Merger Declassified

How American Airlines reached a historic settlement with the Department of Justice to create the largest airline in the world

Photo by Billy Surface

It was front-page news in August 2013: “Department of Justice Sues to Block US Airways-American Airlines Merger.” The talking-head pundits ranted, blog writers raved, and shareholders wrung their hands. Everyone had an opinion, and there was a lot on the line. The deal—a blockbuster plan—would create the world’s largest airline.

Pam Bondi, attorney general of Florida, wrote an opinion piece for USA Today titled “Ground this anti-competitive deal.” She and seven of her peers across the nation joined the lawsuit. US Attorney General Eric Holder said the people of the United States “deserve better.” The official complaint, filed by the Justice Department on August 13, said the $11 billion deal would bring “substantial harm to consumers.”

As a debate about the reaches of capitalism and the state of air travel took off, industry insiders noticed the Justice Department’s pivot. Publicly, the Department of Justice (DOJ) raised concerns about reducing from four to three the number of legacy airlines serving the United States. The DOJ feared the deal would reduce competition and lead the new airline to “cut service and raise prices with less fear of competitive responses from rivals.” The rhetoric, however, didn’t resonate with many airline executives and analysts. The same department had allowed three prior mergers of major US carriers in the previous five years alone. The apparent change in policy raised eyebrows.

One man at the middle of it all was Bruce Wark, now American Airlines Group’s vice president and deputy general counsel. He joined the legacy American company in 1993 and has helped the organization navigate litigation and regulatory challenges involving aviation disasters, the 9/11 attacks, international joint ventures, and a global recession. At the time of the DOJ lawsuit, Wark was an associate general counsel responsible for antitrust and competition issues worldwide.

While he knew the DOJ was reviewing the proposed merger—standard practice for the department—Wark remained optimistic. “We were creating the world’s largest airline through a merger that would combine two companies that were important to communities and to the nation,” he says. “We expected an investigation and some concerns, but we knew we could demonstrate the benefits from joining complementary airline networks.” Wark expected some concerns; what he got was a fight.

“We hoped we had convinced [the DOJ], but we weren’t foolish enough not to consider the alternative.”

When Wark joined American Airlines in 1993, the company had become one of the largest and most successful airlines in the nation. During the ’90s, fuel prices dropped while profits rose.  American enjoyed a reputation for leadership and innovation (the company was the first to develop a frequent-flyer program, and it built the world’s largest computer reservations system linking
airlines and travel agencies).

But by 2010, much had changed in the industry: American lost two planes in the 9/11 events, and the downturn in air travel that followed took a toll on the company. The airline didn’t announce a quarterly profit after the attacks until the summer of 2005. After a trying decade, the company had no choice but to make reductions in both employees and destinations.

Wark and his colleagues watched as American’s major competitors, United and Delta, filed for bankruptcy, completed high-profile mergers of their own, and benefited from shedding legacy costs that American continued to carry. Those competitors enjoyed a revenue advantage from being able to offer consumers a substantially larger network. In contrast, American had an aging fleet and a brand that was losing its shine.

Finally, in November 2011, AMR Corporation (American’s parent company) filed for Chapter 11 bankruptcy, becoming the last major carrier to do so. Rather than be the person to lead the company into and out of a trying bankruptcy, then-CEO Gerard Arpey resigned.

During a conference call with reporters and analysts two months later, US Airways’ CEO, Doug Parker, tipped his hand: he said US Airways had just posted quarterly revenues of $18 million and was interested in merging with American.

American’s new CEO, Tom Horton, remained unconvinced that the merger was his company’s best path out of bankruptcy. “We knew US Airways wanted to merge to with us, and we knew they would view the bankruptcy as their chance,” Wark recounts. “At that point, Horton was focused on the need to fix American’s own business before merging with another carrier. If American was going to merge, he wanted it to be in a stronger position: one that would allow it to get the best deal for its stakeholders.”

In March, Horton was telling legacy American employees they needed to remain focused on reinventing American throughout the bankruptcy process. He believed that by getting its own house in order, the company would find the best outcome. It would do this by establishing a baseline to value a standalone American against any possible merger.

Publicly, Parker predicted large boosts to annual revenues through the potential merger. In the summer and fall of 2012, the two airlines entered a serious due diligence phase. Eventually, American’s board, unions, creditors, and senior management agreed that a merger with US Airways presented the best plan of reorganization.

