American Continues to Slog Through Bankruptcy While US Airways Goes Silent (On Purpose)

It’s been awhile since I wrote about the American Airlines bankruptcy, and there’s a good reason for that. Not much has happened. This thing is really proceeding at a snail’s pace and the pilots are a big reason for that. That doesn’t mean things haven’t been happening. It just means that they haven’t been happening quickly. At least US Airways and American are finally talking, though I imagine the room looks something like this:

Merger Discussions (Not Really)

The last couple of months have just been mired in labor negotiations. In short, here’s how this has gone.

American Mgmt: Hey labor, you don’t work hard enough to earn the money you make, especially when compared to other airline employees. Stop that.
Labor: No way dude. We aren’t the problem here.
American Mgmt: Oh yeah? Well I’ll go tell Judge Lane on you and he’ll make you change your mind.
Labor: Hmm, that sounds not good. Ok, let’s talk.

American Mgmt: Great. We want you to work for free.
Labor: No, we want a billion dollars per hour to work 1 hour per month.
American Mgmt: Let’s meet somewhere in the middle.
Labor (minus the pilots): We hate you but if we don’t agree, it could be a lot worse. Besides, we need to get this over with so US Airways can take over.
American Mgmt: Hooray, let’s hold hands and pretend we love each other.
Labor: No, I hate you so much.

American Mgmt: How about you, pilots?
Pilots: Suck it. We’ll take our chances with the judge.
Judge Lane: You sure about that? I’m going to accept nearly every argument American makes except for a couple minor ones to give you a chance to change your mind.
Pilots: Not interested.
Judge Lane: Ok, fools. Here it comes.

And that’s where we are now. All the labor groups came to consensual agreements except for the pilots which voted its agreement down. I understand the rationale for the vote. After all, they want to show management that they have no faith and want something better. But this vote actually just delays the process even further.

Judge Lane has now approved American’s request to break the pilot contract. Now the airline and the pilots are still supposed to be negotiating while the airline works on the terms that it will try to impose via the bankruptcy court. This thing is taking freakin’ forever and it’s not going to speed up until the pilot deal is done… someday.

US Airways Muzzles Itself
Meanwhile, what you all want to know is what’s happening with the potential merger with US Airways, right? Well not much can really happen until the labor mess is finished, but there has been some movement. American, as promised undoubtedly due to pressure from creditors who think there’s a better option, has finally started to talk about merging. The airline is really trying to spin this whole thing by saying that CEO Tom Horton was the first one to talk to US Airways about a merger, but this all sounds like a bad PR campaign to me. Horton doesn’t want to merge but he has no choice to make it look like he’s now interested.

So American sent out non-disclosure agreements (NDAs) and we know that two have been signed: US Airways and British Airways. This means you aren’t going to hear much from US Airways for awhile. Part of this deal means that US Airways won’t be able to talk publicly in nearly the same way it has been. That doesn’t mean nothing is happening – it just means they can’t talk… until there’s a deal or until there definitively isn’t.

With the NDA signed, the books come open and it’s time to figure out how this thing could actually work. British Airways has seemed pretty happy about the idea of a merger since it knows it would keep a stronger American in oneworld while pulling a competitor out of Star Alliance. So they can all sit together, have a nice cup of tea, and see if Tom Horton and friends can be bothered to realize that this is a great idea.

For all of us, that means we still sit here, waiting to see what happens. It seems pretty clear to just about everyone who understands US Airways’ plans outside of American’s management team (and some consultants) that a merger is the way forward, but that doesn’t mean it’s going to happen anytime soon. The wait continues.


43 Responses to American Continues to Slog Through Bankruptcy While US Airways Goes Silent (On Purpose)

  1. Anyone know what the longest time period it took two airlines to merge?

  2. AirBoss says:

    BA took a $400 million / 25% shine to US in 1993 and that worked out so well AA broke up the relationship. Hey, wait…

    • To be fair that was a different USAir.. Plus that arrangement had weird things such as USAir planes painted in BA’s colors, but operated by USAir.

      I’m curious if BA is just looking at the books to give Horton a kick toward Parker..

    • CF says:

      Nick – That’s my guess. I think BA wants a very strong American and that means getting US Airways in there as well.

