US Airways Takes a Huge Step Toward Acquiring American

For those who like to continue to point out that a US Airways bid for American in bankruptcy will fail just like the bid for Delta in bankruptcy failed, Friday’s news that the airline had won backing from the American labor unions should finally prove that this is a very different animal. US Airways now has the inside track to taking over American. I’d say the chances of American coming out of bankruptcy independently are now pretty slim.

American Labor Supports US Airways Merger

Remember, with Delta, US Airways didn’t try to get labor’s buy-in but it would have had trouble anyway. The US Airways plan then was to shrink the combined airlines, and that doesn’t sit well with labor. Meanwhile, Delta was able to rally its workforce and a huge groundswell of support to “Keep Delta My Delta” sprung up. That couldn’t be further from what’s happening at American.

US Airways doesn’t want to shrink, but more important than that, at American, labor hasn’t respected management for a decade. Sure, there’s a new CEO in town but Tom Horton is still part of the same regime. His announced plans for labor involved so many cuts to wages and jobs, that it wasn’t hard for US Airways to come in with a better plan.

Revenue Growth, Not Just Cost Cuts
See, the current management team at American blames nearly all of its problems on its costs. Sure, that’s an issue, but Doug Parker, Scott Kirby, and the rest of the US Airways team know that there’s a big revenue problem as well. Fix that, and you don’t need to slash labor to the same extent. That’s music to the unions’ ears.

The terms that American unions have agreed to will keep 6,200 jobs that would be furloughed under the American plan. While we don’t know details of where these jobs will come from, this plan should be a no-brainer for mechanics and those in the airports because they stood to lose the most under the current management team’s plan. But what’s really telling about the potential here is that the pilots and flight attendants have jumped on board.

American’s misguided plan is to flood the market with a 20 percent capacity increase over the next few years. Though incredibly misguided, that would mean more jobs for pilots and flight attendants. So even with that carrot being dangled, they’re supporting the US Airways plan. Why?

The pilots have been very vocal about it. In a memo, the message was blunt. “The APA leadership does not believe that AMR’s business plan will produce an airline that is viable long term.” In other words, they agree with US Airways and most airline analysts that they need some heft to compete with Delta and United. And they need that heft without organic growth since there’s no need for more capacity in the market. US Airways offers that opportunity plus the promise of a very smart management team that can make American competitive again.

A Better Team with a Better Network
The real issue here is that labor has no faith in American’s management team. They don’t believe that the business plan will work (read what the flight attendants say), and they have good reason to feel that way. They also don’t trust their management team and haven’t for years. In the pilots’ memo, it was pointed out that American has engaged the same attorney the much-hated Frank Lorenzo used with Continental/Eastern. Things like that do not help build trust. Neither does a Section 1113 proposal that will result in dramatic cuts.

More importantly, the US Airways efforts have started to help build trust with that management team. Some have worried that a combined US Airways/American would look like US Airways. It won’t. It will be American but better-run. The airline will remain American Airlines and will be headquartered right where it is today. There will just be a better team in place to run a better network.

Keep in mind, this is just an agreement with the unions IF an acquisition happens. That means there’s a lot of work to do, but this is a huge first step that might seal the deal. Why do I say that? Look at the creditors committee.

Swaying the Creditors
The unions hold 3 of the 9 seats on the creditors committee, and clearly they support this move. Boeing sits on the committee as well. With US Airways affirming the orders on the books, Boeing should be happy since it hasn’t sold an airplane to US Airways in years. This creates more opportunity.

The Pension Benefit Guarantee Corporation (PBGC) is also a member. It has been downright angry about American’s plans for its pensions, so you would think that US Airways would present a better option. And then there’s Hewlett-Packard. American has been working with HP on a new reservations system but nothing has come of it yet. US Airways, however, uses SHARES, a system that HP owns. You think HP will be onboard? Oh yeah.

That’s plenty of votes right there. If you have the creditors committee behind you, that’s huge. Of course, we haven’t seen what US Airways will offer yet, but you know that if it couldn’t offer something compelling, it wouldn’t be putting so much effort into this.

