Will American Say Yes to US Airways?

US Airways AirplanesWhile American Airlines is attempting to leave its current bankruptcy proceedings as an independent airline, US Airways sent a merger proposal to the airline’s parent company AMR (AAMRQ.PK) last month that its creditors found appealing.

As the Wall Street Journal reported, US Airways (NYSE:LCC) proposed an all-stock deal that would hand 70 percent of the new airline to American’s creditors and 30 percent to US Airways’ shareholders. The result of this deal, taking into account US Airways’ valuation of $2.5 billion, would leave American worth approximately $5.83 billion and the new carrier about $8.33 billion. This combined airline would be large enough rival United Continental (NYSE:UAL) and Delta (NYSE:DAL), the world’s largest carriers by traffic.

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US Airways has said it could generate up to $1.2 billion in revenue and cost savings by merging with another carrier. For AMR, which originally filed for bankruptcy in November 2011 because of uncompetitive costs, additional revenue and cost savings would be a benefit the company as it emerges from the bankruptcy proceedings.

But American has taken one important step to secure its independence; on Friday, 75 percent of its 7,400 pilots voted to accept their first new contract since 2003. The new contract will reduce American’s labor costs by 17 percent, or more than $1 billion, and with these labor savings, the airline could be more valuable than US Airways’ original estimation.

While American is currently pursuing its plans for independence, the US Airways proposal was “was serious enough for American and the creditors to continue negotiating toward a possible deal,” according to the Journal.

But the deal’s feasibility is still dependent on American’s bankruptcy proceedings. The airline’s creditors committee, which includes representatives of labor unions and bondholders, have the ability to influence the company’s future. The creditors have indicated that they do not care whether American merges with another airline, as long as the deal gives them the best financial benefits. To this end, creditors have pushed for a valuation greater than the 70 percent US Airways offered, and AMR Chief Executive Tom Horton agreed.

American bondholders assured the carrier’s pilots in November that they would not support a stand a stand-alone restructuring if the company installed a management that would not be advantageous for shareholders.

However the negotiations are far from finished, and a decision is not expected until next year.

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