The Fort Worth Star Telegram SkyTalk blog has a story about a bond analyst blasting the American Airlines management for their latest request to extend their deadline for presenting a plan for bankruptcy exit.  In her note to investors, Gimme Credit Vicki Bryan said:

“AMR management has been coming off as more arrogant than confident, in our view, with destructive diversions and posturing that almost has boarded on the ridiculous. From CEO Tom Horton’s “revelation” back in July that the merger with US Airways actually was his idea in the first place (oh really? If so, he apparently couldn’t pull it off. See our note on 7/25/12) to the unveiling last week of expensive (and unappealing) corporate rebranding and garish new livery on planes that most likely will be owned by somebody else soon,”

This is what I mean about putting the cart before the horse in this process.  There are way too many attempts to pre-emptively announce developments and changes to control the outcome.  At what point does a board of directors or an unsecured creditor’s committee direct that their inclinations and desires are what controls an outcome rather than the CEO’s desires.  Even if that desire is a multi-million dollar payout if they exit as a stand-alone organization.

And let me ask you this:  Why should multi-million dollar payouts to an executive team take precedence over what is the right outcome for those holding AMR debt?

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I found a blog being maintained by an American Airlines pilot yesterday that was quite the experience.  Unlike most, this pilot was an ardent defender of Tom Horton and credits him with moving the airline forward through the large aircraft orders made and for making a case to grow the business to the board of directors all prior to Gerard Arpey’s resignation.   This blogger also contends that a merger will merely bring the America West / US Airways cat fight over seniority into the Allied Pilots Association and that stand alone is a better thing for pilots.  There is more there but we’ll leave it alone now.

I have a few specific and general thoughts here.

First, crediting Tom Horton with the aircraft order strikes me as overly generous.  More so the financing as being innovative.  To be true, things were negotiated in these orders that have the manufacturers generally providing financing for these purchases and I’m entirely unsurprised at this since the order was largely a historic one and getting a piece of it required the manufacturers to make an attractive deal.  But if we’re to credit Tom Horton for this order, let’s also credit him for the company devolving into bankruptcy as well.  We tend to pin that on Arpey alone and the truth is that Tom Horton was as much a right hand man in the operation of the airline (often to the exclusion of many other capable executives such as Dan Garton) and if we’re handing out credit, let’s hand out all the credit.

As for being the man to grow the airline, I would also point out that Tom Horton has possessed enough influence at the company pre & post Gerard Arpey to have already brought a great deal of influence into this direction.  He did have Gerard Arpey’s ear and let’s not portray the relationship that existed between the two as fundamentally different.  It just wasn’t.  Again, if Tom Horton was a visionary, his vision appears to have been ignored entirely until Arpey’s departure and we know that that just isn’t true.

Let’s also note that Tom Horton served as CFO for AT&T until it was purchased by SBC (Southwestern Bell).  During his time there, he essentially presided over AT&T not succeeding and needing a merger to survive and hence the merger/acquisition by SBC.  It has long been said that Horton realized he wasn’t going to replace the CEO and that current CEO of SBC, Randall Stephenson, had the inside track.  This in fact turned out to be true when Stephenson replaced former SBC/AT&T CEO Ed Whiteacre.

Enough of that.  The truth is that as I think of the conversation as it surrounds this merger between US Airways and American Airlines, it always boils down to arguments about seniority amongst labor.  I agree that integration of work forces is an important element in this merger and any other mergers among airlines.  The idea that a smooth integration is the norm of a successful merger is not correct, however.

We tend to look at the Delta/Northwest merger as the way it ought to always be done.  In truth, I wish it were that way but that was a very, very special case and even in that one the pilots nearly did the merger in but for the leadership of Lee Moak in that process.

In reality, mergers between airlines are almost always messy.  Integration is always difficult.  Successful airline mergers shouldn’t be measured in those terms.  In fact, I would argue that if the merger grew the airline, its revenues and its profits after a 5 year period, it was successful.  Messy or not.  (You’ve still got time United but the clock is ticking.)

The labor issues always revolve around seniority and a system of union representation that dates back more than 50 years.  The union system and its focus on seniority has made life exceptionally difficult for those employees for decades.  Today, among almost all legacy airlines, there is no job portability.  A pilot who merely finds dissatisfaction with his employer cannot leave and go to another airline without starting literally at the bottom-most rung again.  This is a major barrier to portability.

