Deal for AMR Reached Turning Point as US Airways Courted Pilots - WSJ.com
![]()
AMR Corp. AAMRQ +19.81% and US Airways Group Inc.'s LCC +3.65% agreement to merge reached a turning point last March in a posh New York restaurant, when a lieutenant for US Airways Chief Executive Doug Parker enlisted AMR's American Airline pilots to his cause.
That agreement raised the heat on AMR chief Tom Horton who had been resisting a deal, preferring for the American Airlines parent to exit bankruptcy on its own.
On Thursday, Mr. Horton hinted that his reluctance was meant to ensure that AMR's creditors got the best deal. "There was a little poker playing going on in the process," he said.
The following account of how 14 months of posturing and threats resulted in a deal to form the world's largest airline is based on more than a dozen interviews over the past year with people involved in the discussions.
On Nov. 29, 2011, the morning American filed for bankruptcy protection, the rival airline bosses spoke by phone, with Mr. Parker exploring the possibility of a merger. Mr. Horton stressed the airline needed to spend time reorganizing and remaking labor contracts before considering a deal.
But American's pilots had already expressed displeasure with American's management, which aimed to cut the pilots' pay and benefits to better compete with other big airlines.
US Airways, meanwhile, had hired bankers at Barclays BARC.LN +0.71% PLC and Millstein & Co. and lawyers at Latham & Watkins LLP to study a merger. In February the airline started making presentations on Wall Street about the benefits of a combination. The airline also visited Lazard Ltd. LAZ +0.40% bankers representing American's pilots, who found a deal intriguing.
Mr. Horton, though, told Mr. Parker that US Airways public campaign for a merger wasn't constructive.
The pressure on Mr. Horton kept rising, however.
During a February dinner in a Manhattan skyscraper overlooking the Empire State Building, advisers for AMR's creditors committee urged that Mr. Horton and his advisers at investment bank Rothschild and law firm Weil, Gotshal & Manges LLP study merger options.
And in mid-March, US Airways President Scott Kirby met Capt. David Bates, then president of American's pilots union, in a small dining room at Oceana, an upscale seafood restaurant in midtown Manhattan. The goal: Start negotiations on tentative contracts with US Airways on how American's unionized pilots, flight attendants, mechanics and ground workers would be treated in a marriage.
Mr. Bates liked what he heard.
Messrs. Parker and Kirby later flew by private jet to meet the board of the American pilots union at a Dallas hotel. They reconvened at the union's nearby headquarters after a newspaper reporter staked out the hotel
On April 20, US Airways was able to trumpet support for a merger from all the big AMR unions, catching Mr. Horton off guard.
US Airways that same day made a formal merger proposal to AMR and its creditors, suggesting that the creditors own 49.9% of a combined airline, leaving US Airways shareholders in control. The proposal also included issuing $1.5 billion in new debt to AMR's creditors.
The proposal was ignored.
In May, though, American opened the door to a deal, signing a "protocol" agreement with its creditors committee and pledging to jointly explore "potential consolidation scenarios." The pact ensured that creditors-committee advisers could mediate negotiations between the two airlines.
In July, a day after touting a possible merger at the National Press Club in Washington, Mr. Parker met Mr. Horton for breakfast at the Jefferson Hotel. Over oatmeal, Mr. Horton told Mr. Parker that American wouldn't rush into a deal and that it would explore a range of restructuring options.
US Airways along the way worried it would be suckered into negotiations, a delaying tactic to allow American to go it alone. At various points between September and February, US Airways mulled a so-called hostile offer, making a merger proposal to American's creditors. Such a move would be problematic, though, since bankruptcy law gave American effective control of its restructuring process.
Creditor bankers at Moelis & Co., as well as US Airways' financial advisers at Millstein and Barclays, recommended that US Airways stick with direct negotiations to get a deal before American's board.
In the ensuing weeks, a group of hedge funds and other traders holding American's debt started discussions with the airline about providing financing to help the company exit bankruptcy independently, making plain they wouldn't be rushed into any deal.
At summer's end, after signing a nondisclosure agreement, US Airways exchanged confidential information with American to discuss a deal. US Airways executives worried they could no longer press their case in public.
In mid-November US Airways proposed that American's creditors own 70% of a combined airline, and US Airways shareholders 30%, with Mr. Parker running it.
"My entire career has prepared me for this moment," he told the creditors committee around the same time.
Still, another roadblock occurred. Around Thanksgiving, advisers for American and its creditors told their counterparts at US Airways that AMR's board believed its creditors should own at least 80% of the combined company.
US Airways advisers were incensed, but negotiations continued. Mr. Horton suggested getting a handle on labor costs in the merger and then revisiting how to divide ownership.
In December, the airlines and their pilots unions spent about 15 days negotiating more detailed agreements on how to integrate the workforces, holding round-the-clock talks at the Dallas offices of Weil, Gotshal & Manges, American's bankruptcy lawyers. American's bankers at Rothschild, and bankers at Houlihan Lokey representing certain bondholders worked on a complex bankruptcy arrangement that would likely repay creditors fully and, in an unusual move, provide financial recoveries for the airline's existing shareholders.
In January, American's hedge-fund bondholdersincluding J.P. Morgan Securities, Pentwater Capital Management LP and Litespeed Management LLCsigned confidentiality agreements to compare a merger with American's stand-alone reorganization plan. American, its creditors and US Airways raced to finish a deal before this Friday, when the bondholders' confidentiality agreements expired.
