Bankruptcy Judge Sean Lane has disallowed the $20 million kiss for American Airlines CEO Tom Horton.  Horton was to receive roughly half in cash, half in stock as severance upon his departure from the new company (to be called American Airlines Group) formed after the merger.  His departure was scheduled for the first annual meeting to be held after the merger which most believed would be in May as has been tradition for American Airlines.

I vociferously disagreed with this severance payment.  So did a US bankruptcy trustee who argued that it violated federal governing such things in bankruptcies.  After review, Judge Lane offered that the idea that this was taking place post bankruptcy and therefore not entirely within purview of the court was a legal fiction.  I couldn’t agree more.

When you get a severance of that size, it should be for accomplishing something.  Based upon all that has come to light so far on the journey of both US Airways and American Airlines, Tom Horton didn’t have much to do with the success of this agreement.  In fact, if anyone really had much to do with getting the company into alignment with markets, it was Beverly Goulet, AA’s Chief Restructuring Officer.

Horton sought to delay, obfuscate and sabotage the merger at most every point.  He has made public arguments that he’s the superior CEO to Doug Parker in semi-veiled statements made to the press.  The problem with that is there is actually no evidence of what value Tom Horton has brought to the process in approximately 16 months.

Is it the atrocious livery that has been perpetrated on those aircraft?

Judge Lane has pointed out that when the new company is formed and has exited from bankruptcy, the new Board of Directors can vote on this severance.

I have long felt the current American Airlines Board of Directors has not governed the airline well for many years.  Like so many boards recently, it has seemingly given blanket endorsements to the CEOs without regard to assessing what leadership of the company has achieved and without determining if the course set by the leadership is a sound one.

But, man, they sure can vote bonuses well.

$20 million is too much for Tom Horton and what he brought to the table.  But if everyone truly thinks it is necessary, then I would suggest that the new Board vote on it and give it to him.

I would point out that Horton not only isn’t needed to make this new airline work, he’s not wanted.  This deal doesn’t need him.

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The bankruptcy court has approved the US Airways / American Airlines merger as of yesterday without approving the controversial Tom Horton Grand Compensation Plan.  This approval means that the two companies can continue progress towards putting together a complete reorganization plan that defines the merger in the exit from bankruptcy.

It’s well known that I disagree with a $20 million compensation plan for Tom Horton.  In fact, I think that Tom Horton remaining onboard as non-executive chairman is an equally bad idea.  It’s notable that despite Jeff Smisek’s strong personality, the United merger really didn’t get traction and coalesce until Glenn Tilton left the company as non-executive chairman.

Tom Horton has worked too hard to stay out front of this and claim it as his own success.  The news story he gave the Dallas Morning News as an execlusive was, in my opinion, offensive towards anyone else who had a hand in the merger and who came to the table with clean hands.

I think $20 million to lead a company for effectively 2 years (and let’s not forget that Mr. Horton has been receiving an exceptional base salary as CEO already) in which its successful exit from bankruptcy is facilitated by US Airways is way too excessive.

Pay the man $10 million, cash money, to leave upon the deal closing.  Even that is kind of blood money as it  amounts to $5 million / year cash money for 2 years of Chairman/CEO service.  That’s a great paycheck by any standard and certainly so for someone leading an enterprise that had fundamentally failled while under his CFO leadership.

Whether or not the $20 million package is legal or not doesn’t really concern me at this point.  If we’re upset about a $27 million house in London at the beginning of this bankruptcy, we should be pretty upset about a $20 million compensation package given to this CEO.

At least AA will realize a profit on the house.

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It’s a busy week for me but I want to keep making some comments on various items.  There just won’t be the usual analysis until I settle down again.

On the US /AA merger:  The criticisms, comments and half-truths about reduced competition from this merger.  I realize that certain metropolitan areas have a lot to lose if a hub or focus city leaves your area.  Air fares will go up.  I also realize that there is a perception that air fares rise each time a merger happens.

A lot has changed in the airline industry landscape over the last 5 years.  It’s not your papa’s airline industry anymore.  For one thing, it’s focused on profits, not market share.  For another, if there are excessive profits on a route, there will be an airline that will enter that market.  It’s happening all around us.  Just look at the DFW market where AA is so dominant that you can sit at the DFW airplane viewing center and not see a different livery on an aircraft for an hour.

