Why Haven’t US Airways and American Announced a Merger?

Here we are at the end of January and a merger between US Airways and American still has not been announced. This is downright silly since just about every party agrees that it’s the right thing to do. So what’s up? Well, I say “just about” every party, because from what I can see, it’s American’s current management team that is the lone holdout. And it’s that stubborn stance that seems to be keeping the right thing from American Cries About Mergerhappening here.

Last week, Reuters put out a joke of an “exclusive” article saying that a merger between the two could come in the next two weeks. Why was it a joke? Apparently the airlines were in final negotiations with “the final price and management structure still to be resolved.” So the “only” two sticking points are the ones that have always been the issue. Maybe this was leaked to try and help build some more traction, but it didn’t really say anything new.

Now the latest “news” of the day is that American CEO Tom Horton may end up being the Chairman of the combined entities. There is some good and some bad to this kind of thing. The good is pretty simple to explain. If Horton is willing to settle for a Tilton-esque agreement where he can just sit in a fancy office and collect a huge paycheck for a couple of years, then that finally removes the last real barrier to a merger – the fight being put up by management.

On the other hand, if he insists on a more active role, then it’s a bad idea. There are very few supporters of Horton outside management ranks. Wall Street has been quite clear that Horton’s plans to date are unacceptable. In particular, the plan to grow the hubs by 20 percent is suicidal. As one analyst, Dan McKenzie, puts it, the growth plan “would be toxic for industry pricing and ruinous for shareholders….” The views throughout the financial community appear to echo that sentiment. If Horton has any kind of influence in the merged entity, then the money folks will not be happy. And that hurts the chances of the deal going through.

Other than Wall Street, we know the employees have lost all faith in the current management team. That happens to any leadership team that takes an airline through bankruptcy, as it should. That’s why it’s best to have a new team to take you out of bankruptcy. Delta did this well.

Delta Does Bankruptcy Right
When Jerry Grinstein took over at Delta, he started making deep cuts and then led the airline into bankruptcy. He wasn’t exactly hated since he was quite upfront with what had to happen and didn’t take excess compensation, but it was always meant to be a temporary job so there would be no residual friction. When he stepped down, the hard restructuring work had been done. Richard Anderson stepped in to lead the resurgence which included the Northwest merger. Today, Delta is the industry leader.

American could have a similar story if it wanted. Tom Horton has made a lot of necessary cuts that have angered people in order to get this airline in a position where it would even have a shot at competing. He should get credit for that, but now it’s time to step aside and let the people who know revenue take over. When you come out of bankruptcy, you need a new leadership team with a solid revenue plan that people can rally behind. Horton is clearly not the guy to lead that team.

When I talk about the leadership team, I think some people might picture US Airways management coming in and throwing American leaders out the window, but that’s not the case. There is clearly a need for American leaders to run a combined airline. The US Airways team has to know that. In fact, I bet there are people in high places at American who secretly want to see a new leadership team at the top, because it will provide more opportunity for them. This new leadership team needs to fill the key roles at the very top. The rest will be a mix of experience between the two sides.

Too Many Promises
Without a new team, what we get is a current leadership team with a highly questionable plan. The thought seems to be that if American promises enough bells and whistles, people will fly the airline. And it will need 20 percent more capacity to serve all this magical new demand. Not a good plan. First, the promises are lofty and expensive. Today is the first day that any passenger on American can experience those amenities with the introduction of the 777-300ER on the Dallas/Ft Worth to Sao Paulo route, but that is just one airplane. It will take years for the airline to consistently deliver a product that can live up to what is being promised. All this “new American” stuff including the new livery will result in the worst thing possible – overpromising and underdelivering for years to come.

But even then, does it make sense to put all of these amenities out there? Some, yes (like flat beds in biz, of course), but probably not all. It seems like the airline is going overboard with announcing its plans just to try to sway people who may have influence on whether a merger happens or not. If it doesn’t happen? With a 20 percent increase in capacity and no merger, the airline is not going to have the revenue base to support all these expensive promises anyway. (It may not have it afterwards either, which is why the promises should likely be scaled back.)

At this point, my assumption is that the only reason we haven’t seen the merger announced is because the current management team is fighting it. Everyone else seems to be in agreement that it’s the right way to go. If that’s true, then it will happen. There are a lot of great people at American and around the US who deserve just that. It will just take longer than it should. And there will be more pain involved in the process.

[Original child tantrum photo via Shutterstock]

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