Reference no: EM131488538

American Airlines US Airways Merger (1 page)

Ethical Egoism Analysis (from the standpoint of the two companies)

• Statement of ethical theory and key ethical principles
• Application of ethical theory and principles to topic and ethical analysis
• Moral Conclusion pursuant to additional third ethical theory

Case Study

In February of 2013 American Airlines and US Airways announced that the two companies would merge. The merger would create the largest airline in the United States, with more than $38.7 billion in revenue and more than 100,000 employees. The combined airline is expected to keep the American Airlines name and be based in Ft. Worth. Wall Street analysts had been expecting a merger since American Airlines filed for bankruptcy protection in 2011. Currently, the recently merged United Airlines-Continental Airlines is the largest U.S. airline by traffic. The merger, if approved by the government, would leave three other major carriers dominating the airline industry in the United States United Continental, Delta Airlines, and Southwest Airlines. There are also smaller niche carriers, such as Alaska Air Group, and Jet Blue Airways, who could be affected. The new merged American Airlines would be 2.3% larger than United Airlines by capacity and 2.2% larger by traffic.

U.S. Airways Chief Executive, Doug Parker, is likely to lead the merged airline, while American Airlines executive, Tom Horton, would serve as chairman.

Creditors and bondholders of American Airlines have agreed on an equity split. American's creditors would own about 72% of the merged airline and US Airways shareholders about 28%. The all-stock plan would deal would be executed as a reorganization plan that takes American Airlines out of Chapter 11 bankruptcy protection. Creditors of American Airlines support the merger. The bondholders also support the merger because they believe it would enable them to recover more money. American Airlines pilots union ratified a new contract in December of 2012 which included an agreement regarding of memorandum of understanding on the terms for a merger. Other unionized workers at American Airlines, such as flight attendants, mechanics, and ground workers. 

The two airlines are hopeful that the merger eventually will generate increased revenues and cost savings. Those results would mainly come from eliminating duplicative office and operational functions. , including downsizing US Airways Tempe, Arizona, headquarters, reducing management ranks, sharing airport gates, and getting rid of some aircraft. US Airways three hubs in Philadelphia, Charlotte, and Phoenix would be combined with American's hubs in Dallas, Miami, Chicago, New York, and Los Angeles. Phoenix would probably be the first hub to go as it is sandwiched between Dallas and Los Angeles.The new merged American Airlines would then have hubs in the seven of the nine busiest airports and also have a strong presence in Europe and Latin America. As a result, US Airways says that the merger overall would yield $1.2 billion in additional revenues and cost savings.

Consumers should expect higher fares with fewer, larger airlines. Actually, the airline industry has been profitable despite the poor economy and high fuel prices. Although passengers naturally dislike the higher fares, the larger carries also offer bigger route maps, dozens of new destinations, and more perks, especially expanded frequent-flyer programs, as well as the ability to invest more in customer service. However, there still will be the problem of a lack of service to Asia. American now accounts for less than 5% of the seats to Asia and US Airways does not fly to Asia at all. However, the merger deal would bolster American's presence in Latin America, where it is the number one carrier, and which has a 71% of market share in Miami. Moreover, acquiring US Airways would also increase American's service to Europe, since US Airways has near daily flights from Philadelphia to 11 European cities, including Rome, Munich, Amsterdam, and Brussels, which are four cities not served by American. At LaGuardia airport in NYC, where Delta has a 40% market share, the new merged American would increase its share to 31% from less than 20%. Furthermore, at Reagan National Airport in Washington, D.C., where nearly one-half the market is controlled by US Airways, the new American would have control over 62% of departing seats. 

Most industry experts expect that the government will approve the merger since the two airlines have slightly fewer over-lapping routes than the most recent merger partners United Airlines and Continental Airlines. The merger deal would also require the approval of the U.S. Bankruptcy Judge overseeing American's reorganization. Consolidation in the airline industry has met more stability and higher prices, so approval is expected.

Bibliography: Ahles, Andrea, Giant Air Merger Likely Soon, Miami Herald, February 8, 2013, pp. 8B, 10B; Nicas, Jack, For AMR, a Vast New Network, The Wall Street Journal, February 8, 2013, pp. B1, B2; Spector, Mike, and Carey, Susan, Deal to Create Air Titan Nears, The Wall Street Journal, February 7, 2013, pp. A1, A6.

Addendum to Case #199 - American Airlines - US Air Merger - In August of 2013, in a surprise move, the Department of Justice said it would challenge the proposed merger contending it violates anti-trust law because it would eliminate a competitor in over 1000 routes and would cause substantial harm to consumers in the form of higher fares and fees, particularly for checking bags and changing flights. The airlines said they would defend their merger in court and asserted that consumers would benefit because the merged airline would be a stronger competitor against United and Delta (whose mergers with other airlines the Justice Department had previously approved). Bibliography: Yost, Peter, and Koenig, David, "Feds balk at air merger," The Record (Bergen, N.J.), August 14, 2013, pp. L-8, L-10. 

(In November of 2013, the Department of Justice announced that it will approve the merger of American Airlines and US Airways. However, the merged airlines will have to divest and sell to low-cost competitors several takeoff-landing slots at various airports, principally at Reagan National Airport in Washington, D.C., and LaGuardia Airport in NYC. Bibliography: Sampson, Hannah, "Cleared for takeoff," Miami-Herald, November 13, 2013, pp. 1A, 2A).