  3. Compared to United’s recent bankruptcy, this one has been progressing at breakneck speed.

    I could be dead wrong, but it looks to me that the “stars” (in quotes since US will likely be leaving Star if my scenario comes to pass) are lining up for US and American to essentially merge while in bankruptcy, consummating the deal upon emergence, just as America West and “old” US did.

    In fact, I think the whole thing will look much like that merger. The basic transaction will involve almost no cash and will be financed with equity investments from British Airways (a 25% stake) and possibly TPG.

    I’ve seen nothing from Frontier or Virgin America regarding NDA’s or a possible merger with American (except they were mentioned as possible merger partners). I can see a scenario where one of those airlines (likely Frontier, since Republic is looking to divest itself of the airline) would be involved. It’s possible that Republic could “swap” Frontier for Eagle and get a lot of CPA business from the combined US / AA (especially since it already has a long standing relationship with US). A little far fetched? Maybe. It’s also possible that I need to get a life.

    • CColts says:

      I wonder how Republic’s order of the Bombardier CS jets will play into all of this? One thing is for sure is that it is going to be interesting times going forward. I would be interested to see some predictions on route / hub changes in the new consolidated airline after the merger.

      • SEAN says:

        As far as hubs go, CLT is safe despite being a short hop from DCA & MIA. PHL is an option if AA wants to pull out of JFK since they are 3rd in a 3-hub airport. MIA is staying put, but PHX is litterally stuck between LAX & DFW. Unless of course PHX is used as a relief hub for the over crowded hubs in L. A. & Dallas.

        • Phoenix will be fine. Most of its flying lies between the west coast and Chicago / Dallas. Much of its traffic runs north / south connecting Mexico and Canada. LAX is in a terrible location to be an intrawest connecting hub, and it’s not in a great place as an international Asian gateway either (too far south). BUT it has one thing going for it – population.

          I see Phoenix being reduced to about 250 or so departures (down from about 290 now). Much of what will go are “extra” flights to Seattle (Alaska code share), Portland (Alaska), some adjustments to Chicago, LLos Angeles and Dallas to “rationalize” the schedule) and “extra” flights to New York, Boston, Columbus, Atlanta, Florida, etc. where one current non-stop might become a connecting flights through Chicago and /or Dallas. BWI might go bye-bye. US really doesn’t have whole a lot of service from Phoenix to points east of Dallas and Chicago.

          Of course, I don’t have access to the internal profit and loss records that show which flights out of Phoenix are profitable and which aren’t. We also don’t have enough data to know how each flight fits, of could fit, into the overall network of the merged airline as opposed to US as a stand alone. And neither does anyone else outside of US Airways’ corporate offices.

          There’s been a lot of back and forth on Airliners.net and other blogs regarding Phoenix’s future in a merged airline. And, frankly, most of it’s rather silly. It’s a bunch of AA fans saying that Phoenix will be reduced to a “spoke” because Southwest it’s so “dominant” in Phoenix (which it isn’t; but why let facts get in the way of preconceived notions. Living in Phoenix does give me a little more insight than your average fan, but I digress …) and US fans saying it won’t.

          I submit to all of us armchair executives that none of us (including me) has a clue to what will happen without the data I referenced above and the ability to properly analyze it. So all of this is pure speculation. And my guess is no better or worse than anyone else’s. But it is kind of fun to speculate.

    • AA “merging” with Frontier or Virgin America doesn’t seem like it’d help AA much. They’re small potatoes compared to AA..

      The real elephant in the room is what happens to Eagle. Perhaps it’ll get sold off to a regional operator, but I’m not sure anyone would want them. They’ve 198 mostly small 50 seaters and smaller. The rest of the fleet is 39 ATR72s which they’re in the process of returning many of them (per Wikipedia, so take it with a grain of salt) and 47 CRJ700s.. To top it off they’ve got high operating costs.

      AA Pilots are being ornery, but its the AE crew that should be scared. I don’t see a positive way around their high costs. By virtue of a larger network AA/US won’t need as many regional jets, and the AE fleet doesn’t have the equipment or the costs for where much of the industry is moving. I wouldn’t be surprised if AE is left in bankruptcy to fend for themselves..

