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

American, Mergers/Finance, US Airways
APA Votes Yes

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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20 comments on “American Seals a Deal With Its Pilots, Now the Merger Fun Begins

  1. I think the one big hurdle in a merger situation would be the feds. Being last to the table on a merger isn’t the best scenario because there are two recent, large airline merges for them to compare with, and if whoever at DOJ/DOT does the number crunching decides the previous mergers resulted in fewer options and higher fares, it could either get denied or AA/US could be required to make some pretty hefty concessions to push the thing through.

    1. I respectfully disagree. US/AA are simply playing catch up. Moreover, I doubt there will be many concessions. I can see a few at DCA, but that’s about it. If one looks at history, (i.e., the freight railroads [Amtrak is a whole different kettle of fish]), all of the bankrupotcies and mergers ended up producing four major trunk carriers (and some are a bit surprised that there aren’t two) and some profitable niche players. If past is prologue, the same thing will happen with the airlines. Just my opinion.

    2. That all depends on if oficials at AA & US pay off their respective members of congress to push the deal along.

      Now a combined AA/US presents an interesting quandry regarding hubs in terms of…

      1. Does the combined airline pull back in LAX & JFK to focus on PHL & PHX? 2. Where does CLT fit in to this network. 3. How would a combined airline compete in ORD against UA
      with it’s market share. 4. How many 50-seat aircraft will get parked as a result of a merger.

      1. SEAN, In teresting questions. here’s my take for what it’s worth to anyone.

        All congress can do is bloviate. It can’t stop a merger.

        Combining US and AMR is simple.

        PHL (i.e., EWR south) will be the main connecting east coast hub and international gateway. JFK and LGA will likely focus on O&D along with some connecting traffic. According to Holly Hegeman, JFK is AMR’s most profitable station, although it’s not technically a hub (it’s an international gateway). I don’t see LGA or JFK shriniking substantially, but there will be some right sizing with PHL for profitability, and each airport will have a different focus.

        I see much the same with PHX and LAX (and CLT / MIA for that matter). Both will be right sized and focused on their different roles in the combined network. LAX (and MIA) will primarily be an international gateway. PHX (and CLT) will be connecting hubs with some international exposure. Unlike Brett, I don’t see PHX shrinking too much (I live in PHX, so I may be biased, of course). But I do see some downsizing in PHX. For example, instead of having “X” number of nonstops to BOS (and other places east of ORD and DFW), there will likely be “X – 1,” One flight will probably get the ax on routes like this, since there will be more connecting possibilities at both DFW and ORD.

        The new AMR will find its profitable size at ORD and it will be substantial. Profit is more imprtant than shear size in a place like Chicago. AMR has been in Chicago a long time and has a strong customer base there. I moved to Phoenix from Chicago and flew American to get here in 1976 (by the way, United didn’t fly from ORD to PHX (UA didn’t serve PHX at all) in 1976, only American and TWA did).

        A lot of 50 seaters will probably be parked by all carriers. I get the impression that scope at all airlines will probably look a lot like Delta’s new contract in the future.

        Of course, this is only my take (or bloviation). None of us has access to the internal numbers, so what we offer is simply speculation. It should get interesting.

        1. First of all, “bloviate” is my new word for the day, so thanks for that!

          There’s a lot of oneworld traffic currently going into JFK (AA, BA, Iberia, LAN, Air Berlin, and Royal Jordanian). I imagine it’s a mix of O/D passengers and people connecting onto AA headed elsewhere. How do you change your main international gateway to PHL when your partners are so heavily invested in JFK? I can’t see them wanting to shift their flights away from NYC.

          1. I may have been unclear. I don’t see JFK shrinking much. But there will be some adjustments. It isn’t like AMR is going to abandon JFK (as I wrote elsewhere, its most profitable airport). I never meant to suggest that. But there are far more connecting possibilities at PHL. A one to two flight shift by BA would probably take care of most of the connecting passengers (who can, in theory, connect at PHL as easily as at JFK). By the way, US has code shares with Royal Jordanian (inherited from HP). And who’s to say that US (“new” AA) Iberia, LAN and Air Berlin can’t fly profitably to and from PHL given all of the new connecting possibilities? This isn’t necessarily a zero sum game.

  2. I really do see this merger happening at some point. It may be now or after AMR emerges from BK, but it will happen, in my opinion.

    The biggest unresolved issue may be the amount of the payoffs or value of the job offers needed to take care of the executive egos. It wouldn’t surprise me to see a TPG or another airline (i.e. British Airways) step in and finance those buyouts (just speculation).

    Like it or not, US Airways is the only carrier with enough mass to bring American up to the size of Delta and United. US’s network nicely fills the holes in American’s network (as American fills US’s big hole in the middle of the U.S.). Also, US is strong in all of its hubs and focus cities. AMR isn’t. It’s that simple. Jet Blue is built on American’s unprofitable routes. Even with post BK costs, the leisure nature of jetBlue’s network could be problematic. Alaska has a strong niche and would be compromised by a merger with either Delta or American (its best merger partner may be Hawaiian, but I digress …). Moreover, jet Blue and Alaska are only half the size of US. In a network business, size does matter, especially when your main competitors are 25 to 50% larger than you. That doesn’t mean there isn’t room for niche carriers. But one can argue that neither US nor AMR are niche carriers.

