The APFA and its leader, Laura Glading, are pointing at greed on the part of American Airlines CEO Tom Horton for the reason a standalone exit from bankruptcy is being pursued. I generally find the APFA to be a bit over the top and militant in their communications and they tend to follow the model of making it personal with company executives.

But even a militant organization finds a valid argument now and then. Past CEOs of airlines exiting bankruptcy have seen huge rewards from the stock they hold. Both Doug Steenland and Glenn Tilton received tens of millions of dollars. So has Delta CEO Richard Anderson. It’s a lucrative position to be in.

APFA aren’t wrong that its to the benefit of Tom Horton and his executive team to see that kind of exit. The market valuation of AA is liable to raise their rewards dramatically. It might not be “greed” but there is a huge financial incentive.

And I do think that kind of financial rewards clouds the thinking of such teams when it comes to finding an appropriate exit from bankruptcy that BENEFITS SHAREHOLDERS.

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US Airways CEO Doug Parker made a more detailed case for the US Airways / American Airlines merger they are pursuing at the annual US Airways shareholders meeting. Parker is in the position of having to denigrate the airline he wants to merge with somewhat in that he has to make a case that the stand-alone approach doesn’t bring profitability while the merger approach does.

Parker argues that the two airlines together can compete globally whereas the without US Airways, American Airlines doesn’t quite get there. The problem with that viewpoint is that he’s arguing scale at various point while also saying that US Airways doesn’t *need* a merger partner to continue its profitability. So why can’t American Airlines survive without US Airways?

The answer is that the two airlines both face long term profitability risk when facing Delta and United in the marketplace. US Airways *does* need a merger partner just as badly as American Airlines does. US Airways brings an executive team, a profitable operation and network that is complementary to American Airlines. AA brings scale to the table.

The labor issues still linger out there and while they aren’t as rosy as Parker makes them out to be for such a combined airline, they also aren’t as bad as some make them out to be as well. One thing US Airways has proven is that you can run a profitable airline with a fractured labor force. They’ve done it.

Labor unions, particularly pilots and flight attendants, have got to realize that their ability to survive is predicated on accepting new models of flying at the airlines. Preserving jobs is one mandate and that’s understandable. But all unions are going to have to accept the idea that preserving those jobs may require flying on smaller aircraft at vastly lower pay scales.

AA may do US Airways a favor in getting the labor contracts thrown out in court. If a merger goes through, a new contract could take several years to get negotiated into place while new, lower terms are imposed upon the unions which save the airlines money until that new contract is agreed upon. If the unions wants to realize salary improvements, they’ll have to cede some ground on productivity, health benefits and retirement funding. The sooner they do so, the sooner they realize real gains in overall compensation and particularly so on the US Airways side.

On a related note, the USAPA (US Airways pilots union) is now expressing moderated concern about a merger from their point of view. This isn’t surprising since AA pilots would dominate a combined airline from both a seniority and numbers perspective.

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American Airlines has announced direct, non-stop service from Miami to Asuncion, Paraguay with 4 flights per week starting in mid-November. Here is the kicker: These flights will be on AA 757 aircraft.

The distance between the two cities is just a bit over 3800 nautical miles and within the service range of the 757 but I suspect there will be a bit of planning done for non-scheduled fuel stops as a “just in case”.

While the flights are interesting and fit within the capabilities of the 757, I suspect these will not be pleasant, comfortable flights for those in economy class. It will be close to a 10 hour flight on a narrow body aircraft and American’s 757s aren’t well known for being a newer bunch of aircraft. The interiors and seating haven’t been refreshed in some time. First/Business class should be comfortable but I wouldn’t expect much from the back of the aircraft.

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A few weeks ago, American Airlines conceded publicly that it would examine all options for exiting bankruptcy rather than just the stand-alone approach it had been evangelizing up to that point. This was due primarily to the campaign for merger that US Airways has been engaged in and the unsecured creditors committee desire to see all options reviewed.

Since that time, there have been quite a few indicators that American Airlines simply paid lip service to the court of public opinion without actually engaging in the act of reviewing merger potential. PlaneBuzz made mention of an internal town hall put on with CEO Tom Horton and the view that Horton isn’t acknowledging that a merger decision or any decision on AA’s exit from bankruptcy lies really at the hands of the bankruptcy judge and the unsecured creditors committee. In short: Once you’re in the bankruptcy court, your control over your destiny is very limited.

