In a move one airline analyst labeled "a stroke of genius," American Airlines announced three transactions on January 10 that dramatically increases the scope, efficiency and desirability of American's network.

These deals also serve to firmly anchor American's Network Leadership goals by strategically growing the airline in a way that makes sense financially and doesn't introduce overcapacity into the marketplace.

To start, American agreed to purchase substantially all the assets of Trans World Airlines (TWA) for approximately $500 million in cash and the assumption of aircraft operating leases. American also agreed to acquire certain strategic US Airways assets, including gates, slots and aircraft, for $1.2 billion to United Airlines and assumption of approximately $300 million in aircraft operating leases. Finally, American agreed to procure a non-controlling 49 percent stake in DC Air for $82 million. All three transactions require some form of regulatory or bankruptcy court approval.

"In the history of the airline business, there's probably never been a more complicated, more intricately put-together deal, set of deals, as this one," said airline analyst Michael Boyd. "It took a lot to be able to see how these very different pieces could be put together to make money, and also to see how to put them together in a way that makes it very likely that they will get all the necessary government approvals."

Details of the Deals
As part of a bankruptcy asset transaction, TWA would be integrated into American with continued opportunities for its employees and a continued hub operation in St. Louis. American will acquire up to 190 aircraft, 175 gates and 173 slots.

"The addition of TWA will give us an important new hub in St. Louis and significantly improve our position as an east/west carrier," said American's president and CEO Don Carty. "American is also uniquely positioned to fully utilize TWA's excess maintenance capacity, which will enhance our operations and allow us to better serve our customers."

From United's proposed merger with US Airways, American would acquire assets including 14 gates, 36 slots and up to 86 aircraft, as well as the right to lease the gates and slots necessary to operate half of the northeast Shuttle with United Airlines.

The United/US Airways transaction resulted from a growing sense that for the two airlines to get government approval for the merger, they would need to divest some assets. The challenge for American became how to ensure those assets were working for the airline and not against it.

"The United/US Airways transaction will bring to American a large number of valuable gates and slots in key business travel markets," Carty said.

DC Air is the first significant new entrant at Ronald Reagan Washington National Airport in more than a decade, and, in addition to its 49 percent investment, American will enter into an exclusive marketing agreement with the new airline, owned by Black Entertainment Television founder and owner Robert Johnson. American personnel will fly and maintain 11 F100 American aircraft marketed as DC Air service, while American retains the right of first refusal to acquire the remaining 51 percent of DC Air.

"By jointly operating the Shuttle with United and aligning ourselves with DC Air, we can generate a level of customer loyalty and achieve a level of growth for American Airlines, American Eagle and DC Air that would otherwise have taken years to achieve," said Carty.

Acquistions Show Sound Logic, Smart Strategy
After United announced its proposed merger with US Airways, more industry consolidation seemed likely. According to Vivian Lee of Alliance Capital Management, "It was just a question of who was going to make the first chess move. And, as smart and aggressive as the guys at American are, it was hard to think they would sit around and wait for something to happen. They're just doing what they do best, making bold deals."

Addressing the issue of competition, Clyde V. Prestowitz Jr., president of the Economic Strategy Institute in Washington, D.C. said in a Wall Street Journal editorial, "[A]ccording to our analysis, airline consolidation is likely to benefit many passengers by increasing travel convenience. By combining regionally focused carriers into national networks, airline mergers will enable travelers to reach more destinations without switching airlines."

Employee Questions
For all the industry speculation, however, Carty and the other AA dealmakers know the top priority for employees of all the airlines involved.

"We realize that the primary question on everyone's mind is 'How does this affect me and my job?'," Carty said. "We simply don't have the answer to that yet. With transactions as complex as these, it will take us a while to sort through the details. But we know the question and we're going to work hard to ensure employees get accurate information as it becomes available."

TWA president and CEO William Compton, a former TWA pilot, echoed the pledge and provided his rationale for agreeing to the deal.

"If you could pick any airline in the world where you would want to place your employees, American would be at the top of our list," Compton said. In fact, American was the only bidder willing to offer jobs to most of TWA's employees.

Financial Impact
The costs involved in the acquisitions could reduce AMR Corp.'s profits by about 9 percent in 2001, assuming they are completed by mid-year. But CFO Tom Horton said he expects the acquired assets will help boost AMR's profits in 2003-2004 by 23 to 24 percent.

A more detailed, up-to-date description of the deals and the legal and governmental approval processes are available online at http://www.amrcorp.com/aadeals.htm.