Spirit Airlines is here, jetBlue is here, Virgin America is here,  Frontier and Westjet (starting soon) are here.  That is some serious LCC competition.  Delta Airlines has entered AA dominant routes and United is starting to fire up some stuff on the Houston-DFW and Chicago-DFW routes too.

If air fares go up because of this next merger on a few markets, airlines *will* enter those routes because that is low hanging fruit and represents real profit.

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There is an anti-trust hearing on the US Airways / American Airlines merger and, as is common, Congressmen are voicing loud concerns about air fares rising and loss of hubs.  This does, at first glance, make them seem For The People but . . . are they?

I’m not a free market capitalist.  In fact, I’m pretty moderate in my views on business in general and regulation.  I think some regulation is extremely important.  I think the financial meltdown of 2008 is the most evidence that anyone needs for a decade or two.

It is ironic that I find this merger more satisfying on what is going on with this merger.  In previous mergers, it really was clear that certain hubs would be downgraded to focus cities at best.  For instance, the close proximity of hubs in Memphis, Cincinatti and Atlanta made it pretty certain that Memphis and Cincinatti would be sacrificed for Atlanta no matter what Richard Anderson told Congressional committees.   I think the same ultimate outcome is quite likely for Cleveland in the United / Continental merger.

In this merger . . . I can’t see hubs going away.  Assumptions being made about Miami being superior, potentially, to Charlotte causes me to laugh.  Charlotte is a far more strategically important hub on the domestic front.  Miami is and will remain a gateway city for all destinations south.  If I question anything, I question how things will work out between Phoenix and Los Angeles.  While I believe both will remain much as they are in many respects, I’ll concede that things are murkier their.  I think Los Angeles becomes a gateway city and Phoenix becomes a domestic hub.  Much the same is true between Philadelphia, New York City and Washington D.C.

But, bottom line, I don’t see hubs getting reduced in this merger.

As for air fares rising?  Well, they may well go up some.  They may well not.  Here is the critical question in my mind:  Why are air fares that prevent airlines from earning a return on investment that is great enough to cover the cost of capital something we don’t want?  In other words, why might it be desirable for airlines to be market limited to air fares that don’t earn them enough profit to be a viable business over the long term?

Consolidation in the marketplace is largely due to the fact that we deregulated the market side of the airline industry but never deregulated the labor side of the industry.  Airlines needed more market power and then finally figured out how to do it effectively.

Let’s not bash airlines for raising air fares when the industry has lost Billions (with a “B”) of Dollars over the past decade.  Our response, ordinarily, would be if you’re losing money and your cost competitive, you need to raise your prices.

Air fares have gone up in areas where they were unprofitable.  Unprofitable city pair have moved into profitable territory in many cases.  That is as it should be.  Bargain basement fares designed to win market share instead of profit are probably gone for a long, long time.  It was nice while it was here but let’s not kid ourselves into believing that those kind of fares are what we deserve.

However, there are many markets and city-pairs that were earning excessive profits which are now experiencing real competition for the first time as a result of these mergers.  Those fares are going down as they should be.  One great example is American Airlines “owning” the DFW/NYC city pair and now . . . not so much.  They have some competition, fares have gone down and it is far more reasonable to fly that route than it has been in a long, long time.

Were I to respond to Congress about claims of higher air fares, I would say something like this:

“Absolutely air fares are going up as a result of this merger . . . in some markets.  And they should go up because we are not earning a business appropriate profit in those markets.

However, air fares are absolutely going down in other markets because you now are going to have very big, very powerful airlines that will need to compete hard on routes in order to support business growth.  We will experience more competition on more routes over time and higher yielding fares will go down as a result.

Businesses are in business to earn a fair and reasonable profit and let’s not vilify that intent.”

And let’s be cognizant of that last statement.  There are a lot of businesses who earn an unfair and unreasonable profit and even do so with massive government subsidies.  The oil industry is one that comes to mind with some companies earning profits that are greater than the GDP of some small nations.

The airline industry, on the other hand, really not only isn’t subsidized but is probably overtaxed in many ways.  In fact, I would seek to start a dialogue on the fact that despite economic benefit accruing to entire communities, only users are taxed and heavily so.  Airports, for instance, are public infrastructure that offer benefits yet we seek to fund them with taxes only on users.   Highways are public infrastructure too but we tax everyone, not just users, for them because the benefits accrue in many ways.