And if those same employees had some portability, I think that we would discover that airlines wouldn’t be in such a bad financial position in terms of labor costs and airline employees would actually be able to “vote with their feet” when an airline management treated them poorly.

Mind you, I’m not arguing against unions.  They’re the choice of the labor force.  I’m arguing against the idea that seniority and job security should be the overwhelming issue in representing their interests.  At the end of the day and in light of the furloughs and layoffs and ever increasingly slowed advancement that exists at an airline, is seniority really providing job security anymore?  And how about job satisfaction?

At the end of the day, airline employees love their inherent jobs but they’re also inherently disssatisfied with their management, their wages and their quality of life.  The roadblock to fixing those dissatisfactions is seniority.  This makes me wonder when someone is going try to come up with a better model for the future.

Wouldn’t it be great if an airline Captain with Airline A could quit a bad job and go to work for Airline B and be compensated on the basis of his experience and qualifications immediately instead of having to sit at the bottom of a seniority list and forever be “beneath” his peers who started at Airline B at the beginning of their careers?

And wouldn’t it be interesting to see airlines compete for airline pilots on the basis of that experience?  Remember that a desirable airline pilot isn’t just one with 10 or more years of experience.  It’s a person who has shown good judgement, safe judgement, efficiency and a can do attitude.  If I’m starting an airline, that’s who I want.  And an airline startup can’t really get those guys.  They’re stuck with the airlines they work for by and large.

Seniority imposes too much pain on both the employee and the employer at this stage in the game.  It is hurting competitiveness among airlines and impacting employees/labor in a very negative way over the long term.

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Alaska Airlines and American Airlines announced an expanded code share agreement between the two airlines on Monday.  The focus is on American Airlines putting its codes on Alaska Airlines routes from the San Francisco Bay Area and Alaska Airlines putting its codes on American Airlines routes from the Los Angeles area.

Alaska is ready to do business with anyone that it makes sense to do business with.  For them, this is about expanding options with another airlines to gain incremental benefits.

For American Airlines, this is about more than just gaining some incremental benefits.  This is about expanding a partnership with an airline on the West Coast and making the argument that the current AA leadership team is ready to work on the airlines’ revenue problems with a bankruptcy exit.

The next step for AA will be announcing an expanded code share with Jetblue in the Northeast.

Will it work?  Well, personally, I think not.  Code shares like these are what you actually make of them.  To date, American Airlines hasn’t really made much of its domestic code shares because it has always preferred to capture the all the revenue for itself in most domestic situations.  They don’t mind the incremental benefit to their foreign route network and anything that puts a passenger on a flight for a good fare is OK with them but it isn’t their focus.  Other airlines often try hard to drive sensible synergies with their code shares but American’s team just doesn’t seem to do this much.

Financial analysts aren’t fooled by these moves nor are those on the unsecured creditors committee.  What existing creditors and bondholders want is an airline that has long term viability for realizing profits that look a lot more like Delta’s.  A patchwork plan of code shares doesn’t get them there.

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There are a couple of very striking things I notice about the world’s powerhouse airlines and particularly those who are not only surviving but thriving:  They are heavily engaged in building global networks and constantly tweaking their domestic and/or regional networks to support these global networks.

Witness these airlines:  Delta Airlines (who is arguably doing it better than anyone else at present), Emirates, British Airways, Air France | KLM, Lufthansa.

These airlines in one form or another have acknowledged that change in their regional networks is a constant process and that reaching around the globe is necessary.

What the US Airways / AA merger won’t have is a truly global network.

American Airlines has relied upon its Oneworld partners to provide this to them and that has reflected poorly on American Airlines.  Domestically, it makes them appear to *need* these partners rather than being the case of providing a seemless service product around the globe.  The only routes in which AA works on itself are to Europe and those routes involving the UK have been half maintained by British Airways still.

Consider that British Airways supplies almost half the seats between DFW and London Heathrow and this is on a route to and from AA’s most valuable hub.   Chicago to London sees British Airways supply more than half the seats.  In the New York to London market, British Airways supplies 7 of the 12 flights and even a greater proportion of the seats.