Can it Be Stopped?
What can American’s current management team do to stop this? Well, they continue through the process on breaking union agreements in bankruptcy (Section 1113). Could this move by US Airways make American reevaluate its proposal to try and keep labor? Probably, but labor is lost. A new proposal now will be seen as hollow. I don’t think American can get labor back, but really it doesn’t even want to try. The airline circulated some talking points that included this:

We believe statements of non-binding support from union leaders for alternative proposals are no coincidence given the timing of the 1113 process.

Right, it’s all just a negotiating ploy. Keep thinking that, American, and you’ll watch your airline slip away.

I’m sure there are still ways that American can try to maneuver, but so far it doesn’t seem to be trying very hard. It appears to be playing the “stay the course” game with a reminder that it has the exclusive right to reorganize until September 28. What it fails to mention, as has been reported by Holly Hegeman over at PlaneBusiness, is that the while American has the exclusive right, it’s not true exclusivity. The creditors can ask the court to end the exclusivity early if there’s another real option.

What About US Airways Unions?
Yet another common objection to this merger is the tired line that US Airways can’t get its own house in order, so how could it handle American? Very well, actually. The US Airways unions are being cautious, but they should be happy. US Airways has been clear that it needs to keep wages lower because it can’t produce as much revenue as the big three from it existing network. With American, that changes and raises will become possible.

Now, that might not please the pilots union USAPA since that group has acted against its own interests from the start, but that’s too bad. American’s pilots outnumber USAPA members handily. USAPA will disappear in a merger and then hopefully there will be a rational union leadership that will best represent its members on both sides. If the legacy American pilots can come to an agreement with US Airways so quickly, then the US Airways pilots would probably be insane not to take that same contract.

In the end, US Airways is making all the right moves right now. It has now become far more likely that we’ll see a combination of the two airlines.

[Original photo via Flickr user numberstumper/CC BY-SA 2.0]

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91 Comments on "US Airways Takes a Huge Step Toward Acquiring American"

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Rohit Rao
Member

Hahaha – Horton hears a… complete lack of support. What a brilliant line.

It’s interesting that you think Boeing will be happy about a US Airways merger. I would think the opposite – Boeing would be letting a large potential customer become part of an airline that does not order Boeing – Airbus would be happy that US just grew a lot, but Boeing would oppose it.

Brian
Guest

My thoughts exactly…

Don
Guest
I agree with Rohit in regards to the Airbus/Boeing factor. Another thing that also may not help is that America West and US are still run separate of each other as well. But then again this is the aviation world. What we think will happen sometimes doesn’t always pan out that way. I hope they can save as many jobs as they can. Even if this merger does create less competition and and less choice for the traveling public. All the other airlines must be estatic and happy if this happens. Even though it is a monster that is being… Read more »
Gary Leff
Guest
I still say there’s a reasonable argument why American’s unions should be happy, and potential American would be better run, but that’s not the same as an argument that US Airways shareholders would be better off with a US Airways acquisition of American. While AMR certainly has a revenue problem, they DO have a cost problem and they DO need to get those costs under control. There’s no downside to US Airways PURSUING this, it likely DOES make it harder for AMR to cut costs on the labor side, so if the acquisition fails they’re in a weaker position than… Read more »
Rohit Rao
Member

No, AA+US definitely will shrink. I think what Doug Parker is arguing is that AA will shrink less if they merge with US than if they continue on alone in the long run.

Jason H
Guest

Gary – I have to chime in to say that the old ‘fleet commonality’ line is a red herring here. Look at Delta. If it has wings and is cleared to carry passengers it seems to be part of the Delta fleet. The only thing their planes seem to have in common is the paint job.

Nick Barnard
Member

Having a common paint job is a feat in and of itself. If you look how long it took US Air then premerger US Airways to get every plane in the same livery Delta pulled off an amazing feat. AFAIK Gordon Bethune threatened to kill his head of maintenance if he didn’t get the whole Contiental fleet in the same colors.

dan powers
Guest

I think if they do not merge now….in a few years American may enter a 2nd bankruptcy (a la usair) and then be dissmantled….by the way if they do merge they will be #1 in size (by number of airplanes-heavy on narrowbodys) united will be #2 and delta #3…not much hub dupplication by the way= dfw,ord,mia,phx,phl,clt…focus in jfk,lax,stl,bos,sju…

