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American and US Airways on Final Approach to Merger

For American Airlines and its supporters, it's been a long, strange trip, from the industry's preeminent carrier to a bankrupt also-ran, with unmoored seats and a murky future.

The airline took an important step toward solidifying that future on Friday with the ratification of a new contract by its pilots union. That's the last of its unionized groups to approve employment agreements that will put the cost side of American's operations at parity with the other major airlines.

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With the contentious labor negotiations behind them, American's management team can focus on the next step: evaluating the company's post-bankruptcy options and making the case with creditors and the bankruptcy judge for either a merger or a stand-alone future.

The following excerpt from a letter American chief Tom Horton sent to employees following the finalization of the pilot negotiations gives a clue as to the current state of the airline's thinking:

As we bring our restructuring to a close, we are also completing our review of strategic alternatives. As you know, we have been evaluating the merits of a combination under a non-disclosure agreement with US Airways. While we are confident the new American will be very strong, we are evaluating whether such a combination could create value for our owners and a positive outcome for our people and our customers. We expect to have a conclusion on this soon.

To anyone who has followed American through the bankruptcy process, the tone and content of the letter will stand in sharp contrast to American's very public antipathy toward a merger when US Airways first proposed it.

Initially, American flatly rejected any notion that a tie-up with US Airways was part of a viable future. That position softened gradually over the ensuing months, with American in August signing a non-disclosure agreement with US Airways that allowed for data-sharing between the two carriers.

And now, at a critical point in the restructuring proceedings, it would appear that the merger scenario is uppermost on the minds of American's top managers.

The leadership group at American that gave us SAAver fares, hub and spoke networks, and the AAdvantage frequent-flyer program are long gone. And their successors have much to atone for, including delaying restructuring in bankruptcy, a tactic that was proved not only viable but necessary by United, Delta, Continental, Northwest, and US Airways.

US Airways, on the other hand, is solidly profitable.

But for all its recent missteps, American has managed to retain substantial goodwill from its customers.

And in spite of its relatively strong financial performance, US Airways is more likely to be lambasted than lauded by travelers.

A consideration of the pros and cons of the alternatives has left many of American's customers dreading the prospect of a US Airways takeover and convinced that American, in its last and greatest mistake, will be a willing merger partner.

It looks increasingly likely that such concerns are justified.

Reader Reality Check

A US Airways-American merger: Yay or nay?

This article originally appeared on FrequentFlier.com.

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