On the Pacific routes that AA does have, the partnerships of flights and capacity with Oneworld partners is a bit more equitable.  Partners do about half of the capacity from my look into things.   But it is notable that it took QANTAS to put a 747-400ER on a route between Dallas and Australia and that it is QANTAS who is enjoying that revenue far more than American Airlines is.

AA has some good core strength to Europe and South America.  US Airways has the same strengths.  There will be consolidation in this area.  Expect New York, Philadelphia and Miami to be the gateway cities in this merger.

Expect Charlotte, NC to be downgraded to a domestic hub.  Charlotte’s few European routes will transfer to Philadelphia and/or New York and/or Miami.  Charlotte’s Caribbean and South American flights will transfer to Miami (and rightly so) and a some to DFW.

Expect Los Angeles to be the West Coast gateway city and Phoenix will be downgraded to a domestic hub with passengers route to Dallas for flights over the Atlantic and to Los Angeles for Pacific flights.

But that is what I expect them to do with the resources they have today.  What they will also need to do is build core strength to new destinations with aircraft freed up from consolidation.  USAmerican Airlines will need to deploy more strength to Asia and it should strongly consider operating flights to the Middle East and Africa.  They will even have an opportunity to perhaps explore South Africa as an opportunity through its South American flights.

And whoever gets the 787 first, QANTAS or USAmerican, direct routes to Sydney and Melbourne need to be established from DFW.  There should be multiple frequencies here.

Make no mistake, I do think Parker & Company is the right management team but they need to find a risk taker on the AA side to do strong business development in the above named areas.  This is a weakness on both sides but much more so among the US Airways team.   If the entrepreneurial spirit for this business development does not exist on either team, they need to hire it as soon as possible.  I would hire a senior level executive from a multi-national airline as fast as possible and give him or her a budget of resources and money significant enough to build a strong revenue stream from these weak spots.

And I wouldn’t wait to do it.  The longer USAmerican waits to address these core foreign route weaknesses, the more Delta will capitalize on them and the more chance there is that United will regain momentum.

Consolidate these foreign strengths quickly and immediately go to work on route development to destinations outside my core strengths.  I would also stop relying upon Oneworld partners to give me circuitous and service unequal routes to these places.

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When US Airways and American Airlines merge, there will be a great deal of talk about synergies and how they are complementary.  And if it isn’t about that, it will be people talking about how they aren’t complementary and that this is a shotgun wedding.  Everyone will be critic and that includes me.

So I’m going to do it now.

I have actually liked the idea of an AA / US Airways merger for a while.  I do see US Airways bolstering AA’s domestic network in certain areas.  What I never liked was the idea of an AA executive running the show because the first thing that would be done is a shutdown Phoenix and probably Charlotte, NC, too.  That’s what American Airlines executives do when they merge an airline.

Many will see Phoenix get drawn down into insignificance in this merger because of AA’s focus on Los Angeles.  I disagree.  I think you’ll see a distribution of flights and the network between the two cities.  I think Los Angeles will be used for a West Coast gateway to the Pacific and Asia but I think Phoenix will continue to be used to focus domestic connecting traffic in the Western United States.  It’s a more practical hub to use for that.  Los Angeles and particularly LAX is not the airport to use for that kind of thing.  You use LAX to connect traffic in California and to foreign destinations.  You don’t use it to connect traffic to Tuscon.  Bottom line:  I think both remain hubs.

Dallas and Chicago stay right where they are.  They probably add some flights but nothing really changes in a big way.

Charlotte, North Carolina stays.  It fits much better into the Southeast United States as a connecting hub than Miami.  Miami is a miserable place to connect to anything but the Caribbean & South America.  Charlotte is a great place to connect to cities all over the Southeast and will help AA bracket both Delta and Southwest Airlines in that area.

Philadelphia will remain a hub and may see more traffic connecting there for foreign destinations.  New York is a miserable place to connect for anything including foreign destinations.  Philadelphia will remain a strong domestic city and we may well see some expansion of flights to and from this city from AA strongholds.

New York City remains much as it is with some increased network feed to AA flights to Europe and foreign destinations.  The new airline isn’t going to cede ground even more in this city and it has an obligation to work to feed its Oneworld partners there.