CP
Guest
I understand the business and labor arguments for a merger, and I understand that these arguments win in a bankruptcy. As a frequent AA and US traveler, however, I would encourage AA’s flight attendants to ask the question: if US is such a great company to work for, why do their flight attedants consistently seem to hate their jobs? (I would make the same argument about gate agents.) It’s only my perspective, of course, but the difference in the quality of the ‘soft’ service (i.e., strip away differences in facilities, meals, etc.) between the two airlines is vivid. I get… Read more »
Oliver
Guest

I just flew US for the first time in ages…in domestic First (PHL-SFO). The FA was awesome and very attentive. Clearly one single data point that invalidates all claims of grumpy US staff made by people with statistically insignificant data points ;)

RAG
Guest

there is some truth to this statment. the orriginal usairways flight attendants were trained in service and safty the AWA flight attendants were trained on saftey there wasnt much service involved. AA flight attendants were also trained in service and safty

FRANK
Guest

CP, you’re right. One of these airlines is run soooo cheaply, in everything! Right down to their cheap uniforms!

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[…] Flier makes the strong case for acquisition, claiming that the combined airline not just has the ‘better’ US Airways management but […]

Chris
Guest
Gary Leff wrote about this ‘merger’ this morning and I’m curious what you think about his final and overarching point… US Airways is bidding up American?s costs, and American management could be boxed into obliging to avoid losing control of the company. Whichever group comes out on top, they?re likely to overbid and wind up with an American that has higher costs than it would have otherwise had out of a bankruptcy process. Which jeopardizes the airline as a going concern. My fear in all of this is that a successful transaction could jeopardize both American and US Airways when… Read more »
A
Guest
Cranky – after the United/Continetal merger had everyone saying AA/US needed to merge to stay relevant and competitive with the new mega-carriers didn’t you argue against this? Not that you say you are in favor, but what are your thoughts? I agree with CP that from my experience AA has been better than most airlines while US has been dismal at best. Then again CO was far better than UA. In all the airline bankruptcy/merger news of the past several years I think the same general theme continues. We still have overcapacity and fares are just too low for airlines… Read more »
David SF eastbay
Member

Maybe I missed this before, but Oneworld partners was quick to jump in and help Japan Airlines during their troubles. So what is Oneworld doing to help AA during their troubles, anything?

Since US is not a powerhouse on the international scene, could some just see this as a domestic carrier trying to take over a large international carrier and feel they can’t do it which could effect the out come of all this?

Eric
Guest

How would scope work? US uses substantially larger regional feed than does APA permits. It’ll be a very sore point at APA if they have pilots furloughed while Republic flies E175s and Mesa CRJ-900s, especially if the numbers of either get expanded.

XJT DX
Guest

I was under the impression US offered APA Delta contract + 3% and no furloughs of current workforce. regardless of if that’s true or not, there are two things that are clear:

1) A new agreement = new scope clause, for better or worse.

2) Eagle was NOT invovled in discussions, AA+US-Eagle = more for mainline…

DesertGhost
Guest
On Airline Forums, one AA pilot at DFW posted some notes about scope. Here’s what he wrote (condensed somewhat): 110% of the narrowbody fleet upto 81 seats. tail # specific and it will be 2 for 1, i.e. two 81 seat jets to the commuter operation nets one new jet to the mainline. Domestic code share will be limmited to 4% of the total (roiughly equivalent to 25% of jetBlue’s operation. ———– To me, the idea of tieing the commuter and mainline fleet sizes to each other is huge, and a wise move. As I read this, it looks like… Read more »
DesertGhost
Guest

“completely flexibility?” I need to edit better!

DesertGhost
Guest

Not to mention I need to spell better. “limmited” “roiughly” “tieing”? How about “limited” “roughly” and “tying”?

mirabella
Guest

A lack of the proverbial crystal ball notwithstanding, curb your enthusiasm.Harvey Miller and Weil Gotshal are formidable.

Bill from DC
Guest

Is Weil working to help AA emerge solo?

mirabella
Guest

yes.