In addition, AA has proceeded in its talks with unions with the clear intent to win its Section 1113 motions to abrogate the union contracts. What I mean is that they haven’t made progress with the unions although I’ll concede that they have so far managed to engage the pilots enough that they are returning to the negotiation table. However, they largely went through the motions with the unions by all accounts.

CEO Tom Horton was in Beijing for the IATA conference and was quoted by Bloomberg saying: “We’re very focused on restructuring independently,” Horton said. “That has to be our focus now and anything else for the time being is a distraction.”

The problem with these developments is that the UCC (Unsecured Creditors Committee) for this bankruptcy is the one that forced AA to publicly acknowledge that it will examine all options and statements and actions like those on Horton’s part speak loudly to so far ignoring the wishes of the UCC.

And it’s notable that a large part of the UCC is made up of AA unions. The bankruptcy judge has made it clear that even if union contracts are dissolved, American Airlines still has to do a deal with the unions and unions still have to get a new contract in place. His message is that the two parties better start figuring out how to make things work under the legal framework that will continue to exist or both sides are in trouble with respect to a successful outcome. US Airways having top level agreements in place with AA unions shows at least a willingness to get a deal done that hasn’t existed at AA in more than a decade.

I will note that American Airlines does seem to be trying hard to come to terms with others on the UCC to kick the legs out from underneath US Airways. They have managed to come to terms with HP over terminating HP’s development of AA’s new passengers service system that was to be called JetStream. New IT VP leader Maya Leibman has now indicated an AA preference for buying a new system off-the-shelf and adapting AA business practices to the system rather than building a one-off system to meet the business practices of AA. That isn’t exactly the wrong direction at this point. There is less risk involved and it at most brings AA at the level of Delta and United.

HP has plenty of horsepower to offer in passenger reservations anyway. It operates the SHARES system already, for instance, and that is the one that United adopted from Continental.

But how do other creditors view advantageous terms being agreed upon with key members of the UCC? What is a union response to another UCC member getting a quick resolution vs their own membership? And can AA pull off a similar deal with Boeing and Airbus that keeps those orders on the books and Boeing happy as a member of the UCC? Maybe. Then again, maybe US Airways waves a follow on order for more Boeing aircraft to replace aging Airbus equipment? You never know.

At the end of it all, one doesn’t sense that AA has done anything to explore other options that involve mergers. To the contrary, one senses that they have retrenched and gone about their own ideas of what to do without regard to the opinions and desires of creditors. When a big majority of your creditors are your own employees who are already angry at your actions against them, there comes a time to pay attention and I don’t think any leadership at AA is paying attention.

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American Airlines and the Allied Pilots Association extended their mediated talks in bankruptcy court yesterday and that has made everyone perk up as to what is going. My bet is that these talks were extended at the encouragement of the judge overseeing them rather than either party being truly close to an agreement.

That said, if an agreement were to be reached, it would be a big blow to US Airway’s merger plans, I think.

Deal’s aren’t always all about numbers. Sometimes psychology plays a part and if AA were to get the APA on board with its plans, it would be a psychological blow to those advocating for a merger.

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In its execution of the new, better plan for increasing revenue, American Airlines has announced a new codeshare partner for international flying. American plans to begin codeshares with Air Tahiti Nui on flights between Los Angeles and Tahiti (Air Tahiti Nui) and between Los Angeles and 15 destinations in the United States (American Airlines). American has said for 6 months that it would increase its partnerships to enhance revenue and network opportunities in its system.

If you detect sarcasm in the above paragraph, you’re right.

To paraphrase a certain financial analyst at JP Morgan Chase: Is that all you’ve got, American?

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US Airways is approaching its desire to merge with American Airlines with much more strategic thought than its past attempts to merge. Their argument was made first with labor agreements with AA unions and now they’re talking about cost synergies.

There is a bit of optimistic in US Airways discussions. They present the rosy picture that is quite attractive. However, it’s no more rosy than the arguments that got made in other mergers over the past few years.

Synergies are available and they will occur. They never show up as fast as expected and complexities always drive change in those synergies after a merger has been made. That doesn’t mean they aren’t real and it doesn’t mean you can’t count on them. They are and you can.