Miami is named as an AA hub.  It’s really more a gateway city just like LAX and New York City are.  Miami will neither increase nor decrease in importance.  I expect more domestic feed to Miami to connect to foreign destinations but that’s it.

There isn’t really much route overlap between the two airlines.  There isn’t much consolidation to see from this merger.  This will be about redistributing resources to maximize revenue opportunities and domestic routes will get shifted around and replanned around new opportunities.

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Short version:  Non-disclosure agreements keep getting extended for more talks.  Conventional wisdom has it that most issues have a solution framework and that there are perhaps one or two sticking points.

First, who owns how much of the new entity.   The word on the street has the offer amounting to 70% of the entity being owned by AA creditors and 30% being held by US Airways shareholders.   Part of me says this is a touch inequitable but it might be palatable enough for US Airways shareholders to do the deal.

Second:  Who runs the show.  Doug Parker would seem to have the inside track based on his performance at US Airways but apparently Tom Horton (and possibly others) are making an argument for Tom Horton to be Chairman and CEO or, at the least, Chairman, of the new company.  This argument is based on the fact that Horton & Company have run a large international airline before and . . . Parker & Company has not.

Financial analysts see the consensus that this is not what should happen.   The key risks there are that Tom Horton has no employee support and particularly none from unions and lacks a certain credibility with this plan to grow capacity as much as 20% in saturated markets.  I’ll go one further:  Horton and his team have never focused on the revenue side of the business.   It’s always been about managing money and assets as opposed to growing the business.

Parker & Company have a strong reputation for returning value to shareholders, managing their operations closely and responding to problems with solutions that work.  Moreover, Parker & Company haven’t exactly been managing some 20 airplane LCC carrier either.  US Airways may not be quite the size of AA but it’s no small entity.   It’s the 10th largest airline in the world by fleet size (AA is 6th).  In Revenue passenger miles, US Airways is 11th and AA is 2nd.

US Airways does fly a number of international routes.  They just don’t fly to quite as many destinations or with as much frequency.  It’s not like Doug Parker doesn’t know how to establish a route to a South American city.   His team established a route from Charlotte, NC to Rio de Janeiro, Brazil and made it work.  That’s saying something and I want to see what they can do with AA resources.

I also think that the Horton Team just might have overplayed their hand recently with these rapid fire introductions of branding, uniforms, aircraft liveries, etc.  These acts were, in my opinion, designed to help bolster their argument that they should be in charge.  Now I think they are starting to sound shrill and I think many who care (such as the unsecured creditors) aren’t impressed with this team putting the cart before the horse several times over the past 2 months.

At this point, I rate a merger probability as nearly certain.  I think that the most that will be given to Tom Horton is a non-executive Chairman role (such as Glenn Tilton) set to expire after a few years.  Maybe.  If he stops futzing around.  I think many very capable AA executives will be retained.  I think some won’t be.  The truth is that there is a rich garden of talent at AA that can be mined.  There is a reason why Virgin Atlantic hired their next CEO from AA and why Virgin America got theirs from AA too.

I think we’ll hear the merger announcement sometime between now and February 15th.  That’s a pure guess on my part based only my sense of timing and mood in this affair.

The only thing that could make me happier in that announcement would be the news that that awful livery will be stopped and redesigned immediately.

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American Airlines announced yesterday that they will be developing new uniforms for its service staff.  Pilots, flight attendants, customer service agents and others will be given a new look and AA has engaged the designers Ken Kaufman and Isaac Franco to do the work.

This isn’t about the need to urgently rebrand the airline.  This is about AA attempting to create a story to send their message to the  unsecured creditors that everything will be OK if they permit a stand alone bankruptcy exit.  AA and its executive team has been working frantically from a PR point of view to send this message and particularly so this month.

The problem is that it is becoming rather shrill.  Yet, they manage to do this while choking off US Airways with a non-disclosure agreement.  That NDA doesn’t prevent US Airways speaking privately though.

What bothers me is how they’re working so hard to stay on script and timing without paying attention to feedback.  For instance, the overwhelming poor feedback on their livery would, in my opinion, ordinarily ask for a pause in the efforts.

