The bankruptcy court has approved the proposed merger of American Airlines and US Airways without a controversial $20 million payout to American chief executive Tom Horton.

“This merger is a terrific result,” says judge Sean Lane at the hearing in New York today, adding that the proposed compensation to Horton “casts the whole thing in unfavourable light by implication”, prior to making his ruling.

The judge declined to rule on the payout - known as exhibit G in the merger agreement - leaving it up to American and its creditors to decide whether to include it in the final reorganisation plan or remove it entirely from the bankruptcy process and let the new board handle the matter.

Lane objected a proposed amendment to the merger agreement by AMR that would have required the board of the new company to approve the payout.

American parent AMR must file its reorganisation plan with the court by 29 May.

“The companies have to review the ruling and review the merger agreement,” says John Butler, a partner at Skadden representing the unsecured creditors committee, speaking with reporters after the hearing. “I expect that there will be an amendment to the merger agreement in its final form.”

He adds: “There is nothing in this hearing that says this payment will not be made.”

Butler says that the ruling will not delay the merger, which is expected to close in the third quarter.

"Judge Lane’s approval of the merger agreement today allows us to continue progressing forward with our planned merger and we are gratified to know that he considers the merger an 'excellent result' for stakeholders," says American.

The US Trustee objected to the $19.9 million payout, which was split equally between cash and stock and also included free first class travel for life, on the grounds that it violated section 503C of the US bankruptcy code. The statute limits severance payments to executives as part of chapter 11 reorganisations.

“The debtors manipulated the timing of payments in order to avoid 503C,” says Susan Golden, an attorney at the US Justice Department representing the US Trustee, in court earlier today.

She was responding to comments by AMR counsel Stephen Karotkin, a lawyer at Weil, Gotshal & Manges, that the payout would be an obligation of the new company that will be created once it exits bankruptcy and the merger with US Airways closes, and not one of the existing entity undergoing chapter 11 reorganisation.

The trustee was not the only one objecting to Horton’s compensation, or “merger bonus” as lawyers put it. American pilot Robert Pagoni says that the airline’s management has no concept of personal “sacrifice” while its rank-and-file employees have endured cuts and objected to the payout, at the hearing today.

He recommends that the compensation be cut to “$500,000 and unlimited coach travel for the rest of his life”.

The trustee dropped objections to short-term and long-term incentives in the deal after discussions with AMR today. The incentives are designed to bring the compensation of American managers close to parity with their counterparts at US Airways.

Lane must next approve a reorganisation plan for AMR, which could occur by the end of July at the earliest. The $11 billion merger also requires the approval of US Airways shareholders, the US Justice Department and other regulatory bodies before it can close.

Source: Air Transport Intelligence news