But the airline industry is most inept at making such arguments and generally resorts to a “crouch” position when dealing with most things.  When they do bow their backs at government, they often overplay their hands as well.  It’s an industry that could learn something from the oil business. . . or corn growers.

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A couple of days ago, US Airways CEO Doug Parker and US Airways EVP Elise Eberwein went to go talk to a join meeting of the Allied Pilots Association (AA pilots) and US Allied Pilots Association (US Airways pilots).  They attempted to address concerns and foster a new relationship that would see a smoother merger get executed.

Let’s take a moment and think about this.  The soon to be CEO of American Airlines Group and a trusted US Airways executive in charge of People traveled to answer questions and address concerns to unions that will be involved with the new company.

Do you think that move would have been made by an American Airlines team?  For instance, do you think anyone bothered to go talk to TWA unions when AA bought them as an asset sale?  Do you suppose that Don Carty went and talked to the Reno Air people when they got bought?

You didn’t even see these kind of overtures being made when American Airlines needed a deal to stay out of bankruptcy just  a little over a year ago.  I would imagine that the pilots from American Airlines may have had a slightly stunned look on their face.

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The US Airways / American Airlines merger should inspire Southwest Airlines to search for opportunity in this union.  Southwest’s ability to do business in the Dallas Fort Worth area has been constrained by American Airlines for more than 20 years.

The argument that Southwest has rid itself of the Wright Amendment at Love Field may come to mind, I would argue that they remain fairly constrained at Love Field and particularly so when compared to other high density metropolitan areas such as Chicago.

For instance, the maximum number of gates at Love Field were reduced from 32 to 20 and Southwest is limited to using just 16 of those gates.  The other 4 go to SuperLegacy airlines (of which American Airlines is one.)  Furthermore, if Southwest were to introduce any services at DFW airport, it would lose gates at Love Field.

It’s a deal with the devil that got made because of political considerations instead of reality.  I wouldn’t criticize Southwest for making the deal but I would urge that the deal be revisited at this point.

Frankly, I would urge that Southwest being penalized for instantiating services at DFW be changed.  The truth is that Southwest has been boxed into this area for decades and while a successful strategy for Southwest, it has impacted competition in the DFW area.  American Airlines owns DFW as an airport like few hubs are.

Southwest is now seeing competition from both ULCC carriers such as Spirit and SuperLegacy such as American Airlines.  It fills a niche that more would like to enjoy.  But the idea that people in Fort Worth avail themselves of Love Field for Southwest fares is a bit amusing to me at this point.  They just don’t.

The legacy airline playing field will be leveled with this latest merger.  In fact, 4 airlines will dominate the landscape when it is completed:

• Delta Airlines
• United Airlines
• American Airlines
• Southwest Airlines

I think it’s time we stop listening to the economic arguments made by the first 3 now that they all enjoy costs that are as low or lower than Southwest.  Instead, let’s start promoting competition between those airlines like we never have before.

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OK, OK.  I realize that the US Airways name goes away but I like the double strong US flavor in my made up name for the merger.

Many people will point out many potential trouble areas in this merger.  I’ve got some that I think may get overlooked a bit in the conversation.

First, American Airlines’ employees desperately need to be focused on over the next year.  This is a group of people who are very sour on their own company and they didn’t get there in a day.  It is extremely rare to meet an AA employee who isn’t pretty bitter about their company, at least in private conversation.

A big part of the problem has been leadership neglect but it’s also been a lack of clear, direct communication (which is arguably a part of leadership) on a very regular basis.  In fact, historically, the company hasn’t really said much to its employees unless something hit the news or something was about to look bad.  I’m reminded of how Gerard Arpey would make communications that would spin the company in odd ways just before he and his executive staff were about to be awarded yet more stock options for a lack of performance.

As an employee, you can take that weirdness now and then and let it go.  When it just assaults you for years, you lose hope.

So this is a chance to instill hope in these people and it’s a chance to show them that it is a new day by delivering on promises.  I’m actually not worried too much about Doug Parker’s ability to do this but I am worried that between now and the deal closing (6 or more months most likely), he’ll be effectively silenced and the old regime will continue on the same path.   I hope that communications at both companies are clear, concise and voiced with equal fervor and I truly hope that Tom Horton dials back his presence in this in the very near future.

