Airline analysts say court should consider American merger with USAir 8.21.12
Interesting email commentary this morning from airline industry analysts at Air Insight on why the bankrutpcy court should go ahead and now consider a merger between American Airlines and US Airways.
American Airlines' request to abrogate union contracts with its pilots and impose cost reductions after an impasse in negotiations was rejected by the bankruptcy court last week, as AMR failed to demonstrate that a successful reorganization required ending restrictions on domestic airline marketing accords and pilot furloughs. While the ruling was narrow, it demonstrates the strength of the US Airways merger proposal, as that carrier has already received the support of American's unions and could avoid protracted negotiations for a new contract.
The powerful creditors' committee responded to the court ruling by urging management and labor to reach a consensual agreement.
Under the bankruptcy code, American has the exclusive right to propose a restructuring plan through the end of this year. The question is whether that plan would be acceptable to the parties in the bankruptcy, including labor and those holding both secured and unsecured debt. Our read of the situation is that those parties are now leaning the other way, and that unless American can produce something miraculous, the parties will invite the alternative proposal from USAirways for consideration once American submits its plan.
Labor is already in favor of the merger, and each of its major unions, APFA, APA and TWU, have all reached pro-forma labor accords with USAirways. If labor were to obtain shares in exchange for their concessions, they would likely vote for the merger.
The depth of labor problems at American is illustrated by the fact that negotiations with its pilots have been ongoing since 2006, and have remained apart on a contract for the last six years. American plans to resubmit a request and impose contract changes if the bankruptcy court approves them. But there are a host of reasons the court shouldn’t, and instead support the proposed merger with USAirways that its lenders and creditors favor.
American will still be required to negotiate a long-term contract with its pilots union, whether in bankruptcy or after emerging. Flight attendants are currently reviewing a contract vote on a “final” offer from American, while ground workers and the TWU have already ratified new contracts that include givebacks.
There are a number of reasons that the bankruptcy process should consider the USAirways merger as an alternative to a stand-alone business plan. First, it could provide better returns for the secured and unsecured debt holders, and has already reached labor accords with employees. A USAirways acquisition would enable the combined companies to match the mass a reach of Delta, which acquired Northwest and United, which acquired Continental. American, formerly the industry leader in attracting high yield corporate traffic, has become a second tier player as the two larger carriers can offer truly global coverage. This is demonstrated through their higher passenger revenue per available seat mile, 14.23 cents per seat mile for Delta and 13.57 cents for United against 12.33 cents at American. Even with cost reductions, when you have 13.3% lower revenues than a major competitor, you will still have trouble at the bottom line. American has lost its edge, and needs critical mass.
Second, the management team at USAirways could replace the key executives at American who failed to address their problems on a timely basis, and are an impediment to labor negotiations, having paid themselves large bonuses while extracting concessions from unions.
Third, the route networks would be quite complimentary. American in a filing mentioned Virgin America, Alaska, Frontier and jetBlue as potential merger partners. None offers the critical mass and synergies that USAiways would provide.
So why won’t American recognize the handwriting on the wall and include USAirways in their business plan? Traditional arrogance and the desire of senior management to determine their own fate appears to be the answer, despite the obvious handwriting on the wall. Their debt holders, unions, and most industry experts agree that a USAirways acquisition of American would yield better results than a stand-alone American emerging from bankruptcy. Let’s hope the bankruptcy court agrees, and will hear alternatives that would better serve the constituents the process is intended to protect.