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Statement of Gary F. Kennedy

Senior Vice President, General Counsel and Chief Compliance Officer

American Airlines, Inc.

Before the 

COMMITTEE ON THE JUDICIARY

SUBCOMMITTEE ON REGULATORY REFORM, COMMERCIAL AND 

ANTITRUST LAW

Hearing on Competition and Bankruptcy in the Airline Industry: The Proposed Merger of 

American Airlines and US Airways

February 26, 2013

Chairman Bachus, Ranking Member Cohen and Members of the Subcommittee, thank you for 

the opportunity to testify today about the issues of airline competition, bankruptcy, and the 

proposed merger of American Airlines and US Airways. We appreciate the manner in which this 

hearing is structured as all of these issues are inter-related.

As General Counsel of American Airlines, I have been intimately involved in both the Chapter 

11 restructuring of the company and the proposed merger between American and US Airways. I 

would like to give you a sense of how we arrived at this point from American’s point of view 

and why this transaction is so critical to the customers, employees and communities of both 

companies. I believe Mr. Johnson from US Airways will address what both companies hope to 

achieve going forward.

As this Committee knows well, the airline industry has experienced severe economic turbulence 

over the past decade. The shock waves from the events of 9/11 created enormous difficulty in 

the aviation industry and all US carriers grappled with ways to survive in the wake of the 

emotional and economic upheaval created by those terrible events. This was followed by the 

unprecedented run-up of jet fuel prices in the summer of 2008 and the financial collapse of the 

economy that further strained our industry as corporations cut travel budgets, and discretionary 

spending on non-essential items plummeted. The consequences were significant. During this 

period, there were a series of airline bankruptcies, severe cuts in capital expenditures, the 

furlough of thousands of employees, the loss of air service to many communities, and three 

major commercial air carrier mergers.

For most of the past decade, American Airlines took a different path than many of our 

competitors. In 2003, we were on the brink of filing for bankruptcy protection, but thanks to the 

willingness of our organized labor representatives to take the steps necessary at that time to 
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reduce costs, we avoided a Chapter 11 filing. For the next eight years, as our major competitors 

reduced costs through their own Chapter 11 cases and created larger and more attractive 

networks through consolidation, we struggled to find a path to financial stability, while 

maintaining a generous package of benefits for our workers and quality service for our 

customers.

As we worked hard to avoid a bankruptcy filing, our largest competitors were embarked on a 

different course and new entrants were poised to take advantage of the turmoil being experienced 

by the legacy carriers. In 2001, American was the largest airline in the world. With the mergers 

of Delta and Northwest, United and Continental, and Southwest and AirTran, American became 

the fourth largest carrier domestically and dropped to the third largest carrier globally. At the 

same time, low cost carriers, old and new, continued to grow and enter more markets. Today, 

the vast majority of our passengers are flying on routes with competition from one or more low 

cost carriers, and that number is expected to increase. That will certainly be the case in the 

Dallas/Fort Worth region and elsewhere when the Wright Amendment perimeter rule is lifted 

next year. 

In addition to the changes occurring on the domestic front, the configuration of international

global airline alliances was also changing. Although the joint business venture among British 

Airways, Iberia, and American was finally approved after 13 years, we had fallen far behind our 

US competitors, all of which enjoyed the benefit of a much earlier approval of their joint 

ventures. In short, on a competitive and financial basis we continued to lag far behind the rest of 

the industry.

American did not stand idly by during these years. We undertook a variety of steps to position 

ourselves for long-term success. We strengthened our network by focusing on markets with the 

greatest concentration of business travelers, and we fortified our alliances with the best 

international partners. We signed a historic and transformational aircraft purchase agreement for 

550 new aircraft, one that promised to give us one of the most modern and fuel efficient fleets in 

the industry. And, we began investing again in our products, services and technology to create a 

world-class travel experience. Despite our efforts and the substantial progress we made to 

succeed in the long term, our losses continued to mount, reaching $12 billion over the previous 

10 years. And, there was no end in sight.

In November 2011, our Board came to the painful conclusion that time had run out. The only 

viable path forward was to restructure our business under Chapter 11 of the Bankruptcy Code. Of 

course, in the months and years leading up to our Chapter 11 filing, we gave strong consideration 

to possible merger partners. Given our weak financial condition at the onset of our restructuring 

and the fact that we had yet to establish a track record of financial improvement and value 

creation, we determined that we must first get our own house in order before we could properly 

evaluate a potential merger with another airline. Indeed, until we had a line of sight to a far more 

stable financial structure, both in terms of revenues and costs, we believed we would not be 
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negotiating from a position of strength and, as such, would be more challenged in fulfilling our 

duty to maximize value for our owners.

On the day we filed for relief under Chapter 11, we had a change in leadership. Our new CEO, 

Tom Horton, asked everyone at the company to work hard to achieve a successful restructuring, 

while continuing to run a top notch airline with great service to our customers. He reminded us 

that with a strong balance sheet, a competitive cost structure and restructured contracts that 

allowed us to compete on a level playing field, we could then appropriately consider a range of

strategic options.

There is no easy way to describe how difficult our bankruptcy reorganization has been for the 

company and our employees. Beginning at the top of the organization, we reduced our senior 

management ranks by 35 percent. We then moved through the balance of the organization 

making necessary changes, including the reduction of 15% of total management staff. 