But that’s the problem with the current team:  They are extremely deaf to critical feedback and particularly so when it comes to external sources and even external stakeholders.  If I’m a member of the UCC, I’m going to be annoyed with the persistence being shown here without regard to putting first things first.

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United Airlines has posted a $620million loss for the 4th quarter and a 2012 loss of $723 million and that, my friends, isn’t trivial.  Conventional wisdom has it that this is the cost of a poor integration.  I think the integration has gone poorly and has impacted the company but I think the poor integration is an indicator of something else.

This management team isn’t working very well together.

We are at the point where United should be seeing its operations mesh together nicely and, instead, we’re seeing ever greater impacts from the merger on the bottom line.  Good, strong management working together makes this airline work better, not worse.  It’s notable that the combined operation earned $840 million in profit for 2011 when it really wasn’t integrated.   In one year, there is a direction change equivalent of 180 degrees.

This is a management problem.   Various management groups are executing the integration of their parts without regard to whether or not other parts are ready for that integration.  This is the source of their reservations integration.  It was pushed forward despite other parties not being ready so that a box could be checked on integration progress.

At some point, this becomes intolerable to external stakeholders.  In the meantime, I would hope that leadership calls a halt to integration efforts and executes a 360 degree review of each department and what its progress has been to date and what each expect to accomplish before allowing anyone to move forward any further.  In that process, I would hope that managers who are executing without coordination are replaced with managers who understand that this is a dance party that needs to work together rather than just a group of individuals seeking an ultimate payout as reward for checking the box.

Jeff Smisek described the integration being particularly tough in 2012 but also declared that things were back on track.  My problem with that is that just because you say it, doesn’t make it so.  Time will tell but, for the moment, a huge 4th quarter loss contrasted against other airlines who’ve had great years doesn’t signal that things are “back on track.”

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American Airlines has inked a deal with Republic Airways to flying under the American Eagle brand.  Republic will operate 53 Embraer E-175 jets with 12 first class seats and 64 coach seats.  The contract will last 12 years from the time the aircraft are put into service and the full complement won’t be in service until 2015.

If I were American Eagle or an employee of American Eagle, this would worry me.

It’s clear that no matter who runs AA in the future, contracting out American Eagle services will only increase, not decrease.  In addition, it will likely go to regional airlines that either have the equipment today or the orders for the equipment already in place.

American Eagle has neither.  It’s fleet is primarily comprised of the ERJ-135/140/145 aircraft although they do have 47 Bombardier CRJ-700 aircraft.  If the team at American Eagle wasn’t getting ready for a new world order, they should be doing so as of this morning.

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While reporting and commenting on both 4th Qtr and 2012 earnings, US Airways CEO Doug Parker emphatically stated that they (US Airways) had nothing to say about a merger with American Airlines at this time since they continue to operate under a non-disclosure agreement.  All of this is right and proper and I must say that I have been impressed that all parties seem to be honoring this pretty well with the exception of AA CEO Tom Horton who continues to say a lot without saying it by making passive-aggressive comments at each public event.

But Doug Parker and his team haven’t had to say much vocally because their performance, once again, continues to make the argument for them.

$37 million profit in the 4th Qtr despite Hurricane Sandy impacts and this contrasts with Delta announcing just $7 million.  Revenue growth of 3.9 percent in 4Q as well.

A 2012 profit of $637 million on record profits of $13.8 billion.  Again, this contrasts with a profit of $71 million for 2011.

These guys are killing it and they know it and this has to be getting the attention of creditors and other bankruptcy stakeholders.

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I think it kind of got missed that the CWA union election for passenger service agents did not succeed for the union.  About 6000 agents voted (out of approximately 7800 agents total) and the election did not pass by about 150 votes.

Did AA win?  Actually, I think not.  These kinds of elections are very difficult for unions and unions have to show real value to people who need every bit of their paycheck to live on.

If the US Airways merger does happen, expect another election potentially.  US Airways passenger service agents are represented jointly by two unions:  The CWA and Teamsters.

This issue isn’t over, the first couple of chapters in this story have merely been completed so far.

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Terry Maxon at the Dallas Morning News made a post about Mike Boyd responding to American Airlines’ rebranding and livery change. The short version is that Boyd was scathing in his criticism of American Airlines management for doing this now.

And it mirrors some of my own feelings posted earlier today.

