AMR Bankruptcy Could Pave Way For US Air Deal, Citi Says

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Bankruptcies in the airline industry have a way of leading to mergers, as carriers use court protection to rework contracts and emerge with better cost structures. With American Airlines parent AMR filing Chapter 11 Tuesday, bets are already being made on a potential dance partner.

Citi analyst Will Randow writes in a note that he ��would not be surprised�� to see AMR pursue a tie-up with US Airways. Both companies were left out of the musical chairs consolidation game the last time around, when the United-Continental and Delta-Northwest mergers were consummated.

All four of those airlines endured a spin through bankruptcy court first: United filed in 2002, Continental in 1990 and Northwest and Delta on the same day in 2005. US Air is no stranger to the bankruptcy process, having filed Ch. 11 in 2002 and then again in 2004, but until Tuesday AMR had never filed for court protection since the airline industry was deregulated in the late 1970s.

Not being forced into court-protected restructuring may be a badge of honor, but it also had AMR in a position of being at an $800 million disadvantage on labor costs vs. its peers, Citi��s Randow writes. The recent rejection by the airline��s main pilot union of a deal that would have save $100 million per year may have sealed AMR��s fate.

Restructuring its cost and debt would certainly make AMR more attractive as a partner, but Randow also points out that the carrier may be more receptive to a deal with the ascension of Thomas Horton to Chairman and CEO after the departure of Gerard Arpey, who preferred a go-it-alone strategy.

In a conference call Tuesday, Horton said the labor issues with the pilot union ��was not the final straw�� that resulted in Ch. 11, according to TradeTheNews.com. Horton went on to say that ��anything ! could ha ppen�� in reference to a hostile takeover, and said he is ��hopeful�� the airline can emerge from bankruptcy in about 15 months.

AMR shares, which had lost more than three-fourths of their value this year before Tuesday��s filing, plummeted in a herky-jerky trading session marked by several triggered circuit breakers. Near the closing bell shares were off 80% at 32 cents apiece. US Air gained 4.7%.