This feels like phase 2 in the merger argument. First labor, second costs and I think we’ll next see an argument made on revenue opportunities.

Revenue improvements are what those who know the airline industry want to see in American Airlines. Costs are important but everyone knows those can get fixed in this bankruptcy. But without revenue improvements, AA’s bankruptcy won’t succeed.

Capacity restraint and a fairly stagnant airline market make analysts concerned that AA’s current plan for revenue growth is going to spur fights among airlines for market share. They’re not wrong. American Airlines wants to move more heavily into international flying and that means competing more heavily against Delta and United on destinations where AA is not only the underdog but finds itself in the position of having to fight for enough market share to fill an airplane enough to get a toe hold. That toe hold is going to come on the basis of price and significant drops in prices mean significant drops in revenue for all airlines involved.

One reason I like the US Airways / AA merger idea is that US Airways is strong in two regional areas of the United States where AA is weak. The southwest United States (not Texas, Texas is its own area) and the Southeast United States. US Airways offers an attractive hub in Phoenix that can serve Asia/Pacific destinations, South America and the entire West Coast of the United States.

Charlotte, North Carolina offers an entry into the Southeast that AA has never had. American does point to Miami in this argument but Miami is far more a “gateway city” than a hub. Charlotte isn’t Atlanta but it does offer convenient connections to the entire Southeast and that’s something AA doesn’t have today.

American has strength in the middle of the United States with Chicago (where it isn’t competing so well against United) and Dallas / Fort Worth. It has decent gateway city/focus cities in Los Angeles, Miami and New York City. Let’s not call them hubs because they aren’t being operated in quite that manner. AA’s core strengths are exactly in the areas where US Airways is weakest. That’s a good thing.

Philadelphia works well with AA’s focus in the Washington DC area and AA’s focus in Washington DC augments US Airways dominance as well. In fact, so well that I suspect that divesting slots in the DC area will be required before a merger takes place. In addition, US Airways has managed to compete effectively enough against Southwest Airlines in this part of the country and I think any management team that can do that deserves strong credit.

This is far from over. I still think we may hear a real merger announcement this month. The pressure is on AA and it isn’t going away. Their Section 1113 motions in court to break the union contracts only garnered them more unpopularity both in the public and within the industry. No one sees their moves with their union labor as being particularly good for a bankruptcy exit.

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There is a story making the rounds that US Airways and TPG may partner in a merger/acquisition of American Airlines and it’s got some legs. Some seem surprised by this and some seem impressed by this. I’m neither surprised nor impressed. It just makes sense.

US Airways probably could muster the cash necessary to buy off certain creditors and probably could use some of that rather large cash reserve that American Airlines is holding on to in order to pay off people too. But why not spread the risk?

TPG isn’t adverse to the airline world. It’s made good (and bad) investments in airlines and unlike most, has generally done very, very well. It’s Chairman, David Bonderman, continues to sit as non-executive Chairman and shareholder of Ryanair in Ireland. These guys know the airline business.

So why not partner up with them? This is a company that could provide excellent finance advice, access to relatively cheap capital and who doesn’t need to be educated on what makes a good airline. That’s just smart, good business.

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The Fort Worth Star Telegram’s Mitchell Schnurman has THIS POST on SkyTalk about companies keeping morale high to maintain profitability.  It’s timely since it coincides with my own blog post about the labor cost that American Airlines is incurring with its battle over costs with the unions.

Profitability is about quite a few things in a major company such as an airline.  It’s about keeping a strict eye on costs, certainly.  It’s also about keeping a close eye on cash flow and cash holdings.  One little storm can cost an airline tens of millions of dollars.  It’s about maintaining strong metrics in ontime departures and arrivals and it’s about being smart enough to buy a fleet to do the job you have without overextending oneself.

Some airlines have been profitable with poor labor relations.  Generally that has occurred at a “peak” in the airline industry curve and almost always when contracts are in place and not up for re-negotiation.

How an airline survives the downturn in the airline industry has a lot to do with employee morale.  Employees with a strong, loyal morale tend to fight for their company.  They realize that their jobs and their success are tied to their airline succeeding more often with more customers more of the time in those bad times.