AMR Corp. AAMRQ +19.81% and US Airways Group Inc.'s LCC +3.65% agreement to merge reached a turning point last March in a posh New York restaurant, when a lieutenant for US Airways Chief Executive Doug Parker enlisted AMR's American Airline pilots to his cause.
That agreement raised the heat on AMR chief Tom Horton who had been resisting a deal, preferring for the American Airlines parent to exit bankruptcy on its own.
On Thursday, Mr. Horton hinted that his reluctance was meant to ensure that AMR's creditors got the best deal. "There was a little poker playing going on in the process," he said.
The following account of how 14 months of posturing and threats resulted in a deal to form the world's largest airline is based on more than a dozen interviews over the past year with people involved in the discussions.
On Nov. 29, 2011, the morning American filed for bankruptcy protection, the rival airline bosses spoke by phone, with Mr. Parker exploring the possibility of a merger. Mr. Horton stressed the airline needed to spend time reorganizing and remaking labor contracts before considering a deal.
But American's pilots had already expressed displeasure with American's management, which aimed to cut the pilots' pay and benefits to better compete with other big airlines.
US Airways, meanwhile, had hired bankers at Barclays BARC.LN +0.71% PLC and Millstein & Co. and lawyers at Latham & Watkins LLP to study a merger. In February the airline started making presentations on Wall Street about the benefits of a combination. The airline also visited Lazard Ltd. LAZ +0.40% bankers representing American's pilots, who found a deal intriguing.
Mr. Horton, though, told Mr. Parker that US Airways public campaign for a merger wasn't constructive.
The pressure on Mr. Horton kept rising, however.
During a February dinner in a Manhattan skyscraper overlooking the Empire State Building, advisers for AMR's creditors committee urged that Mr. Horton and his advisers at investment bank Rothschild and law firm Weil, Gotshal & Manges LLP study merger options.
And in mid-March, US Airways President Scott Kirby met Capt. David Bates, then president of American's pilots union, in a small dining room at Oceana, an upscale seafood restaurant in midtown Manhattan. The goal: Start negotiations on tentative contracts with US Airways on how American's unionized pilots, flight attendants, mechanics and ground workers would be treated in a marriage.
Mr. Bates liked what he heard.
Messrs. Parker and Kirby later flew by private jet to meet the board of the American pilots union at a Dallas hotel. They reconvened at the union's nearby headquarters after a newspaper reporter staked out the hotel
On April 20, US Airways was able to trumpet support for a merger from all the big AMR unions, catching Mr. Horton off guard.
US Airways that same day made a formal merger proposal to AMR and its creditors, suggesting that the creditors own 49.9% of a combined airline, leaving US Airways shareholders in control. The proposal also included issuing $1.5 billion in new debt to AMR's creditors.
The proposal was ignored.
In May, though, American opened the door to a deal, signing a "protocol" agreement with its creditors committee and pledging to jointly explore "potential consolidation scenarios." The pact ensured that creditors-committee advisers could mediate negotiations between the two airlines.
In July, a day after touting a possible merger at the National Press Club in Washington, Mr. Parker met Mr. Horton for breakfast at the Jefferson Hotel. Over oatmeal, Mr. Horton told Mr. Parker that American wouldn't rush into a deal and that it would explore a range of restructuring options.
US Airways along the way worried it would be suckered into negotiations, a delaying tactic to allow American to go it alone. At various points between September and February, US Airways mulled a so-called hostile offer, making a merger proposal to American's creditors. Such a move would be problematic, though, since bankruptcy law gave American effective control of its restructuring process.
Creditor bankers at Moelis & Co., as well as US Airways' financial advisers at Millstein and Barclays, recommended that US Airways stick with direct negotiations to get a deal before American's board.
In the ensuing weeks, a group of hedge funds and other traders holding American's debt started discussions with the airline about providing financing to help the company exit bankruptcy independently, making plain they wouldn't be rushed into any deal.
At summer's end, after signing a nondisclosure agreement, US Airways exchanged confidential information with American to discuss a deal. US Airways executives worried they could no longer press their case in public.
In mid-November US Airways proposed that American's creditors own 70% of a combined airline, and US Airways shareholders 30%, with Mr. Parker running it.
"My entire career has prepared me for this moment," he told the creditors committee around the same time.
Still, another roadblock occurred. Around Thanksgiving, advisers for American and its creditors told their counterparts at US Airways that AMR's board believed its creditors should own at least 80% of the combined company.
US Airways advisers were incensed, but negotiations continued. Mr. Horton suggested getting a handle on labor costs in the merger and then revisiting how to divide ownership.
In December, the airlines and their pilots unions spent about 15 days negotiating more detailed agreements on how to integrate the workforces, holding round-the-clock talks at the Dallas offices of Weil, Gotshal & Manges, American's bankruptcy lawyers. American's bankers at Rothschild, and bankers at Houlihan Lokey representing certain bondholders worked on a complex bankruptcy arrangement that would likely repay creditors fully and, in an unusual move, provide financial recoveries for the airline's existing shareholders.
In January, American's hedge-fund bondholdersincluding J.P. Morgan Securities, Pentwater Capital Management LP and Litespeed Management LLCsigned confidentiality agreements to compare a merger with American's stand-alone reorganization plan. American, its creditors and US Airways raced to finish a deal before this Friday, when the bondholders' confidentiality agreements expired.