If one considers the priorities just prior to and during bankruptcy, rebranding efforts should have been suspended upon entering into bankruptcy.  I assure you millions of dollars were spent on it leading up to the unveiling of the new livery.

I do think AA needed rebranding ultimately but whether it got done today or a year from now wasn’t really important.  Delivering a great customer service product is the priority right now.

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So, it’s been a couple of days now and I’ve had time to reflect more and time to look at the new AA logo and livery again with fresh eyes.  Here are my final thoughts:

1)  I think they *nailed* it with the silver paint for the fuselage.

2) I think the “blade” aka the stylized aircraft tail next to the name is growing on me some but I still think what is supposed to represent an eagle’s head actually implies a star more.  It’s a touch too stylized, in my opinion.  That said, it’s OK and I think that it is strong enough to be associated with the name going forward.  As people see it, they’ll tag it as AA.

3)  Hate the tail more than I did yesterday.  I simply think it is way too generic and has no connection to the history or branding of American Airlines.

4)  As much as I think the billboard title on the fuselage was absolutely the right way to go . . . I just don’t think it stands out enough against the silver fuselage.  It needs a different color, I think.

It’s interesting to me that when asked if this branding would be redone in the event of a merger, Tom Horton said he didn’t think so.   Well, I think it would be.  I think you would see the silver paint retained.  I think it’s possible the logo would be retained in some form.  But I think there are two things you would see the US Airways crew change immediately.

The tail of the aircraft would be cleaned up considerably.  The billboard “American” title on the fuselage would be made bolder.  And the fact that Tom Horton’s good friend Doug Parker hasn’t paid a public compliment to AA over the re-branding kind of indicates that they are, at best, lukewarm to the concept.  US Airways did issue this statment:

“We applaud our friends at American as the new brand elements and livery mark the culmination of a significant amount of work and coordination, and clearly those efforts have produced a compelling result.”

Make of that what you will.

Does AA need a new brand?  Yes.  Did it need one *today*?  Nope.  There were interim solutions that could have been employed.  Does this new brand move them forward?  Logo wise, yes, I think they’re there mostly.  Does the livery do anything for them?  No, I think if you parked that aircraft at a major european hub it would be lost in a sea of Euro Styling and particularly with those colors.  Heck, I kind of wonder how it would stand out taxiing through Atlanta’s airport.  I see a livery done by committee rather than a leader and its notable that they say this has been in the works for 2 years.

To misquote a certain financial analyst at JP Morgan Chase:  “Really Tom?  Is this all you’ve got?”

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American Airlines’ board of directors met on Wednesday but don’t expect a merger announcement quite yet.  I think there will be a merger.  Frankly, I think there is a very high chance of a merger.  But I also think that the details of the deal still have to be worked out to everyone’s satisfaction.  Tom Horton will be arguing that shareholders will get more value with a standalone exit (I’m not sure I agree here if one considers what is likely to happen with a mediocre operation over the 3 years following bankruptcy exit).  I think a better guess for an announcement will be around late January.

Delta Airlines is set to acquire regional airline Pinnacle as it is already providing its Debtor In Possession financing.  Pinnacle entered bankruptcy and Delta needed that airline to stay afloat and operating.  Whether the airline is integrated into Delta and Delta managed, I can’t say for now.  I suspect that Delta will become the majority owner and seek to install an executive to finish making Pinnacle a viable entity.  At that point, I would expect Delta to spin off Pinnacle again.

US Airways is setting new records (again) for revenue and passengers.  While they expect a $35 million hit against 4Q earnings because of Hurricane Sandy, I would expect that their earnings report for December to, once again, shock and delight investment analysts.  This is where US Airways is making its best argument for a merger with American Airlines:  Investment analysts, shareholders, etc all want this management team in charge of American Airlines because it performs and does so under the worst of network circumstances.

Delta Airlines opened up 300 flight attendant positions and got 22,000 applications for the positions.  That’s about 73.5 people per job applying.  (Take note flight attendant unions:  People want those jobs and readily accept the entry level conditions.)

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Virgin America is going to be flying into Newark Liberty International Airport in the near future with flights from Los Angeles and San Francisco.  It’s a destination that Virgin America has coveted for some time but which has been unable to get into due to slot restrictions at the airport.

