US Airways' Kirby On Merger Rules: Bring Labor In, Get Systems Right

CHARLOTTE, N.C. ( TheStreet) -- US Airways ( LCC) and bankrupt American ( AAMRQ.PK) say they will put together a very complicated merger, creating $1 billion in cost synergies, in a very short time.

The carriers expect the merger transaction to be completed, with bankruptcy court and regulatory approvals, by the third quarter of 2013. It should take about 18 months, to mid-2014, to secure a single operating certificate, although CEO Doug Parker said on a conference call with analysts and media that "what customers see will hopefully be sooner."

In an interview on Thursday, after the two airlines announced plans to merge into the world's largest airline, US Airways President Scott Kirby said that a 2005 merger between America West and US Airways yielded two key lessons.

"We learned it is important to have labor on board upfront, as much as possible, (and with) the historic partnership we have developed with labor, we will have 100,000 employees on day one all pulling in the same direction," he said.

Asked what management did wrong in the 2005 merger, Kirby cited the technology systems integration, saying "it's really important to make sure the process and the training works. You have to make sure all the people are (well) trained."

On the conference call, Parker elaborated on the systems integration, saying: "The learning experience we had, we will certainly bring to this. Airlines talk a lot about the merger of systems; the real issue is the processes these systems drive. That's where you get yourself caught."

In the 2005 merger, America West's Shares reservations system was picked over US Airways' Sabre system. But Parker said it will be different this time, because "adopting the larger carrier's system and process is easier.

"Stealing from a competitor, the people at Delta ( DAL) called it 'adopt and go,'"he said.

Kirby said many decisions, such as how to integrate management teams and whether to paint some American planes in the colors of predecessor airplanes, as was done in the 2005 merger, have not been made. He indicated that a Winston-Salem, N.C., reservations office, which employs about 820 people and dates back to Piedmont Airlines days, will remain open, as will an American reservations office in Cary, N.C, that employs 721 agents as well as 1,465 additional agents, includijng 575 in the Raleigh-Durham area, who work from home.

"There are no plans to close any reservations offices," Kirby said.

Asked how the Philadelphia and New York Kennedy hubs would be integrated, Kirby said that in general the merger will create growth. Philadelphia and Kennedy "are complimentary today," he said. "Kennedy is mostly a local market, serving customers to and from New York," while Philadelphia serves both a large local market and a large connecting hub with about 500 daily flights. "They are in relative geographic proximity, but they serve very different markets," he said.

Parker said he does not anticipate regulatory hurdles. The new airline will serve 218 destinations with more than 900 routes. Only 12 routes, mostly hub-to-hub routes, are served by both airlines, he said.

The merger is expected to produce $1.1 billion in synergies in 2015. That includes $550 million in cost synergies and $900 million in network synergies as well as $400 million in "dis-synergies" or added labor costs.

Kirby said the network synergies include, primarily, flying the proper size of aircraft on each route, as well as revenue synergies derived from connecting more customers at hubs -- "between Charlotte and Chicago, we can now connect on both ends," he said, and winning back corporate customers currently served by Delta and United ( UAL) whose "networks are more comprehensive" at the moment.

On the call, Parker and AMR CEO Tom Horton exchanged pleasantries. Parker noted that he started his aviation career at American, "sitting in a cubicle, look across at a cubicle that had Tom sitting in it," and said, "We wouldn't be here today if it wasn't for Tom and his leadership."

Horton initially resisted a merger, though he noted that "American has been looking at US Airways for about 20 years now. It goes back a long way." This time, he said, that before entering into a merger "we felt very strongly that it was good to get our own house in order and get our costs competitive. Once we got that squared away, it became clear this was the right deal and the right time."

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

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

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