    For those who argue that US’s profits are built on extremely low wages, I offer numerous earnings calls where Doug Parker has repeatedly stated that there is room for “nice” pay increases, but management isn’t going to agree to pay as much as a United or Delta. Why? US’s network can’t support United or Delta pay levels. But that doesn’t mean its network can’t support better pay levels than it has now (a subtlety that gets lost on AMR apologists on airline blogs). Based on what I’ve seen from analysts, a stand alone AMR can’t support United and Delta level wages either. Only a merged carrier can do that. To me, that’s why AMR’s unions (after hiring consultants who know and understand airline economics) back a merger with US Airways, not a stand alone plan.

    The bottom line: Both US and AA can survive on their own. But they’ll be stronger merged. That’s the way I see it, anyway.

  3. I share the DOJ concerns….I’m not sure this second term Administration will be a mega-merger friendly one(barring serious financial distress). Second wild card is the unsecured creditor committee. The proposed 70/30 (UCC/US) spit has not generated rousing applause from bondholders. From a network perspective, it looks great on paper…with some tweeking of LAX/PHX and PHL/JFK. But as Sean points out above, there is a hellaton of north american capacity dependent on regional lift. Rationalization of regional flying in a US/AA merger could be the Black Swan game changer that will shake up, consolidate and close the regional industry.

  4. “””””…..and positive outcome for our people and our customers”””””

    Do AA workers really believe they and the customers who pay all their salaries are really thought of at a time like this? Will AA workers be thinking how their company got rid of just about every TWA worker after the merger, so they may suffer the same fate from US?

    Nothing is safe at a time like this so no one group should be thinking they are.

    1. Wasn’t there a bill passed a few years ago that regulated the merging of seniority lists, so that they would be more evenly merged instead of “stapling” one list to the bottom of the other? I would think that any workforce reductions would be more evenly split between the AA and US (and HP in some cases) groups. Another often overlooked item is the size of AA’s unions relative to what US has now. That has the potential to become the great equalizer in a potential merger. Take the pilots as an example. US has roughly 5500 pilots, while AA is in the neighborhood of 7800. The sheer numbers of AA employees that would be absorbed would potentially even out any ongoing or future strife between labor groups.

      1. The amendmemt is called “McCaskill-Bond” for the legislators that introduced it. It probably won’t come as a surprise to learn that both legislators were from Missouri.

  5. This definitely isn’t going to be pretty for the regionals. If you followed the proposed US-DL merger, Parker et al were very careful in their wording that they were not reducing mainline flying, so that merger would’ve accellerated the 50 seat bloodbath that is coming up.

    Although, I’m curious what’ll happen to the USAPA pilots.. The union most definitely will be the APA, although I’m curious if they’ll ever get back pay raise for all the years they’ve been dillydallying aorund, or if they just shot themselves in the foot..

    1. The USAPA guys are always bleating about Date of Hire…but I’m guessing they will be silent..LOL The America West pilots and the AA pilots will have the majority to squash the USAPA creeps (they always say that the majority rules…)

      I’d like to see PHX stay a hub, the economy is coming back in PHX faster than anywhere else, and it is much cheaper to operate there than LAX.

  6. “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.”

    The last three words of that statement are really unnecessary as I’m pretty sure most customers know that what they think is no factor at all in these issues. Put out the press release and let the competitive fight begin. Assuming we all make it past December 21, I doubt that any of combinations will still exist a few years down the road.

  7. I believe this merger will happen with some concessions. I doubt they’ll have any problems getting it approved. Creditors and the unions have already agreed to it happening. Don’t see why DELTA and Northwest or Continental and United would be allowed and not this. Whatever happens the lawyers will be very busy over the next few months and then some.

  8. I think politicians and local communities where hubs are based are going to fight this merger. When Delta and United promised that they wouldn’t eliminate any hubs, people believed them. This time around, after seeing what happened at CVG and MEM, and what is starting to happen at CLE, they are not going to be so gullible.

    It’s hard to tell which hubs are at risk, but I would guess PHL will lose transatlantic flights to JFK and PHX will lose some transcontinental traffic to DFW and ORD.

    1. Jim, Totally disagree. PHL can be a relief valve for JFK as PHX does the same for DFW & CLT can do the same for MIA. The 50-seaters are the big losers as far as I can see.

      The smallest hub city in this case is Charlotte, but it plays an importent roll as the #2 finantial city behind New York. This creates a huge market on the business side & a central point for connecting passengers who want to avoid Atlanta.

        1. DTW is nowhere near as congested as JFK, so its an apples and oranges comparison. Plus both PHL and JFK have strong O/D whereas CVG’s O/D has been on the low side..

  9. It’s interesting no one pointed out what the AA pilots got for voting down the first contract. There’s a whole host of points that management let up on including but not limited to:
    Lower limit on seats and weights for regional feed aircraft
    ?76 seats, 86,000 lb. limit matches agreements at Delta and United
    Lower cap on number of regional feed aircraft allowed (65% of narrowbody fleet count, down from 75%)
    Hub-to-hub restrictions added to code-sharing agreement
    Proportionality restrictions on code-sharing between AA hub and partner hub
    Definition of hub established
    100% furlough protection (down to the most-junior active pilot on the property)
    Definitive path to industry standard pay rate. Increases, date of signing (DOS) 4%, 2%, 2%, ?mid-contract? (DOS+3) industry ASM-weighted average, 2%, 2%.
    Mid-contract adjustment based on ASM-weighting
    ?LBFO was 2% raise worst-case scenario, now 17% raise
    ?TA compounded pay raises between 31% and 39% over the life of the contract
    ?LBFO worst-case could have resulted in only 14.8% compounded total raises

    So no, Cranky, the original LBFO was not something the American pilots should have just “accepted.”

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