Is American Airlines' CEO panicking? – 7.30.12
By Mitchell Schnurman
At least Tom Horton didn’t say he invented the Internet.
The CEO of American Airlines has been stretching the limits of his credibility on a recent publicity campaign. He took credit for starting the industry's consolidation and flip-flopped on the company's interest in a merger. One analyst said he was on a rampage, presumably because US Airways’ Doug Parker has been dominating the coverage of a possible AA-US Air hookup.
Rather than bolstering his bona fides, Horton has muddied American’s message and, at times, made himself look small.
Before reviewing Horton’s comments, it’s important to note why this matters. My take is that Horton is overreaching because he's losing the war for American’s hearts and minds, maybe even with unsecured creditors.
His management team must sense it, and stock and bond markets are also betting on a merger with US Air. Parker has a good shot of running the combination, too, given that he championed the idea and won over American’s labor leaders.
Horton’s initial strategy was to stay focused on a stand-alone business, get through a long Chapter 11 to-do list and stay above the fray. He started out rock solid, unflappable and disciplined. But that’s over.
Horton is now slinging mud and revising history, and it must feel like panic city on Amon Carter Boulevard. Horton has been mocking Parker for campaigning by press conferences. Guess who’s going to be mocked now?
Here’s the quote Horton will never live down: “People said American sat out the consolidation wave of the last decade,” Horton told The Wall Street Journal last week. “No, we didn't. We started it, with the TWA acquisition.”
This is such a stretch that it’s fair to wonder if it was a slip of the tongue. It wasn’t. I’ve heard the same statement from American more than once, during background interviews. This time, Horton went on the record with it — for the Journal’s national readership, no less.
To outsiders, including those who pulled off successful airline mergers, Horton was claiming to be an architect of modern airline consolidation.
That’s on par with Al Gore and the Internet. Gore never said he invented the ‘Net, but he took a lot of credit, and opponents and comics wouldn’t let it go. The line stuck, because it fit the narrative that Gore would go to any length to impress.
In this case, Horton is trying way too hard to portray American as a consolidator. Here are three reasons that American’s TWA purchase didn’t start the consolidation wave:
1. It wasn’t even the first big deal of the decade. Almost eight months before AA-TWA was announced in January 2001, United and US Air had agreed to merge. That combination called for 2,900 more daily flights than No. 2 American, prompting one analyst to say: “This is going to trigger a major realignment in the airline industry.” American felt compelled to respond and targeted bankrupt TWA. A year later, the Justice Department threatened to sue to block United-US Air, so that merger fell apart. By then, American owned TWA.
2. Buying TWA was a huge mistake. American spent $742 million, assumed $3.5 billion in debt and added capacity just before the airline industry cratered. No one could have anticipated 9-11, but debt-rating agencies downgraded American because of TWA, and bloated American was already easy pickings for Southwest. American added a bunch of old planes, even more labor troubles, a maintenance facility in Kansas City, and another hub in the country’s center (St. Louis, in addition to Chicago and DFW). It would later shed almost everything. Maybe worst of all, the deal made American the world’s largest airline. That was a good brag for a while, but it ensured a tougher Justice review on other mergers. In sum, American used its chits on a third-rate asset, while rivals found much better partners later.
3. Airline mergers ground to a halt after TWA. For four years after the TWA deal, there wasn’t a single merger in the airline industry — the longest such drought since the 1980s. Clearly, 9-11 had more to do with that than American’s disastrous results with TWA. But in pinpointing the start of modern consolidation, try September 2005. That’s when Doug Parker closed the merger of America West and US Air. In the following five years, nine mergers happened, including Delta-Northwest, United-Continental and Southwest-AirTran.
It seems odd that Horton was so eager to remind people about TWA, given the outcome. Although he worked on the deal, he wasn’t one of American's five most senior executives at the time. He could have buried it on his resume but chose to highlight it instead.
Why? He’s trying to change the current story line. So far, it’s been all Parker, whose commitment to mergers is beyond question. After landing US Air, Parker went after Delta and United (twice), and learned enough in those failed bids to make a much stronger run at American. (Crucial lesson: Strike early and get employees on your side.)
On Horton's recent press tour, he talked about more than TWA, but his harsh sound bites got the most attention and seemed out of character for the usually reserved executive. Horton said US Air had “fake labor agreements”with American’s unions; that it was desperate for a deal; and that Parker was in “a race against the clock.”
US Air had a perfect same-day counter-punch: It reported that net income tripled to $306 million, its biggest quarterly profit ever.
Then, after months of publicly dissing the prospect of a merger with US Air, Horton offered up a baffling scoop to AP: He said that he had approached Parker first, two months before the bankruptcy filing. This happened reportedly during a secret meeting of airline execs at a ranch retreat in Wyoming.
"I said to Doug, standing by the river, I think there could be the potential for value creation in a combination," Horton recalled. "I made that pitch. We nodded heads to one another."
So Horton was actually keen on a merger before American went under? Was that like getting close to mergers with Continental, Northwest and United half a decade ago, and not pulling off any of them? And how does sharing the river story help Horton's cause today?
“He obviously failed to seal the deal and save his company from a massive failure, which has created devastating harm to all its stakeholders,” wrote Vicki Bryan at Gimme Credit, an independent research service on corporate bonds. “That’s really nothing to brag about.”
Bryan, a senior analyst, warned about a pending American bankruptcy last year, and has been a caustic critic of Horton’s plans. She wrote last week that the unions believe they have a better future with an airline that is "decidedly not run" by Horton and his team.
“We agree, and we suspect the unsecured creditors agree as well,” Bryan wrote.
American’s reorganization is still in the middle innings, and current management has exclusive rights to present a plan this year. Execs might be all over the place at the moment, trying to find a message that sticks, but they’re not done yet.
Insiders insist that American was hemmed in by the demands of its restructuring and couldn’t fully engage in communications. Only now, after notching gains in operations and labor contracts, can Horton really make his case.
They say that’s what he’s doing. And this is what he planned all along – to get the company healthy and then evaluate every option.
In politics, they call this a pivot. The trick is doing it artfully.