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What A US Airways & American Airlines Merger Would Mean For You

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About two years ago, some analysts first floated the idea of a merger for US Airways. After all, the airline was the smallest of the legacy carriers, a stand alone airline with only about eight percent of market share. Back then, one of the potential suitors was ... American Airlines.

Funny how times have changed. Last November, American filed for Chapter 11 reorganization, and the merger/acquisition rumors started flying again. Would Delta buy American? Would Delta go after US Airways? Or would US Airways go after ... American?

The most likely scenario turned into a real one last week when US Airways announced it was pursuing American, even before it emerges from bankruptcy.

In a letter to employees, US Airways chairman Doug Parker, who had made an unsuccessful bid to go after Delta a few years back, announced he had filed a statement (a form called an 8-K) with the Securities and Exchange Commission disclosing that the airline had signed agreements with the three unions that represent nearly 55,000 American Airlines employees: The Allied Pilots Association (APA), the Association of Professional Flight Attendants (APFA) and the Transport Workers Union (TWU), which represents all of American Airlines' mechanics and fleet service employees.

In what could only be described as a smart and essential move, it turns out that Parker had been in discussions with these unions for quite some time. At the same time, American Airlines was planning to go to bankruptcy court on April 23 to seek court approval to void its existing contracts with its unions.

What Parker did was go to those unions and more or less ask them if they wanted to cut a better deal with him than they could conceivably ever get from American, including promising better wages and fewer layoffs.

It was -- in relative terms under the circumstances -- an offer the unions needed to consider. American proposed to cut 13,000 jobs as part of the bankruptcy.

US Airway's merger offer to the unions proposed saving at least 6,200 of these positions. It didn't save all the jobs, but was positioned to be decidedly less painful. The result: The unions jumped on board. Shortly after US Airway revealed it had had those discussions last week, the three unions issued a public statement announcing their support of the merger.

Does this mean the deal is done? Hardly. There are other creditors in the American bankruptcy proceedings that have to agree as well. Let's not forget US Airways' own unions as well as issues like seniority, work rules, integrating ground/maintenance/flight crews.

But, it was an important step towards a merger. What happens next? More court proceedings for American, more meetings between US Airways and other American bankruptcy creditors, and then, of course, there's the bankruptcy judge and some upcoming rulings. Last but not least, federal regulators have to determine if a merger like this violates anti-trust rules or creates a major restraint trade issue. For the moment, the regulators seem to be the smallest challenge to the proposed merger, since there is very little overlap or additional market concentration formed by the merger.

About the only thing that is likely to happen, if a merger occurs, is that the resulting airline would be called American and it would remain based in Dallas. Phoenix, where US Airways is based, would most likely continue as a major west coast hub for the airline.

What does it mean for you? In the short term, absolutely nothing. At the very earliest, a merger probably wouldn't happen for at least a year. First, American Airlines is likely to fight this -- or insist on tougher terms. American doesn't even expect to come out of bankruptcy until the end of this year, and a growing number of analysts are now projecting 2013 at the earliest.

It's the long term impact that worries me. I have yet to see a merged airline substantially increase its routes or fleet of planes or improve service except on highly competitive overseas routes where they can make money in the business- and first-class cabins. I have yet to see a merged airline start -- or even maintain -- low fares.

The name of the game today is capacity reduction: fewer planes, fewer flights. And that translates to fewer seats. The law of supply and demand is quite unforgiving here -- airfares have nowhere to go but up.

If you're a member of either US Airways or American's frequent flyer program, a combined new program may boast more routes, but the reality is fewer available award seats. My advice is to start planning ahead as much as you can so you can start to redeem those miles as quickly as you can. There is every reason to believe that no matter what happens -- whether there is a merger or it never happens -- those miles will be devalued in the days and weeks and months ahead.

For the time being, there's no need to fasten your seat belts, but this could eventually be a very bumpy ride.