American Seals a Deal With Its Pilots, Now the Merger Fun Begins

The results of the pilot vote at American were released Friday and the tentative agreement was overwhelmingly approved. Does that mean that the pilots are now in love with their management team. Hah, yeah right. This was the last big hurdle to be cleared before the really serious US Airways merger talks could begin. Now, it’s game-on.

APA Votes Yes

When the pilots first voted on an agreement with management, they shot it down. That meant American was allowed to impose its own work terms, and the pilots didn’t like what they saw. The truth is they should have voted for that first agreement, but they might not have really realized it until they saw what American was going to do otherwise.

Of course, while American was able to impose the terms it wanted (with only minor changes per the judge’s decision) on its pilots, that still left them without an actual contract. So there was some uncertainty there about the long term costs that would be incurred by the airline.

That might not sound like a big deal – management could enjoy the lower costs while they could until the next contract – but it actually was a huge issue. As we all know, US Airways has been interested in doing a merger deal since American filed for bankruptcy. But to do that, it had to convince those involved in the bankruptcy that it was the right thing to do.

There’s only one problem with that. It’s really hard to convince people that your plan is better when they don’t know the value of the alternative. Without a pilot contract, it was really hard for the money guys to determine whether a merger would be better or worse than a so-called “standalone” plan where American stays independent. That made it difficult to move forward.

Now with that last big hurdle out of the way, it’s time for things to get serious. Management, the board, the creditors, and thanks to a non-disclosure agreement, US Airways, can now all figure out the value of each plan. US Airways has apparently already fired the first shot by presenting its offer which values the combined airline at around $8.5 billion. (I’ve heard other reports the offer was made in November.)

Now it’s up to the creditors to decide what’s best. Of course, US Airways thinks a merger is best. Labor thinks a merger is best. American’s management doesn’t, though there have been much softer words coming from the executive suite when it comes to the merger as of late. CEO Tom Horton said this in a letter to employees right after the pilot vote came out:

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 positive outcome for our people and our customers. We expect to have a conclusion on this soon.

But ultimately, it’s the creditors that matter the most here because the airline is still in bankruptcy and these guys need to get paid. The question for them is which plan will get them the best deal in the end?

US Airways is still trying to convince American that its plan is better. Maybe American management will get a big enough payout to go along. Or maybe AA’s management will see the writing on the wall depending upon how this offer unfolds and just decide it can’t win. Or maybe it can actually come up with something that will keep American independent, but I’d say that the chances of that are slim.

As we head toward the holidays, everything starts to slow down. We might not hear anything about a merger until the new year, but I wouldn’t expect that we’d be waiting much longer than that. The time to decide which way this airline is going is here. Now we just have to sit and wait to see what happens. I’m still expecting that a merger will happen, but I’m really curious to see how it all unfolds.

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