largest airline in the world?

Hub Utilization

For airline geeks, this could be the most fascinating part of the merger. US Airways has hubs in Charlotte, Philadelphia and Phoenix and dominates Washington Reagan National Airport. American has hubs in Chicago, Dallas, Miami, Los Angeles and New York. US Airways has benefited immensely from a strategy of focusing 99% of flying in the four cities it dominates, while American has suffered from trying to build hubs at airports it doesn't dominate.

What will US Airways do now? Charlotte, Dallas and Philadelphia seem likely to grow, while Miami seems unlikely to diminish. Over time, Phoenix seems destined to lose some connecting east-west flights to Dallas. After all, does Fresno require five daily flights to Phoenix plus two to Dallas? What changes in Chicago, where American is No. 2 to United? And how will a major hub in Philadelphia interact with a small hub at Kennedy?

Alliance Politics

US Airways has already said it will leave Star Alliance for Oneworld, assuring continuation of a rational setup combining three major U.S. airlines with three global alliances.

Given that American has a limited presence in Asia and US Airways has none, Oneworld partners Japan Air Lines and Cathay Pacific will be heavily involved in getting American passengers to Asia. "They have to quickly wrestle with the question of how to fill the gap in Asia, and they have to come to an early and robust decision on how to fill that gap," said aviation consultant Robert Mann. Oneworld doesn't include a mainline China airline.

Of course, it is easy to say you will leave Star, but somewhat tougher to actually do so. "These divorces are expensive 12-month exercises," Mann said. "You have to manage the divorce and then get married to someone else, but in this case you want to get married before you get divorced."

Other questions will involve international partners. For instance, will Oneworld member British Airways return to Charlotte? Will Star member Lufthansa continue to fly Charlotte-Munich?

Paint Schemes

Soon after the 2005 merger, Parker embraced the US Airways merger heritage that included strong allegiances to predecessor airlines Allegheny, Piedmont and PSA, as well as to America West. Each got its livery honored on a narrowbody Airbus aircraft.

Will these predecessors now get their colors on American airplanes? How about American acquisitions AirCal, Reno and TWA? And will US Airways keep the paint scheme that American just unveiled? Mann says that is likely. "These guys certainly aren't going to spend millions of dollars" to develop another paint scheme, he said. "That's not what they do."

Technology Glitches

If precedent is any indication, we should worry about a computer glitch when US Airways and American seek to merge their technology systems.

On March 4, 2007, US Airways and America West merged computer systems, leading to months of disruptions that led to poor operational performance statistics for the full year. United has also experienced similar service disruptions related to the merger of its computer system with Continental's.

The question will be: How much did US Airways learn from the mistakes it made the first time?

Pilot Seniority

A 2005 seniority ruling turned out to be unacceptable to pilots from US Airways because hundreds of former America West pilots were given higher seniority ranking than US Airways pilots with many more years at the airline.

The ruling, which continues to separate the two pilot groups, had been viewed by some as a barrier to getting a merger done. This argument appears to have been vastly overstated.

The two pilot unions believe the problem can be mitigated because the merger brings another chance at seniority integration, this time with different rules. But most America West pilots believe that one trip through binding arbitration is sufficient. They say they will return to the courts for a decision if the ruling is overlooked.

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

>To contact the writer of this article, click here: Ted Reed

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