Employee morale isn’t about high salaries.  It really isn’t.  Study after study has shown that employee morale can’t be maintained at a high level with just a high salary.

It’s about making employees a part of the business.  Giving ownership of problem solving to employees who experience the problems.  Providing a share in the profitability and providing benefits that allow them to feel secure with their families while they work.   It’s also about employees perceiving “shared pain” on the part of their management team when things are bad.  There is nothing worse than an executive earning a bonus while other employees are “sharing the pain”.

A workplace where treatment is both fair and just is also important.  Valuing the inputs of a baggage handler should be just as important as valuing the financial analyst who monitors and sets pricing.

It isn’t just about your union employees delivering great service to customers either.  It’s about being able to get agreements to cover your needs now and the future.  A company that is doing right by its employees is better able to negotiate union contracts to cover new flying, new aircraft and new partnerships.  The faster you can negotiate those contracts, the more competitive advantage an airline has.

It’s notable that Southwest and Delta airlines are working very hard with their union employees to put new contracts into place to cover opportunities for new business very quickly.  It’s also notable that airlines such as American Airlines and United Airlines aren’t doing too well with their employees and aren’t executing new strategies to compete and, most importantly, earn sustaining profits.

Employee morale isn’t the only key factor to success.  But it is one of the top 2 or 3 key factors and one that several airline CEOs seem to be ignoring more and more as time passes by.  Historically, the airlines who have done well both in regulated and deregulated environments with respect to profitability are those that had genuine leaders as CEOs.  Shareholders would be wise to pay more attention to leadership at the helm and a little less attention to quarterly profitability.

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The bankruptcy proceedings of American Airlines are, to me, exceptionally interesting in the airline industry today with respect to labor.  It’s been a while since we’ve seen such a breakdown between labor unions and airline management (since United Airlines in the late 1990s and early 2000s) and this breakdown of trust and communication inside American Airlines is particularly bad at this point.

When I look at American Airlines as a company, I ask myself just how such a reasonably well run entity got derailed so badly over the last decade.  At the core, the airline industry is selling a service and within that industry, we have a marketplace that is fairly free market oriented in pricing.  However, pricing is generally determined by who has the lowest costs on a particular route.  When there are no or few barriers to entry on a route, the airline with the lowest costs will generally set the price for that route.

We often hear just how much price is the driver in a choice of airlines but I’ve never felt it was purely price and I believe that over the years, there is subtle but strong evidence to my belief.   Everyone thinks Southwest Airlines wins on price and while that might have been true in the 1980s and earlier, it really hasn’t been true for the past 2 decades.  They often do set the prices on routes but they’re generally matched by other airlines.  When you speak to loyal Southwest Airline customers, it generally comes down to it being very convenient, very predictable and generally a more service oriented experience.

Curiously, convenience, predictability and service quality are a function of labor more than any other input.  Labor is what makes those achievements possible.  Also curious is that the most successful airlines generally are the ones who manage a good relationship with their employees.  That doesn’t mean they give into labor demands over and over, it means they have a rapport, communicate well with each other and find common ground.

It’s notable that Southwest and Delta Airlines each have reasonably good relationships with their employees since these two airlines are the ones that are gaining more passengers, better revenues and consistent profits.  That’s no accident.

When I look at American Airlines and the actions its taken over the past five years to come to new labor agreements, I have to give them a grade of “F” in labor management.  Even if you strip away labor rhetoric, you find that AA really never did much to come to an agreement with their employees.  They kept their company line but they never sought to find some common ground and their communications all too often struck me as “Times are tough, work harder, do more.”   After a few years of that, the general response to that was “Times are tough for everyone, suck it up and find a way to make it more worth our while to work for you.

Since bankruptcy, AA has more often reminded me of a mafia strong man than a company trying to get its act together.  The steps its taken to reduce labor costs and the magnitude of those labor costs reductions is striking.  Again, even if you strip out the labor rhetoric in response to AA’s actions, the moves that American Airlines has made in the past 6 months just strike me as premeditated, heavy handed and stubborn. It smacks of accountants looking at financial numbers and never looking up from their desk to notice the human element involved here.

They can and likely will get what they want in court in terms of breaking labor agreements.  They may impose severe cost cuts unilaterally and may even exit bankruptcy as stand-alone company.   They may get exactly what they think they need from a financial perspective.