DesertGhost
Guest
It looks like someone’s done some homework. US failed to win labor support for its Delta takeover (which in my view was ill timed) so it failed (which has worked out well, since US attempted to merge with the wrong carrier in my opinion). It’s impossible for me to believe that US Airways’ management and its consultants haven’t fully looked at the potential revenue generating capacity of the combined carrier and concluded it has the ability to produce enough revenue to cover the increased costs. That’s not how that management works. Look at the track record. US Airways was made… Read more »
Bill from DC
Guest

It’s nice to have the support of the union; however, I have not seen any real discussion of the acquisition costs. How much debt would US take on? How will that impact their performance? The potential is that a combined US/AA ends up being overleveraged, burdened by high interest expenses, higher cost of debt thanks to unfavorable debt/equity ratios, etc. Union approval is helpful but it should be a very small consideration in the grand scheme of things. Time to talk total dollars and cents… i.e., common sense!

noahkimmel
Member
My big complaint to your analysis is why would HP support the merger? Aren’t 2 customers better than 1? I have reservations about Boeing being on board with a merger, as it means a management team that hasn’t bought a boeing product in years would be in control, but since they barely got the AA order in, maybe this is a chance to showcase their products. Especially since the new AA/US would have a larger longhaul network and more pax, making the 777 more attractive than the a330. Also, if AA is alone, it might not be long-term viable, which… Read more »
Sanjeev M
Guest

Fleet commonality is overrated after 25 aircraft, so I don’t see any problem. Boeing and HP would rather have 1 healthy customer than one small one (US) and one in BK (AA).

PHX loses a headquarters but at least they have a hub, which in terms of Phoenix jobs is all they need to care about.

I think Parker will wait until the November election to actually announce the merger…

Peter
Guest

I think PHX would be reduced in size–if you’re going to concentrate on LAX and DFW, that leaves little function for PHX.

mandel.jerry1
Member

I don’t see anyone mentioning that US has for years been designated as having the worst passenger experience of the major USA airlines. They seem to PO passengers more than the other airlines.

lrosenberg
Member

I flew US from Chicago to charlotte in a Air Bus in preferred coach seat that I padi $25 extr. I am not a big guy but the seat is smaller than AA and there was virtualy no leg room. What happens with US and Star Alliance?

David SF eastbay
Member

I wonder what would happen if some other airline came along and offered a lot of $$$$ to purchase a part of American say as an example their Latin routes what the courts and creditors would do? The largest creditors might like the thought of getting paid now instead of waiting to see what happens with a combined AA/US.

Just a thought.

Zack Rules
Guest

Cranky

20% is a funny number that Horton came up with. It corresponds almost exactly to how many more passengers AA would have to carry to comparable in size to United or Delta. Maybe be coincidence but does not make sense

Hotel Mom
Guest

Something had to be done and and I figured it was just a matter of time until US Airways would acquire them or try. It will be interesting to see how everything pans out.

kelty
Member

As a consumer in the Washington, D.C. area and a member of Star Alliance, it has been great to fly with UA and US. If US Airway aligns with American, this will reduce our frequent flyer opportunities.

My preference would be to have two viable airlines merge, i.e., US Airways and Alaska. One on the East and one on the West, with a combined transcontinental network from Hawaii to Europe.

Sanjeev M
Guest

Yes. However, the scale of the new United should cover you. United redemptions are already good. I know the extra DCA options are nice but when you actually need to pay for a ticket you realize US rips you off and makes you go to IAD (or BWI on Southwest). When US leaves Star for Oneworld you’ll actually have interalliance competition.

One from the east and one from the west is exactly what US Airways and America West did years ago. Alaska Airlines only adds Alaska and Hawaii to the picture. AA and the oneworld alliance give you the world.

Nick Barnard
Member
I’m really curious what happens to Eagle. I can’t see US Airways’s management wanting to keep such a large regional operation under the same corporate roof. I put together some numbers about the number of planes in each fleet because I was curious. (Sourced from Wikipedia, yeah I know, but its close enough.) AMR Mainline: 608 LCC Mainline: 304 AMR Regional (Eagle and American Connection): 299 – 33% of AMR operations AMR Wholly Owned Subsidiary Regional: 284 – 31% of AMR Operations, 95% of AMR Regional operations LCC Regional (Contracted and Wholly Owned Regionals): 292 – 49% of LCC operations… Read more »
Tarver
Guest

Not only hasnt American Eagle been mentioned. Nor has anything been mentioned about AA foriegn bases and hubs flown by foriegn nationals. I am wondering how they are apart of a AA/US merger.

Nick Barnard
Member

American Airlines isn’t a flag bearer airline. The United States Government doesn’t own any part of American Airlines.

