Since Friday’s announcement that US Airways has the support of American Airlines’ three largest unions for a merger between the two airlines, quite a few people have weighed in on the prospect.  Those objecting are just about every political leader in Texas.  Senators, Representatives, mayors and even chambers of commerce are all voicing their preference that American Airlines exit bankruptcy and *then* engage in a merger if it is so desired.  So, what’s the objection?

Like virtually everything else, money.  Each of those constituent parties benefits a great deal politically and financially from American Airlines.  American Airlines knows how to spread the money around to get what they want in this state and nationally.  There is a reason why it took years to rid the DFW metroplex of the Wright Amendment restrictions and even when they were struck, they were done on a timeline that benefited American Airlines, not Southwest Airlines.  Even then, Southwest Airlines is forever constrained to use Love Field because if it takes a gate at DFW Airport, it has to give up a gate at Love Field.

US Airways is a political unknown to Texas and the politicians know that if a merger between the two is consummated today, it’s US Airways leadership who will control the airline and whoever controls the airline, controls the dollars.

The problem is, US Airways has already laid out a fairly compelling case for the merger.  It has support from labor and it has identified the key problem that market analysts have been worried about with respect to American Airlines’ cornerstone strategy that it continues to cling to.  Half or more of AA’s problems are on the revenue side, not labor cost side and the strategy to improve the revenue side seems to involve flying more and charging less (as a function of draconian labor cost cuts) to get more market share.  We saw how that works in the US airline industry for 30 years.  We’ve also seen how capacity discipline can really work well even in a market that is heavily impacted by a bad economy.

In addition to making a compelling case, I have to wonder what anyone is afraid of here?  Fewer job cuts, more synergies, more revenue, a more diverse fleet and a company that stays in Texas and maintains a massive hub at DFW airport.  There is no reason to argue against that unless it potentially means you don’t get what you’ve been getting.

Furthermore, the executive leadership at AA is plugged into the community.  It’s hard to advocate on behalf of a merger that fundamentally sees your friends lose their jobs.

The preference expressed by these political entities is that AA gets through bankruptcy and especially benefits from huge labor cost cuts that enables it to be the consumer rather than be consumed.  How does that happen?  Let’s not forget that AA sits on massive cash holdings that if it preserves them well, they suddenly have positive cash flow, profits and cash holdings to buy an airline instead of being bought.

The problem with that scenario is that there is only one constituent group that really believes that AA comes out of bankruptcy strong enough to compete against Delta and United with positive cash flow:   The American Airlines executive team.  The rest of us see AA coming out of bankruptcy able to maintain the status quo for several years longer because until you fix the revenue side of the business, you are fighting a holding action against Delta and United at best.

Filed under: Airline News by ajax