There is a deal.  Each party has its roles defined.  Everyone needs to speak with one voice.

I’m actually not worried about how this team harmonizes the systems.  I think they’ll figure that out without much problem.  What I do worry about is how they create a new identify.  This isn’t going to be US Airways and this isn’t going to be American Airlines and that’s that.  This team has to decide what the new airline really will look like and what’s consistent with the marketplace.  They have to identify core strengths and value propositions that exist today and figure out how to bind them together into a product that the customer wants.

In addition, they have to truly fix the basics of the operation at AA.  There is a lot of underperformance going on and turning that around is no small task.   At the end of the day, the customer wants flights that leave on time, flights that arrive on time and baggage that shows up on time.  Then they want a value oriented price.

The truth is, new planes don’t fix the inability to operate as advertised.  People fix that.  Until the New American is operating in a consistent, predictable way across the system, leave out the branding hype.

Finally, get rid of that new branding.  At least the livery.  Pause *everything* in that area asap.  Wait until the operations are fixed and wait until you have decided what the New New American really should look like.  Then, take what’s good and go get a re-design on what isn’t.

Your corporate branding should very clearly reflect what you are selling to the customer.

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A reader posted a link to this story on The Onion earlier today but I thought it deserved a better window to others.

It’s funny and remember to keep your sense of humour when you read it.

American Airlines, US Airways Merge To Form World’s Largest Inconvenience

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I’ve been reading the news accounts of the merger announcement this morning and so far I haven’t seen anyone acting luke warm over this announcement.  The usual spin is going on about hubs being maintained (probably true) and jobs being preserved (probably not as true, at least with respect to jobs in corporate or support roles) and how excellent everyone is.

One item I’ve noticed:  Tom Horton seems to always refer to Doug Parker as “my good friend”.  So much that I wonder if the knife is going to sink slowly or quickly into Parker’s back.  It’s overdone.

Top Level Summary:

The Pilots:  Yea!

The Flight Attendants:  Yea! (AA at least)

Other service labor:  yea!

They expect the deal to be worth about $11 Billion and it will require regulatory approval and bankruptcy court approval.  It’s expected that it will take about 6 months to close the deal formally.

Tom Horton stays as non-executive chairman temporarily until around May 2014.  Then Doug Parker takes over and the board member count drops from 12 to 11.  AMR gets 3 board members, US Airways gets 4 board members and the balance come from creditors.

This isn’t a merger of equals.  While it is a merger, it’s a merger where the little guy swallows the big guy.  The advantage in this merger is that the little guy knows the big guy’s business and culture pretty well.

Now, with the deal made, there is a lot of work to be done not just in integration but in planning where to use the large numbers of new aircraft due in from both Airbus and Boeing.

There has been a lot of focus on this merger but curiously no one has noticed the potential effect on another Texas airline:  Southwest.  I’ll be writing more about that soon.

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US Airways and American Airlines will merge and the announcement will be made early tomorrow morning.  Doug Parker will be CEO and Tom Horton will be non-executive chairman of the board.

We like that they are merging but we don’t like Tom Horton’s presence in this because even a non-executive chairman wields influence and is able to engage in second guessing a CEO.  Doug Parker will be doing things very differently in this airline and that’s liable to create opportunities to sow dissent.

This will create the world’s largest airline but it won’t be the world’s strongest.  There is a lot of work to be done to be that airline and Delta CEO Richard Anderson is unlikely to make it easy for anyone to topple his airline.

More updates later.

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Now the latest news has Tom Horton holding a non-executive chairman of the board position until some time in 2014 (that’s more a compromise than I expected) and Doug Parker assuming that role afterwards.

The company is expected to be valued at $10.5 to $11 Billion with about $3 Billion of that credited to US Airways.  The boards of each company are expected to meet mid–week and I expect an announcement on Thursday morning by my best guess.

It should be interesting to see how much the smile on Tom Horton’s face is strained and whether or not he takes credit for the merger.

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Digging into news items more today, I have found more explanation for this desire to have Tom Horton remain as Chairman of American Airlines.