Nick Barnard
Member

And this friends, is why you should not comment on comment spam, even if it is somewhat on topic.

dcamia
Guest

according to nytimes the TWU has a tentative agreement to be voted on soon. Wonder what the rest of the UCC, especially the creditors sans labor, are thinking? Im thinking, what a mess!

mirabella
Guest

Jack Butler of Skadden Arps, counsel for the Unsecured Creditors Committee, has stated that the Labor Subcommittee of the UCC (comprised of Bank of New York Mellon, Boeing, Hewlett-Packard, Manufacturers and Traders Trust, Pension Benefit Guaranty Corporation and Wilmington Trust) have endorsed the rejection of labor contracts in the 1113 proceedings.

Bill from DC
Guest

that’s huge…

Nick Barnard
Member

Hrm, its true that its huge, but I’m also curious if US Airways decided to get an agreement with labor first, then intends to work on striking a deal with the other six members of the creditors committee next.

HJH
Guest
mirabella, Please read the wording of the statement,’Putting aside the question of strategic alternatives, the committee supports the debtors’ business judgment of a standalone plan” while in bankruptcy,Butler said. Key words, putting asid the question of strategic alternatives…this is the first day, what can you glean from all of this? I’m sure that those who follow aviation more closely than I do, know much more but, as a 27-year AA flight attendant, I can tell you that I have not seen so much comraderie and eagerness to move forward, as I have since Friday, at least not since the sorrowful… Read more »
Nick Barnard
Member

@HJH This is awesome and inspiring to read. Shared visioning is an awesome experience. I hope that this goes through and improves US and AA for both labor groups, both customer groups, and US’s senior management. (IMHO, AA’s senior management on the other hand can have their damned golden parachutes if they just get out.)

Consumer Mike
Guest
In my opinion a “Buy-Out”, merger or anything you would call a take over of AA by US Air would be a disaster for Consumers and airline loyalty members across the board. Less competition, fewer flights, less cities serviced by air, and absolutely a minimum of airline award seats to use airline miles. It could be the end of viable award seat loyalty programs as we know it. I can understand the move by the AA unions in backing the take over, but the promises from US Air are just that; “PROMISES”. US Air has been fighting with the unions… Read more »
Nick Barnard
Member

Mike, make an important correction, US AirWAYS’s unions have been fighting with themselves. Management is caught in the middle.

Consumer Mike
Guest

Thanks Nick, I should have said that US AIR management has not been able to resolve the civil war between its unions in the years since the merger with Air West. Not a good track record and something it appears the AA unions want to overlook or dismiss.

Nick Barnard
Member
Mike. First things first could you please get the airline names right? The two you’re referring to are: US Airways America West Airlines The former is almost forgivable to call US Air. (Although that’s a pet peeve of mine.) Calling the latter Air West, is simply incorrect. Period. Next, why is it management’s responsibility to resolve a union’s civil war? I’d argue that it’s the unions problem to solve their own disagreements. That being said management has asked a court for guidance on what they should do, since they literally can get sued by a union no matter what they… Read more »
Consumer Mike
Guest
Nick, I use the two names as it was easier for me to type, symantics be damned. By the way, before the merger everyone I know called it America West. Some, America Worst. Regarding your comments on US Air management, any major company that has labor problems has to address it ASAP or it will not be functioning at its most efficient level. US Air delayed in addressing this to the court and since I am not a lawyer I can only wonder why years after the union civil war US Air management has not been able to address the… Read more »
axelrod44
Guest

Has anyone heard that Delta has put forth its deal for American? According to my sources Delta’s plan is to buy AA and keep its most profitable routes in Miami and Latin America/Caribbean etc. Sell United the UK routes and sell Jetblue whatever it wants domestically. Can anyone concur?

mirabella
Guest

It might be helpful in understanding the issue of management’s role in union seniority integration to read the Supreme Court’s decision in Humphrey v. Moore 375 US 335 (1964). The case law reads: “The issue here is whether the Kentucky Court of Appeals properly enjoined the decision of a joint employer-employee committee purporting to settle certain grievances in accordance with the terms of a collective bargaining agreement. The decision of the committee determined the relative seniority of the employees……..”

axelrod44
Guest

Has anyone read anything on Delta’s plan for American? I heard they want to buy AA and keep it’s very profitable Miami routes. Sell United the UK and sell Jetblue some domestic stuff.

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