      • Nick, I was thinking that Frontier / Republic would be a part of, not an alternative to, a US / AA merger. Maybe I wasn’t clear.

        • Ah, yeah.. I can see Frontier doing an asset purchase of Eagle or a purchase of the whole thing, if they can come to an agreement with Eagle’s unions before the sale.

          • That’s sort of what I wrote, an asset swap, with AA / US getting Frontier (and / or its assets) and Republic getting Eagle (and / or its assets).

            I’m not sure what would happen to Republic’s (I’m almost certain the order is Republic’s not Frontier’s) CSeries order. But, on paper, the CS300 looks like a good A319 replacement, maybe …

            By the way, there was some mention at the Dahlman Rose conference yesterday regarding Republic bidding for more large aircraft (E-jets?) flying for American in light of relaxed scope. Stay tuned …

          • Interesting possibility.. But that’d be a complex transaction. There is also the question of how much of Frontier’s network will be profitable at an US/AA cost structure.. (e.g. The same argument why Alaska is still independent.)

          • It wouldn’t have to be be any more complex than any other integration. In my opinion, the Frontier acquisistion would end up a lot like the Reno Air and TWA transactions. It would essentially be a way to buy assets (i.e. aircraft) on the cheap.

      • CF says:

        I can’t imagine what American would want with Frontier. The airline is working well now but that all disappears if it becomes a part of a network airline like American. There is no good way that Frontier works as part of American at all.

        • Frontier only works with American as an asset acquisition. That’s all. It was simply an exercise in what might be (?) since Republic is looking to off load Frontier.

          In the real world (and some further reflection), I see Frontier either being spun off to Republic shareholders, being bought by United for a song (or a CPA contract with Republic at a very deep discount), or possibly a merger with Spirit.

    • Oh, one other thing, AFAIK bankruptcy law changed that we won’t see three year long Chapter 11 cases anymore.

  4. SEAN says:

    It’ looks like AA has another problem on it’s hands. A 16-year old with downs syndrome was denied boarding at EWR because the pilot thaught he was some kind of a thret & didn’t want him on the plane. I don’t know the exact details, but it doesn’t look good from a public relations standpoint especially once the press gets wind of a story like this & lawsewts are filed under ADA PROVISIONS.

    • Every airline always has a customer service problem on its hands. Given how large airlines are its a given. If we hear about it just depends, if the customer in questions knows how and wants to call the media.

      • SEAN says:

        Granted that’s true nick, but when the issue revolves around someone who has a disability, it takes on a whole different meaning. I should know, since I’m legally blind & understand quite well the challenges people with disabilities be them mental or physicle face each day of their lives.

        Yes this was the pilots call, but it shows a lack of awareness on his part & he needs to take some sensitivity training sessions on how to handle these types of situations.

        The crews I delt with on America West, JetBlue & the short lived National were great when I needed assistance while traveling. Homeland security on the other hand, was hit or miss.

  5. I still hope that AA can come out of this financial and labor mess intact. Less competition is NEVER a positive as a consumer, no matter what the product. I fully understand that at times it may not be possible. However, the fact remains, less choices of any product or service normally hurts the Buyer/consumer.

    My opinion.

    • SEAN says:

      Well stated Consumer Mike. The only thing I will add to that is even with healthy compitition, the consumer can choose not to fly at all regardless what ecconomic insentives exist to do so. It isn’t like food & other basic nessessities of life.

      • In the economy of today and the swelling price scale of air travel, this is something I now chose (travel by car) when it makes economic sense and I am not in a rush. However, when traveling coast-to-coast added costs of hotels, food and gas may outweigh the excessive air fare. ALSO as important, if time is of the essence in making a trip.

        AND – there is always either a unwise consumer or one where saving money is not an issue.

    • I’ll admit that less choices do make things a bit less ideal, however in the airline business too many choices leads to carriers not being able to make money.

      Yes, not making money isn’t our problem, but I want my airlines to be profitable so they’re not skimping on training, maintenance, and other areas. We already went through an era of too much competition in the airline business and that lead to horrible ends such as ValuJet 592 and Air Florida 90.

      • And to clarify other areas includes the hard product and actually paying their employees.. (which yes wages have gone down, but they’re now going back up..)