But how does that improve the revenue side?  How do you win business customers with a service model that is delivered by demoralized and angry employees?  How do you get  productivity to improve when your labor hates your guts and just wants their paycheck and to be left alone?

AA’s labor hates American Airlines management.  Hates them with a passion generally reserved for bad dictators.  It’s a seething, lingering hate that isn’t easily resolved.  And there is no movement to get it resolved.

If labor and AA management were a married couple, this would be relationship headed for divorce, not reconciliation.  Reconciliation doesn’t occur when you take all you want (not need but want) and then act as if the other party should be grateful for winning . . . nothing.

There is real damage happening here.  Enough that it calls into question whether or not AA can remain a viable company even with the labor cost reductions.  Viable comes from providing something someone wants to buy and from the ability to sell that something to a great many people.  How many people want to ride on Surly Airlines 2 years from now?  They will if they have to but they won’t if they don’t.

That stuff gets fixed when leadership is shown.  Leadership shouldn’t come from the unions.  It should come from the executive management of the airline.  I’ve tried hard to think of a real example of leadership that has happened over the past year at AA and I honestly can’t think of a single example of leadership being demonstrated.  Not one.

If I were a shareholder, that would scare the hell out of me.  I’d have a company exiting bankruptcy with the task of building new value and the inability to do so because no leadership exists.  Delta CEO Richard Anderson says that its time for airlines to return a responsible profit on investment.  I could not agree more.   And that does mean that more productivity and lower costs are probably called for.  But it never meant kick the employees into submission.  And Delta never really has done so.  It found common ground, got the deal made and ensured its employees were marching in the same direction.

Are we seeing that kind of leadership at American Airlines?  If you were an objective investor and saw that kind of dysfunctional behavior, would you be encouraged to invest in that business?  In any industry?

What’s the cost of angering and demoralizing your employees for the next 5 to 10 years?

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Chief Commercial Officer Virasb Vahidi at American Airlines says that American is engaged in studying how to modernize its brand going forward.  Part of that modernization may come in the form of American Airlines embracing a livery change.

AA’s aircraft livery has been the same since 1967 which, even for an airline, is one very long time.

American Airlines has made the polished aluminum look a part of their brand since the DC-2 and has resisted adopting a fully painted aircraft for decades.  However, new aircraft coming into the world aren’t made of aluminum and cannot be polished.  Furthermore, while polishing aircraft instead of painting them saves fuel, it also increases the maintenance of the airliner as well.  If it truly saved a great deal of money, other airlines would be doing it as well.  They aren’t.

Would a livery update be revolutionary?  I doubt it.  I think we would likely see a white aircraft with a slight revised logo at best.

But if anyone at American Airlines is reading this, I vote for these looks instead:

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It’s not a catchy name, in that form.

Last Friday, AMR/American Airlines capitulated a bit in publicly stating it would engage in examining the possibility of a merger with some other airline.   This after beating a drum for 2 weeks that it was fine, there was nothing to see here and American Airlines was a better airline if it exited bankruptcy as a stand alone enterprise first.

The thing is, an airline in bankruptcy is answerable to many parties.  It must answer to the courts and creditors and it must justify its decisions, particularly those related to bankruptcy, at every turn.  There isn’t nearly as much maneuvering room to do what one wants to do in those conditions and I’ve often wondered over the past few months if that wasn’t the prime driver for Gerard Arpey’s decision to leave the company.

Is this a merger?  Nope, not yet.  But US Airways has played this very, very well so far.  They’ve got the public support of unions and have managed to make themselves look more and more attractive to interested parties who aren’t tied to AA through employment or as a major creditor.   The next steps will be to win over Boeing by reaffirming the aircraft orders made last year and to win over HP by reaffirming a desire to go forward with the new reservations systems.  Not hard to do as any merged entity will need both the new aircraft as well as the new reservations systems.

My prediction is that we’ll see some sort of understanding between the two airlines some time in June.  It will be about brotherhood and great synergies and that no one need to worry about their jobs.  Worst case scenario sees Tom Horton elevated to non-executive chairman (and I doubt that that happens) with a small handful of American executives retained.  More practically, Tom Horton leaves for a different industry and maybe 1 or 2 executives are retained for the new company.

The best part will be seeing the new livery for such a company.

