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Making the Case for an AMR/US Airways Merger


Beyond acknowledging that it has hired advisers to study a potential merger with AMR (AMR), US Airways (LCC) isn't talking directly about its pursuit of the bankrupt carrier.

Yet, piece by piece, US Airways is very publicly starting to lay out its merger case, which is essentially that American is weak in the heavily populated East, while US Airways is strong.

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Additionally, US Airways executives have been saying recently that they learned during a failed 2006 bid for Delta (DAL) that it is important to secure the backing of employees for a takeover.

"You can't do it on value," US Airways CEO Doug Parker said Wednesday, at US Airways media day. "You have to have the employees on your side."

Parker deflected questions about the effort to merge with AMR.

Meanwhile, a labor source close to the AMR creditors committee said "there is little confidence on the committee in the management plan, and that is not just labor speaking,'" while a US Airways pilot said that Parker told pilots, at an employee meeting in Charlotte, that ample financing is available to mount a takeover bid. In fact, Bloomberg reported Friday that US Airways has already made presentations to some members of the creditors committee. The carrier has not made a formal presentation, but has spoken to individuals, the labor source said.

In an interview on Wednesday, US Airways President Scott Kirby listed, in order, the four most profitable major airline operations in the U.S. in terms of profit margin. They are Newark, Washington Reagan National, Houston, and Charlotte. Two are East Coast airports dominated by US Airways, while two are United (UAL) hubs. Kirby emphasized that US Airways could only estimate profit margins at other carrier's hubs, and said margins at US Airways hubs in Philadelphia and Phoenix are "in the middle of the pack."

He would not comment on profit margins at American hubs. But in the past, Kirby has said that it is important to be No. 1 in a hub. If you have a few more flights than your competitor you can put a few more passengers on each connecting flight, and that is the difference between a profit and a loss in a low-margin business. American is No. 1 in Dallas and Miami, but its cornerstone strategy also includes maintaining a strong presence in Chicago, Los Angeles, and New York Kennedy, all airports where it is not the No. 1 carrier.

Also at media day, Andrew Nocella, senior vice president, marketing and planning, spoke about US Airways' strong presence in the East.

"US Airways serves more cities in the east than any other carrier, with above average frequency levels," he said. His charts showed that US Airways serves about 65 "spokes or smaller cities that connect to hubs, in the East, while Delta serves about 63, United serves about 55, and American serves about 30.

Additionally, US Airways has about 650 daily departures in the East, while Delta has about 700, United has about 440, and American has about 200.

A recent report by J.P. Morgan analyst Jamie Baker makes the same point, that AMR is weak in the East, compared to its two rivals, because it cannot gather passengers in small cities: It has neither the aircraft nor the hubs to serve those cities. Baker also described himself as "underwhelmed" by American management's plan to boost revenue by $1 billion annually.

However, Virash Vahidi, American chief commercial officer, has said that a planned aircraft order and proposed changes in the pilot contract would enable increased revenue because American could serve new markets with more aircraft types and could boost flying to smaller cities by flying more regional jets. That would reduce its weakness in smaller eastern cities, although, without Charlotte, American would still lack a hub that is well-positioned to serve them.

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