    • I look at it a bit differently. I feel that three strong legacies plus Southwest, with adequate pricing power, will provide a better long term outlook for the industry, consumers, employees and shareholders.

      Air fares are still below what they were in 1995 adjusted for inflation. The numbers indicate that there’s been plenty of competition even with two mega mergers (the AMR bankruptcy is a testament to that). I think there will continue to be plenty of competition even with a US / AA tie up.

      Not only will an AA / US merger keep competition alive, but enhanced pricing power will allow carriers to offer better service. Strong air carriers won’t have to file for bankruptcy protection every ten years or so. They’ll be able to invest in a better product, not merely fight to survive.

      • Agreed, although strike Southwest and replace with Spirit. As much as Spirit isn’t customer friendly they are low costs. Southwest doesn’t do that well anymore.

        • I include Southwest in the overall competitive landscape. But I did fail to mention Spirit and Allegiant. They (and Frontier if it remains independent – or merges with Spirit, but that’s another discussion altogether) may find a really profitable niche in less than daily flying to leisure destinations and relieve the larger carriers of some marginal (for the legacies / Southwest) flying.

        • Sean S. says:

          Spirit is not really comparable to Southwest in either size or scope of network. I don’t see Spirit servicing the many small towns that will inevitably spring up in response to the shuttering of American Eagle/mainline American flights.

  6. EricInChi says:

    I think that the US aviation market has itself consolidated into a ‘too big to fail’ scenario. We see how well that worked out in the financial sector.
    US and IAG need to produce a pretty nice carrot to pry AMR away from Horton & Co. US has made inroads with labor and the UCC but the AMR BOD leans to the current regime.
    IMHO the VX/AS/B6 name dropping was a red herring. Anything involving F9 involves Republic Holdings and probably more of a venue to unload Eagle vs acquiring F9.

    • Too big to fail is an issue in the financial sector because of leverage. If everyone tries to de-leverage at once or liquidity dries up, things go to hell in a handbasket.

      The airline business doesn’t have these dynamics at the same scale.

      • CF says:

        I actually do think this is a “too big to fail scenario” now. The problem is that if an airline goes under the size of United or Delta, there is a major economic hit that can’t be replaced right away. Sure, it can be replaced in relatively short order but not before a ton of damage will have been done to the economy.

  7. TurtleSVS says:

    Nick, What’s the best, worst and most likely scenario for the pilots here? I saw the MEC voted to send strike ballots out, is there a realistic chance of seeing a major US carriers pilots strike?

    • I’m honestly not sure what’ll happen with the AA pilots. A strike could kill AA, unlike flight attendants or mechanics getting enough trained replacements is essentially impossible..

    • CF says:

      I go back to the “too big to fail” argument. I don’t think we’ll see any president allow a strike, regardless of party persuasion.

  8. skunk says:

    What on earth are talking about: “This thing is taking freakin? forever and it?s not going to speed up until the pilot deal is done? someday.”

    It’s been less than 9 months dude. It takes a long time to screw that many people over and to work out the management mega-bonuses.

  9. Jeremy says:

    Just wait US will end up going to one world if a merger does not happen

  10. Eric C says:

    The AA pilots I’ve spoken with believed the contract imposed in bankruptcy would be largely similar to the “last, best” offer they recently voted on. What’s more, by having the contract imposed rather than ratified they believe they’ll be able to re-open negotiations the day the company comes out of bankruptcy. Also they would use their old contract as a base point for any JCBA, not the imposed contract, so they felt they were suffering a little now for a better end result. Not sure if either belief is grounded in fact.

    I’m curious what happens if AMR trashes scope while in bankruptcy and then, when out, the pilots refuse to go along with. AA pilots held a pretty firm line on large RJs, it’ll be ugly if they leave bankruptcy to discover 100 E-190s flying their RJ side.

  11. mirabella says:

    The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 generally made reorganization under Chapter 11 more difficult and costly. Among other things, it reduced the amount of time that unexpired leases of real property (where the Debtor is the lessee) are deemed rejected and it also denied a Court the authority to extend the exclusivity period beyond 18 months after a bankruptcy petition is filed. Depending on one’s position as either the Debtor or a creditor, there has been both criticism and praise of the Act.

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