How US Airways Snagged Merger With American Airlines

Bates flew to Phoenix, where US Airways is based, with union vice president Tony Chapman and had dinner with Parker. Soon after, a large union contingent went back to Phoenix. "Security was a big thing," Bates said. "I was careful to brief my whole team -- no insignias, nothing that says American Airlines on it. Don't talk to anybody. One accidental conversation to a pilot on a jet bridge: 'I'm down here in Phoenix.' Somebody's going to put that on the Internet."

Bates also flew to Charlotte, N.C., to speak to 60 or 70 national officers and negotiators of the US Airways' pilots union. "The whole gang was there. They wanted to be part of the process. I said, 'That's why I'm here. We are going to bring you in.' "

US Airways approached the unions after American filed in bankruptcy court to terminate existing labor contracts. In that document US Airways learned what American had offered its unions.

"We knew what the 'ask' was and, therefore, the bar over which we had to jump in order to get the unions' allegiance," Millstein said.

Big surprise

Laura Glading, president of the American flight attendants, and airline economist Dan Akins, met Kirby for dinner in New York on March 19.

"We listened attentively. From that point on, I thought this was just a great idea, something both companies really need to do," she said.

Parker and Kirby went by private plane to Dallas to speak again to pilots. Bates picked them up. As they approached a local hotel, they saw a reporter, who had been tipped off, waiting outside. Bates made a hasty U-turn and radioed those inside. "We've got to move this whole thing back to headquarters. Change of plan!"

The pilot and flight attendant leaders went to Phoenix on the same day in early April. "I brought a couple people with me," Glading recalled. "We had dinner with Doug Parker. Then I brought the negotiating team out shortly after that. We negotiated a contract with US Airways that week," she said.

US Airways chief operating officer Robert Isom was in Dallas -- near American's headquarters in Fort Worth -- at the same time negotiating a contract with the Transport Workers Union representing American's mechanics and fleet service workers.

On April 20, US Airways and American's three largest unions, representing 55,000 employees, announced that they had signed conditional labor agreements, if a merger occurred.

"What are business schools going to say about this? How do you so thoroughly lose all your employees?" Glading mused. "Think about it: All three unions went off and cut a deal with another company? It's a critical message."

AMR Corp., American's parent, was caught by surprise.

"In retrospect, they did a very clever thing," said Miller, American's lawyer. "By tying up labor, it gave US Airways enormous leverage. And that, combined with the fact the labor unions essentially controlled the creditors' committee, was a very powerful weapon."

In April, US Airways made a "50-50 offer" recommending US Airways' shareholders get 50 percent of the stock, and American creditors get 50 percent and a debt instrument large enough in principal that together with the 50 percent in equity creditors would own two-thirds of the combined company.

American wasn't interested.

AMR chief executive Tom Horton said they were "laser focused" on completing a stand-alone restructuring.

Art of the deal

From May through July, US Airways did several things that caused the creditors committee to persuade American to evaluate a merger.

US Airways lobbied the creditors. "They were interested, but made it crystal clear that their objective was to support an approach that was most beneficial to the creditors," one insider recalled.

The airline began a media campaign, including meeting with newspaper editorial boards. In July, Parker spoke at the National Press Club, joined by American's unions.

US Airways reached out to elected officials, civic and business leaders in Washington, Philadelphia, and Charlotte, where US Airways has hubs, and Miami and Dallas, which are American hubs. The goal was preventing opposition to a merger and persuading people that it was in the best interest of the companies, communities, and employees. Duane Morris L.L.P. provided legal and lobbying advice in Pennsylvania. Philadelphia-based Dechert L.L.P. provided antitrust advice to US Airways.

In July, Horton announced that American would evaluate strategic alternatives and asked interested parties to sign non-disclosure agreements to exchange financial information.