The real surprise, to me, is who they’re getting the slots from:  American Airlines

American, through its bankruptcy proceedings, is terminating existing leases of its slots to both United and Porter Airlines and making those slots available (plus additional slots direct from AA) to Virgin America for the exact same price.

Given just how much Virgin America has attacked American Airlines on certain routes, I’m rather surprised at this development.  This development potentially puts pressure on American Airlines on transcontinental routes between NYC and SFO/LAX.  American doesn’t have dominance at Newark and certainly isn’t the dominant airline in NYC at this time.

The dominant airline at Newark is United Airlines and certainly so for that route between those airports.   Between SFO and JFK, both Delta and United have more dominant positions but AA is certainly not a minor player either.  Between LAX and JFK, American Airlines is the dominant carrier but only barely so with Delta and United also being major players.

So I can make a few interpretations here.

First, American sees United as the competitor to fight with on these routes and wishes to make trouble for United in the form of Virgin America.  Why AA doesn’t wish to add frequencies into and out of Newark, I do not know.  There are several trunk routes that presumably would fit neatly into AA’s system for that airport.

Second, American has traditionally viewed even upstarts like Virgin America as a threat and gone to great lengths to price them out of markets.  AA has most recently done this when Virgin America entered the DFW market with flights from LAX and SFO.  So perhaps American views Virgin America as insignificant competition when compared to the SuperLegacy landscape.   Personally, I wouldn’t be quite ready to write off Virgin America when you give them access to an airport in the NYC area that plays very well into their strengths.

Third, I now wonder if American (primarily CEO Tom Horton) is starting to eye Virgin America as an acquisition.  This isn’t quite as far fetched as it might seem.  Virgin does have some valuable landing slots (although many are currently leased) into slot constrained airports.  Virgin is also run by a former American Airlines CFO, David Cush.  And Virgin has the equipment that American has decided to adopt for its future:  The Airbus A320 and A320NEO.

Virgin America has done poorly and even I think it’s time for Virgin to seek a partner.  Their value isn’t much at this point given that they’ve never earned a profit and their position has worsened in the last year.  An acquisition of Virgin America would essentially be an asset purchase to get their hands on aircraft faster.  Virgin America has nothing in terms of infrastructure, IT, leadership or service product that AA wants or needs.

Right now, I think that AA wants Virgin America alive to provide competition to the airline that best represents trouble for it:  United Airlines.  That competition can hurt United in the near term and allow some breathing space for AA to gets its bearings and start competing with United again.  If I’m right, I would not be surprised if the next market we hear about Virgin entering is Chicago.  Virgin has wanted to fly into O’Hare airport for a long time as well but hasn’t been able to get decently located gate space thus far.

It could be one other thing:  This could be part of a strategy to form partnerships with Virgin America and a closer partnership with jetBlue to give both Delta and United more trouble.  Virgin America competes hard with United on the West Coast and on trans-continental routes.  It also competes heavily with Alaska Airlines on the West Coast and Alaska Airlines has been moving closer and closer to Delta.

On the East Coast, American’s partnership with jetBlue has worked out OK and expanding upon that partnership would put some pressure on both Delta and United as well.  Since this strategy benefits two of the Cornerstone markets of AA, this may well be the purpose.

For now, we’ll just have to watch this play out.  If a US Airways / AA merger isn’t consummated, I’ll be ready to bet heavily on a partnership approach to building the AA network upon bankruptcy exit.  This may well be Tom Horton’s method of not engaging in a merger where he is ousted.  He may well be ready to argue that AA can do as well or better in this approach vs a merger.

Filed under: Airline News, Mergers and Bankruptcy by ajax
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In the conversations that take place regarding the US Airways / American Airlines merger opportunity, naysayers within both companies frequently end up being the pilots.  The minority groups of these pilots like to ask for (demand) firm agreements on seniority integration and point to Doug Parker and his team being unable to achieve seniority integration for US Airways pilots since the America West / US Airways merger of 2005.