Meanwhile, we began renegotiating certain of our secured obligations, our leases, and our

contracts with vendors. We eliminated significant expenses and tightened our belts in every 

department of the company. Most importantly, we entered into intense negotiations with our 

labor unions in an effort to improve productivity and reduce overall costs. While this was a long 

and difficult process, we achieved new long term contracts with each of our organized labor 

groups. These new contracts include productivity improvements and changes to health and 

retirement benefits that put American on a level playing field with the legacy carriers. At the 

same time, we increased pay for our employees and mitigated job losses by offering retirement 

incentives. One of the most important objectives we achieved was to freeze, rather than 

terminate, our employee pension plans. As a result, we now expect to fulfill those obligations, 

rather than unload them on the PBGC, as other airlines have done. 

Of course, all of what we have accomplished was done in the context of our Chapter 11 case and 

in consultation with the Official Committee of Unsecured Creditors appointed by the US Trustee. 

As we worked our way through our Chapter 11 case, we were approached by US Airways early 

last year with a merger proposal. At that time, we declined to engage in discussions with them. 

Instead, we continued to work on our reorganization. As we did, a number of positive 

developments quickly emerged. First, we began to see encouraging financial and operational 

results. Operating costs were down and, just as importantly, revenues began to rise – topping the 

US industry in year-over-year unit revenue improvement for six straight months – and our

operational performance began to improve to the best levels in many years. By mid-summer we 

had enough certainty around our standalone plan and our improving financial position that we 

decided, in conjunction with the Creditors Committee, to embark on a formal process to consider 

strategic alternatives. 

As part of this process, we entered into a non-disclosure agreement with US Airways that 

allowed both companies to share information and engage in a detailed analysis of the potential 
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benefits of a combination. The Creditors Committee, through its financial and legal advisors, 

actively participated in this undertaking. Later in the process, an Ad Hoc Committee, consisting 

of substantial holders of our unsecured debt, also reviewed the proposed combination in

significant detail. It is fair to say that multiple parties scrutinized and evaluated this proposed 

transaction. Ultimately, we agreed to a structure with American stakeholders owning 72% of the 

combined companies. 

It was clear from the outset of our review that a merger with US Airways could create significant

value for our stakeholders and bring substantial benefits to the traveling public. We have 

conservatively estimated that by 2015 revenue and cost synergies will outweigh cost dissynergies by over $1 billion. The majority of these revenue synergies are derived by combining 

two complementary networks that will offer consumers more service at more times to more 

places. And because this will be a merger of complementary networks, these benefits come with 

virtually no loss of competition. Of the more than 900 domestic routes flown by the two carriers, 

there are only 12 overlaps. This is one reason we are convinced that this merger is consistent 

with good public policy. The combination will make our company a much stronger competitor 

against the other large airlines. Consumers will have three strong, healthy global network carriers 

from which to choose, as well as a number of low cost carriers, including Southwest, JetBlue and 

Virgin America. The new American will have the financial strength to invest the resources 

needed to improve the customer experience, including new aircraft, cutting edge products and 

services, and the technology and tools designed to help our employees deliver superior service to 

our customers. 

The combined airline will offer new routings for our passengers in thousands of additional 

markets. For American, the greatest benefit derives from two principal components. First, US

Airways offers a substantial network in the Eastern section of the country. This will complement 

our strong operations in the Southeast, Midwest, and West Coast. Second, US Airways offers an 

impressive network in small and medium size communities. We view these as great assets that 

will provide us the opportunity to reach many communities that our customers are not able to 

access today. Like US Airways, we value service to small and medium size communities and 

have consistently looked for additional markets that can enhance our entire network. 

We are under no illusions that mergers are easy or seamless. We have agreed from the outset to 

do everything in our power to learn from both the successes and mistakes of those who have 

gone before us. Many of the most important decisions have already been made. The combined

company will build on the great American Airlines brand and our AAdvantage loyalty program. 

The company will remain headquartered in the Dallas/Fort Worth area, and all hubs in both 

systems will continue to be hubs in the new American.

Our CEO, Tom Horton, and US Airways’ CEO, Doug Parker, will jointly lead both the transition 

team and the new American as it emerges from bankruptcy. Mr. Parker will be CEO of the new 

company and Mr. Horton will be Chairman of the Board. I can personally attest that despite the 
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difficult path that got us here today, the spirit of cooperation and determination in both 

companies is extraordinary.

For reasons that Steve Johnson will outline in greater detail, we believe this transaction will be 

good not only for our two airlines and employees, but also good for competition and the 

travelling public.

I know that many Members of Congress are skeptical of promises made in these situations and 

also concerned about industry concentration. As to the former, we do not intend to make 

commitments that we cannot keep. And as to the latter, it is clear that this merger does not create 

a high degree of concentration. Above all, however, I would urge you to consider the facts with 

which I began my testimony. Nothing has been more damaging for the airline industry, our 

employees, our customers, and our shareholders than the years of economic turmoil we have 

experienced. 

This transaction will give us the opportunity to become a stronger competitor, one with a degree 

of financial stability that we have not experienced in many years. We will be a company that is 

better positioned to deliver for customers and its people. This transaction is unique in that it is 

endorsed by all of our labor unions and embraced by the management and boards of both 

companies. We know we have a solemn obligation to implement the transaction with great care 

and thought. We are eager to do so.

Thank you again for the opportunity to testify today.
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