In the end, American’s stakeholders would keep 72 percent of the new company. “American’s management had to weigh the value of 72 percent of a merged company versus a plan that would have allowed American to emerge as a standalone carrier,” Wark explains. “American would likely have been profitable on its own, but the merger presented a far better alternative for our creditors and our stakeholders.”

Before & After

American Airlines (Pre-Merger):

  • 627 mainline jets
  • 77,750 employees
  • Loss of $1.17 billion in operating income (2011)
  • 3,400 daily flights
  • 250 destinations in 40 countries

American Airlines group (Post-Merger):

  • 972 mainline jets
  • 100,000+ employees
  • $4.2 billion net profit excluding special charges (2014)
  • 6,700 daily flights
  • 336 destinations in 56 countries

Just one major step remained—the two parties had to overcome opposition from the Department of Justice. Wark was a key member of the team led by Steve Johnson of legacy US Airways and Gary Kennedy from the legacy American side. Together, the two airlines worked to convince the DOJ that the merger would be good for consumers and should be allowed to close as other airline mergers already had. “We knew [the Department of] Justice would look at this merger very carefully, and we began discussions before we even had a merger agreement,” Wark says. The airlines submitted information to the DOJ and retained experts to substantiate their claims regarding the consumer benefits of the merger and the highly competitive nature of the airline business. The airlines showed that their existing networks were largely complementary and had fewer competitive overlaps than previous mergers the DOJ had not opposed.

The timing of this process was always a critical consideration. The DOJ starts its review process on a standard 30-day time line, which is extended when it makes a request for additional documents, known as a second request. That request stops and resets the time line for a DOJ decision. The airlines fully expected a second request for more documents and information, and they both moved as quickly as possible to submit documents and get the DOJ back on the clock. “We needed them to make a decision so we could close our merger and complete the reorganization of American,” Wark explains. “We had important time lines in the bankruptcy court, and we couldn’t let the DOJ decision move beyond those. We wanted the DOJ process to be finished before we sought final approval of the plan we were presenting to the bankruptcy court.”

With American’s bankruptcy deadlines looming, the DOJ arranged a series of escalating meetings. During this last session, the airlines made their pitch to noted antitrust lawyer and assistant attorney general William Baer, who, as the Federal Trade Commission’s competition director, had blocked a merger between Staples and Office Depot in 1997 and challenged an Anheuser-Busch/Grupo Modelo deal shortly after his appointment by President Barack Obama in 2012. Weeks later, the DOJ sued to block the deal.

After filing the lawsuit in US District Court in the District of Columbia, Baer spoke with reporters on a conference call, saying the decision was consistent with the DOJ’s handling of similar mergers. The two airlines could survive as independent companies, he said, and implied that competition would be better served without the merger.

Back at the airlines, the legal teams prepared for a fight. “We hoped we had convinced them, but we weren’t foolish enough not to consider the alternative,” Wark says. “We had litigators lined up for both legacy companies, and we knew our counter arguments. The plan was already in place.” Wark adds that the key to navigating high-profile cases lies in picking the right team. American hired Jones Day and Paul Hastings, and US Airways retained O’Melveny & Myers and Dechert. “You’re not going to handle a bet-the-company kind of case without first finding the very best outside resources,” Wark says. “We look at both individual attorneys as well as the depth of the firm and the resources.” In this case, a team led by Jones Day, with support from Paul Hastings, provided American with the expertise and skills it needed.

As in any major case, legacy American focused on communication, ensuring the entire team understood recent developments and strategies. Periodic conference calls kept everyone on the same page and allowed an experienced team of lawyers to find the best solutions to issues and challenges. Wark had previously handled cases that landed on the front page of major newspapers and understood the importance of updating business executives and involving corporate communications teams.

“We felt the deal would lead us back to the top, which is where we believe American belongs.”

Timing remained critical, and the first major fight in the lawsuit involved how quickly the case could get to trial. The airlines didn’t stand before a judge until September 2013. The DOJ had been investigating for almost a year, and officials pushed for a spring trial. American, which could not emerge from bankruptcy until its merger plan was approved, wanted to try the case in late fall. When the judge set a trial date before the end of 2013, the airlines’ teams launched into overdrive, working around the clock.

