Is AMR Finally Headed for a Merger?

US Airways PlanePaving the way for a potential merger between AMR’s (AAMRQ.PK) American Airlines and US Airways (NYSE:LCC), a memorandum of understanding has been approved by the Allied Pilots Association, the union that represents AA’s pilots, and the US Airline Pilots Association, the pilot union of US Airways, as well as by both airlines.

The document’s provisions state that pilots of both carriers will be governed by the contract bargained for by the Allied Pilots Association in 2012, reported Reuters on Tuesday. The agreed-upon terms, which will only be effective if the merger is completed, outlined a plan for pilots to reach joint collective bargaining agreements and allowed the unions to make $522 million worth of improvements to contracts over a period of six years.

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In particular, the memorandum “was negotiated to give the parties greater clarity on both the costs and the pilot integration processes associated with a potential merger, as American reviews its strategic alternatives,” American Airlines spokesman Bruce Hicks said in a statement.

The American Airlines union had previously warned that the carrier’s merger with US Airways would be postponed until it exited bankruptcy restructuring unless unions from both airlines could agree on interim contract terms. The airline’s parent company, AMR, filed for bankruptcy in November 2011 because of the carrier’s uncompetitive costs. Now the company is deciding between merging with the nation’s fifth largest airline or exiting Chapter 11 proceedings as an independent company.

So far, American Airlines has been left behind by the current trend in the airline industry with the consolidation of the so-called legacy airlines nearly at its end. In recent years, Delta (NYSE:DAL) joined with Northwest and United with Continental, leaving American and US Airways the fourth and fifth largest airlines in terms of passengers, respectively. But as shown by AMR’s bankruptcy, the stronger competition undermined its business. However, if the two airlines merge, the combined revenues would match those of United Continental Holdings (NYSE:UAL), now the world’s largest airline.

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