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American Airlines announced lie flat seats for its business class sections on 777-200ERs and 767-300ERs.  The changes are to start in 2014 and I yawn.  Part of this announcement made it clear that about half the 767 fleet will be retired going forward and it is easy to assume that means there is the expectation that the 787 will be rolling into the fleet.  I’ll yawn again.

I think American Airlines made this announcement, in part, to distract from its rather ugly look that it has in its bankruptcy proceedings.   Those US Airways announcement really put a hit on them and their hearings in New York regarding breaking the union contracts made them look worse.  So why not announce new seats that won’t show up for several years?

Am I the only one who thinks of The Emperor’s New Clothes when watching American Airlines these days?

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The Los Angeles Times has this story about American Airlines actively prosecuting its AAirpass holders for fraud.  Purchasers of the AAirpass essentially paid big sums of money for an unlimited, lifetime first class pass and many bought them in the late 1980s and early 1990s.  They actually made financial sense for some and some purchasers used them in ways that American Airlines never conceived of.

Personal note:  When playing the “what if” game on what one would do if one won the lottery, I always said that I would want an Airpass first above all other things.

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US Airways has announced new routes from its Philadelphia hub to Austin and San Antonio as well as adding a 6th frequency to DFW airport as well.  This is, without doubt, an attempt to put more pressure  on AA in its merger quest and demonstrate that the airline can satisfy travelers in Texas.

Consider that US Airways is pointing out that it already competes admirably on a trunk route like DFW to PHL.  This is an argument that service they provide is up to American Airlines passenger standard and exceeds them more than likely.

Putting direct flights in to San Antonio and Austin is also a statement that it intends to move into Texas and do well whether American Airlines wants to cooperate or not.  Those two cities provide an exceptional amount of “feed” into DFW and US Airways is going to try to poach that feed with direct, non-stop flights.

These are bold moves and designed to get the attention of American Airlines.  If AA responds with its normal “we’re not bothered” statement, I think they’ll find themselves subject to scrutiny from both creditors as well as its board of directors.  You can only ignore the elephant in the room for so long.

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American Airlines’ PR machine continues to beat the same drum on how they’ll succeed exiting bankruptcy as a standalone airline.  The story is that they’ll fly considerably more international flights, do even more code sharing and partnering with existing Oneworld airlines and “right size” their flying with the new fleet they’ve ordered.

And everyone else keeps saying that ain’t gonna get it done.

Analysts don’t like the extremely aggressive growth being spoken in the plan because it reflects above industry average in growth when capacity restraint has shown that that is the pathway to reliable revenues.  Growth may only come from one thing:  Exiting bankruptcy with such superior labor costs that it can undercut other SuperLegacy airlines on price and start a fare war.  That would anger just about everyone in the business.

Codeshares have been touted by AA for several years now but AA never seems to aggressively capitalize on these codeshares.  It adds some incremental revenue here and there but the additions never seem that strategic and even its codeshare and interline partners seem inclined to poach on AA’s turf right now.  There is, after all, a reason why both JetBlue and Delta Airlines have added flights between NYC and DFW:  AA is vulnerable and, frankly, not doing a good job of keeping the interest of its business travelers.

International flying is more profitable and American Airlines has ordered the aircraft for increased international travel in the form of 777-300ERs and 787 aircraft.  It has not managed to achieve a contract for those aircraft at all with the pilots union and seems to have forgotten that it couldn’t manage an acceptable agreement with the pilots to add a new route between Dallas and China a few years ago.  What makes it think that pilots and other aircrew are going to agree to more flying internationally on these aircraft without some concessions?  It’s a bargaining chip that the unions have and will use.

Finally, nothing in the business plan addresses what are fundamentally important issues for the airline presently.  It performs much worse on the revenue side today because it has older, less pleasant airlines, a website that just angers more than serves its customers, service fees that seem hostile towards a customer and a service staff that seems intent on delivering a cynical and lackluster service product to its passengers.

Where is the plan to upgrade aircraft into a pleasant experience?  Where is the plan to get employees happy again to serve their customers?  Where is the website that, you know, allows you to prepay for a checked bag when checking in online?  Where is the rational fee structure that makes sense and an implementation that doesn’t feel like extortion to the passenger?