As they prepared, the airlines readied themselves to take the dispute through to trial. The DOJ was concerned about the number of the new company’s slot holdings at Reagan National Airport in Washington, DC—US Airways already had more than 50 percent of the slots at the airport (one of the few in the nation that is subject to slot regulations that limit the number of arrivals and departures). The DOJ was also interested in putting gates and other facilities in the hands of low-cost carriers at other gate-constrained airports, such as Boston, Los Angeles, and Chicago.

Through complex negotiations, the airlines and the DOJ exchanged proposals that ultimately led to a deal. The new American agreed to divest slots and gates at Reagan National and other key airports in cities including New York, Chicago, Boston, Los Angeles, Miami, and Dallas, and the DOJ agreed to dismiss its lawsuit. The airlines also agreed to continue serving locations in the plaintiff states (Arizona, Florida, Michigan, Pennsylvania, Tennessee, Texas, and Virginia) and the District of Columbia that had joined the DOJ in opposing the merger. The states dismissed their claims, as well. The path was finally cleared for American and US Airways to close their merger.

Both companies announced the settlement agreement on November 12, 2013. Two weeks later, the US Bankruptcy Court for the Southern District of New York approved the settlement, directing all unsecured claims against AMR Corporation to be satisfied by stock in the newly created American Airlines Group.

Settlement Details

American Airlines Group divested assets at seven airports.

The new American conceded:

  • 104 slots, plus gates at Ronald Reagan Washington National
  • 34 slots, plus gates at LaGuardia (New York)
  • 2 gates at O’Hare International (Chicago)
  • 2 gates at Los Angeles International
  • 2 gates at Logan International (Boston)
  • 2 gates at Miami International
  • 2 gates at Dallas Love Field

On December 9, 2013, the airlines closed their historic merger. With the settlement, lawyers from legacy American felt their company was back on track. “I’ve been with American for over 20 years and have seen periods when we were clearly the industry’s leader and periods when we’ve fallen behind,” Wark says. “We felt the deal would lead us back to the top, which is where we believe American belongs.”

Today, American Airlines Group is deep into its post-merger integration process. US Airways’ senior management team took over most of the top positions with strong support from labor unions. From American’s perspective, the deal has been overwhelmingly positive. Wark calls it “the most successful bankruptcy reorganization in the history of American commerce” for shareholders, creditors, communities, and employees. Creditors received stock in the new American that was worth 100 cents on the dollar for their claims; shareholders, who are usually wiped out in bankruptcy, recouped billions of dollars in value; employees received better pay and benefits; and the new American has used record profits to reinvest in new airplanes and products that benefit its customers.

On January 27, 2015, the new company released earnings and results on a conference call with stakeholders and reporters. In comparing year-over-year results for American Airlines and US Airways, and on a combined basis, the company’s fourth quarter 2014 net profit was a record $1.1 billion, or $1.52 per diluted share (before special charges). The figures total a 153 percent improvement from the same period in 2013. 2014’s annual net profit before special charges was $4.2 billion.

Still, challenges remain. In late 2014, the company sent four-percent pay increases to most employees in a move designed to reset the tone with labor. The merged company has deals in place with pilots and flight attendants, and it’s working as quickly as possible to obtain new agreements with its entire unionized workforce.

Later this year, American will integrate two frequent-flyer programs and two reservation systems while continuing to renegotiate agreements with vendors, buyers, and other partners.

Additionally, American Airlines Group must continue to operate American and US Airways as separate airlines until the Federal Aviation Administration gives it approval to operate under a single operating certificate. Obtaining that approval is a protracted process that has taken other airlines as long as two to three years to complete. American hopes to receive a certificate by summer 2015.

Despite these challenges, Wark believes American Airlines has the right people in the legal department to help the company move forward. “Under the direction of Steve Johnson (executive vice president of corporate affairs), we’ve completed the integration of the legal department, and the team is extremely deep,” he explains. “We’ve combined the best of the two departments and have established a
collegial and collaborative atmosphere.”

With the merger and lawsuit behind him, Wark says the future is bright. The industry is in a better place, fuel costs are down again, and the new American is poised for success. After five years of upheaval, American Airlines is ready to take flight.

Client Connection
Dechert LLP: “Bruce seamlessly integrates a keen business sense with a deep understanding of the litigation process. I have been across the table from him and now share the same side. I much prefer the latter.” –Paul T. Denis, Partner