That’s really not true.  The history there is bloody but it really is the fault and responsibility of the pilots involved that combination.  Here is what has happened:

America West and US Airways pilots were both represented by ALPA.  As such, when the merger occurred there was a mechanism in place at ALPA to arbitrate such a seniority integration.  There were many issues but the overriding viewpoints on each side were centered around a couple of things.  America West pilots felt they deserved to have their seniority (and job opportunities) guarded to some fair degree because it was their airline that was consuming US Airways which had been in bankruptcy not once but twice in the same decade.  That was a reasonable viewpoint and it could have been handled by using “fences” to protect some percentage of jobs for those pilots.

US Airways pilots wanted a date of hire seniority integration because their pilot group had some very old, very senior pilots who didn’t want to be knocked down from the premium pilot opportunities.  Since these pilots had agreed to major wage concessions in two bankruptcies, they felt they had given enough at that point.  This wasn’t entirely reasonable but it wasn’t entirely unreasonable either.

In the arbitration discussions, US Airways representation basically went “hardline” and drilled in on a date of hire seniority integration and avoided discussing any ways to come to a compromise using mechanisms that would give each side some protection and some opportunity.  Fencing routes and/or aircraft was one way this could have been handled and the most senior of each pilot group could have had their retirement protected reasonably well.

But the hardline negotiations on the part of the US Airways group led to the arbitrator having to make a tough ruling that blended each group with a relative date of hire integration.  This solution had some fairly junior America West captains sitting in front of some fairly senior US Airways captains (as an example.)

US Airways pilots went livid and used the nuclear option.  They held a new union representation election and formed a new independent union called USAPA.  They were able to do this because they actually outnumbered America West pilots.  Essentially, US Airways pilots didn’t like the binding arbitration and had a rare opportunity to stick it to everyone and did so.

This breakaway and the lack of seniority integration has been litigated in court ever since between the two pilot groups.  Doug Parker and his executive team have very wisely stayed far, far away from this problem the whole time.  They’re not even sure who they should legally engage in negotiations with and have (rightly) offered the opinion that the pilots had to get their act together first.  The pilots have been unable to do so for more than 5 years.

Frankly, my own opinion is that a court should have made a decision that looked like this:

• The pilots may organize in any way they wish including creating an independent union.  However,
• The pilots must integrate according to the ALPA/Nicolau seniority integration arbitration decision before anything else occurs.  Binding arbitration that results in a decision should be enforced otherwise binding arbitration isn’t binding.
• After the seniority integration is implemented, the pilots may work out their contracts and future seniority issues among themselves and with the company leadership.

Under that scenario, no one gets their cake and the chance to eat it too.

Now, there is a reason why most pilots actually view the US Airways / AA merger as a good thing.  There is now federal law which governs a seniority integration which didn’t exist when America West bought US Airways.  This law works fairly well.  Not perfectly but it does get the job done and that’s important.

American Airlines pilots are very senior and know that under that federal law they’ll do pretty well.  If they do pretty well and the new airline is successful, their future is pretty secure and that’s what a pilot wants.

America West pilots know that they’ll do pretty well because the merger framework pretty much raises their incomes to levels never thought of before because the baseline for those wages will be AA pilot wages.  Even if they lose some positions in seniority, everyone makes a lot more money.  Best of all, USAPA almost certainly goes away as a union and that is an emotional win for America West pilots.  (I would argue that while USAPA is pretty awful as a union, they aren’t exactly upgrading big with AA’s Allied Pilots Association.)

US Airways (Old) pilots are very senior and know that they’ll do pretty well under the federal law as seniority integration goes and they, too, get a big raise.

All three parties in this know that they don’t have to deal with a multi-year mess of seniority integration if this deal is made because the McCaskill Bond statute provides adequate framework for a fairly timely seniority integration.  No union leadership in this battle has to “fight” because there is only so much that can be fought for under the law now.  Notice that in the United / Continental merger there really wasn’t much “fight” between the unions as there were few areas where any “fight” could occur.

So despite the naysayers predicting a mess of seniority integration, that’s not really true.  It will happen and the worse case scenario is that everyone gets a pay raise and gets a fairly secure future with an airline that can compete globally.  More so, Doug Parker and his team also know this and also know that if they present a deal that gets everyone a bit of what they want in a worst case scenario, they’ll be integrated in fairly short time.  They can do this deal and succeed in the labor area without much fear and most creditors know this by now.

Filed under: Mergers and Bankruptcy by ajax
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