You can beat the same drum hoping to get people dancing to the beat but if the beat is awkward and without rhythm, no one is going to join you on the dance floor.

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After a week of allowing the fallout from the US Airways agreements with American Airlines’ unions to settle, the question of what it will take to see an actual merger between the two airlines comes to mind.

It’s not just the union agreements that gets this deal done.  To the contrary, there are several issues that will have to see deals made.

Aircraft manufacturers:  Boeing wants to see an independent AA because AA is fundamentally a Boeing customer not withstanding the Airbus order made last summer.  Boeing is going to need reassurance that it remains viable in future aircraft orders and that existing orders won’t be cancelled.  US Airways can make those assurances with confidence.

Hewlett Packard:  Hewlett Packard sits on the creditors committee because of all the IT work it has done to date to bring AA into the future.  A lot is left undone and some reportedly isn’t really ready for prime time.   Currently, US Airways uses SHARES and American Airlines uses SABRE.  However, SHARES, originally developed by EDS, is now owned by HP.  Do you see where I’m going here?  A deal can be made to put both airlines on the new system being developed called JETSTREAM.

AA Executive Team / Board of Directors:  This is a sticky area.  Who wants a team or board that allowed the status quo to exist that long?   It’s possible we might see someone like Tom Horton retained as non-executive Chairman (a la Glenn Tilton) and a few of the existing AA team retained but that would be it.  The board has to go and its tenure is so high in average age, it has an incentive to fight this.  Solving these two problems is possible and these two stakeholders have the least power in making decisions in many respects.

The when is the next question.  US Airways is clearly getting good advice and it is clearly motivated to make a deal.  I would guess that their intent is to use their own cash holdings and AA’s cash holdings to make a deal that creditors can’t refuse.  I think that deal will happen between now and the end of June.

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Boeing CEO James McNerney expressed his and Boeing’s viewpoint that they support American Airlines having an opportunity to exit their bankruptcy as a stand alone company.  McNerney acknowledges that US Airways hasn’t bought Boeing in a some time and sees AA as a loyal Boeing customer as well.

Is this support for AA an attempt to preserve the AA orders for Boeing 737MAX aircraft?  At least a little bit, yes.  In addition, Boeing has and continues to support AA’s purchases for aircraft in a variety of ways.  They’re a good customer.  Is that support founded on sheer love for the airline?  I suspect not.

In fact, any worry about the 737MAX is kind of silly.  The merged airline would, upon conclusion, have far more Boeing aircraft and far more resources to service and operate Boeing aircraft than Airbus aircraft.  Furthermore, both airlines have orders for Airbus A320NEO aircraft already.  Airlines of that size can no longer afford to be an exclusive customer of one manufacturer or another.  Their size (and the size of several competitors) demand manufacturing positions that can’t be serviced exclusively by one manufacturer.

I suspect that if Doug Parker is able to re-assure Boeing over its existing AA orders, Boeing will go neutral or even supportive of such a merger.  At the end of the day, it’s about having a customer and earning money.  Furthermore, it even gives Boeing an “in” with the US Airways executive team that it has not had for some time.

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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.

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American Airlines’ response to the announcement of a merger support agreement between US Airways and AA unions is, to say the least, lackluster.  If anything, I actually read a hint of bully in the announcement.  It says:

“American Airlines is moving steadily through the Court supervised restructuring process and the Court has granted American the exclusive right to create its plan of reorganization at least until September 28, 2012. We are making substantial progress in our efforts to return American to industry leadership, profitability and growth and maximize its value for all of its stakeholders.”Our immediate next step is to pursue vital modifications to our collective bargaining agreements through the 1113 process that begins on Monday, April 23rd. We believe statements of non-binding support from union leaders for alternative proposals are no coincidence given the timing of the 1113 process. These statements do not in any way alter the company’s commitment to pursue our business plan or our focus on moving steadily through the court supervised restructuring process to create a profitable, growing industry leader.

“For American’s outstanding employees and loyal customers, business continues on track, as we continue to provide the safe, reliable travel experience our customers expect.”

This, I believe, is non-productive when having to deal not only with your 3 largest unions but unions who have a significant amount of input on your unsecured creditors committee.  It also demonstrates that you don’t “get it” when it comes to your labor and the need to lead them through this bankruptcy.

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