American Airlines Announces $11 Billion Merger with US Airways
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UPDATED: Feb 15, 2013
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American Airlines is set to merge with US Airways in an $11 billion deal. US Airways shareholders will take 28 percent of the newly-formed airline, while American Airlines shareholders, employees, unions, and creditors take 72 percent, reports The Wall Street Journal.
Under federal business law in the United States, one corporation can legally take over ownership of another through a merger. The company being absorbed by the other is no longer a brand, while the acquiring company maintains its identity and takes on the assets and liabilities of the merged corporation.
American Airlines had been struggling and filed Chapter 11 bankruptcy in 2011. For a company in bankruptcy to be merged with another, the presiding bankruptcy judge must give consent. As the merger moves forward, American Airlines will have to get judge approval before the merger can be finalized. Many other airlines have faced bankruptcy in recent years and those involved in airline mergers including Delta and United had to cross the same bridge. A bankruptcy judge will generally approve this type of merger knowing the failing company may have no other choice and liquidation would cause loss of jobs.
There are various types of acquisitions that can take place. The merger between American Airlines and US Airways is called a horizontal merger, which is when one company absorbs another that provides a similar product—in this case, air service. Because the two airlines cover many different airport hubs around the country, the combination will make for a wider reach and ideally more convenience for passengers.
Problems, however, could arise. An increase in delays and reservation errors was reported during other similar airline mergers and given the complexity of the merger of such massive corporations, many would expect the same complications from the American-US Airways transaction.
Concerns Over Competition
Another concern is that with mergers comes diminished competition in an industry and in theory makes for higher prices, fewer options and the potential for monopoly. After this merger, US Airways is going to be an air transportation giant, among the ranks of other big-name domestic airlines. Some say this is progress leading to better, stronger companies. Others disgree.
What happens when United buys Delta or US Airways merges with United? Any of these scenarios could lead consumers down a path that ends with only one or two options for domestic air travel. Without competition, companies can charge as much as they like; what are consumers going to do if there are no other airlines to choose from? Fortunately, the federal government regulates corporations through anti-competition laws—to some extent. The intention of the law is to ensure monolpies do not form in any given industry. But some would argue oversight is lax and many firms merge as they wish.
The arguments for acquisitions, however, maintain that they are business tools that bring stronger management and better employee skills; or that they can improve product quality and efficiency in product development, ultimately increasing profit and quality alike. If one business is doing much better in the same field than another, clearly they are doing something right, and a merger only maximizes this efficiency.
Regulators will take a look at a proposed merger and determine if it is in the best interest of the companies and consumers. In this case, the two airlines got the go-ahead and proponents of the business deal report it will create an overall better airline. Some are saying that the new and improved US airways can now buy updated planes, improved technology and offer more to customers. Others are not convinced this won’t lead to price hikes for plane tickets and added fees. After all, many of us remember a time when we could check our bags for free—one could argue, a time before many of the recent mergers took place.