Apparently it is the American Airlines Board of Directors who are pushing for this and some even for an executive chairmanship and in the interests of “protecting” the board on the promises of revenue synergies being promised from the merger.

What’s interesting to me is that the board, largely unchanged over the last year, wasn’t pushing for this kind of conservatorship more than a year ago.

Questions I would ask are these:

1. Why is Doug Parker’s track record of return on investment at US Airways inferior to Tom Horton’s track record given the profits that Parker and his team have realized with an inferior airline network?
2. Why is it preferential to put controls on Doug Parker in this merger that we wouldn’t, for instance, put on Tom Horton himself in a stand alone exit from bankruptcy?
3. Why are AA’s interests valued so highly in this merger and US Airways interests so low?
4. As an unsecured creditor, would I not want to see the management team in charge be the people who have the best chance for success in the marketplace and who do return shareholder value since my “payback” will largely be in the form of an equity stake in the company?
5. And, if #4 is true, why would I want to constrain that with leadership that while fiscally good has ignored the revenue picture for 10 years or more?

I sense overreaching by the board and when I consider the composition of AA’s board of director’s, I think I know why.  AA’s board is dominated by financial interests who favor conservation of capital in all situations.  They are one of the most conservative boards you could find on an airline and most independent directors lack direct airline experience.

US Airways board is very different.  It is seeded with airline experience, entrepreneurial experience and is generally more diverse both in geography as well as industry.

Again, let me point out that Doug Parker is no fool.  He has an excellent education and has had excellent multi-airline experience which was founded on a long stint in finance at American Airlines itself and has since managed America West/US Airways for a 12 year tenure with great success in returning a disadvantaged airline organization to health despite severe industry economic challenges and ever increasing competition from very large SuperLegacy airlines.  that’s the guy you bet on and that’s the guy you don’t hamstring.

If Doug Parker or his team were foolish, unwise or inexperienced, they would not have achieved consistent successful results that largely outshine the rest of the industry.

And I would remind AA’s Board of Director’s that they chose to ride the Gerard Arpey horse and they chose to ride the similar legacy in Tom Horton with the results of a company entering into bankruptcy because of an inability to lead and an inability to generate increasing revenues.  The strategy was waiting for other airlines’ costs to rise and meet their own.  What makes you think your entity is so much more valuable today than it was 14 months ago?

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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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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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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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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.

Filed under: Airline News, Mergers and Bankruptcy by ajax
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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.)

Filed under: Airline News, Mergers and Bankruptcy by ajax
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I’ve watched this unfold much as anyone else has and there is one peculiar observation I have.

Am I the only one to notice that Doug Parker & company have largely kept their mouths shut in the merger process while virtually all other parties keep trying to find ways into the public eye?

Am I the only one to notice that AA CEO Tom Horton seems to be working overtime to speak about this merger opportunity?

We continually here Tom Horton portray himself neutrally when speaking to news media.  Yet when he has an opportunity to make a company communication, there is always a tone that leads me to believe that he’s less than happy with the merger idea being pressed upon him.

And it is curious to me that Horton’s “private” comments about the merger opportunity get leaked to the press pretty frequently whereas Doug Parker and his team really have largely just kept their mouths closed.

I’m tempted to think that Tom Horton protests too much in this and tend to interpret his behavior as somewhat desperate.  This may in fact not be the case at all.  The truth is, what’s going on behind closed doors is pretty much unknown by all.

But the more I notice Doug Parker’s silence, the more I think that he’s managed to pretty much corner this deal and it is his to lose at this point.

Filed under: Trivia by ajax
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I’m often struck by how many successful investors have often described their choices in who to invest in being based upon their own personal experiences with a product.  Time and again, one of these people tries a product and realizes that someone has something worth betting on.

For those who may invest in American Airlines and particularly at this time, I would ask that you try the product out.  Read my trip reviews found HERE and HERE.

Don’t fly in First Class.  Don’t schedule a trip known to AA management.  Buy an economy class ticket for a flight of a duration of 2 hours or more and make a decision based upon your experiences and contrast those experiences with those on other airlines.

American Airlines may have largely fixed its cost problems but it hasn’t addressed its service problems at all.  Service will be what determines the airline’s ultimate success.  Service is what attracts revenue, not cost cutting.

Consider the value proposition AA is offering in comparison to other airlines and particularly those it is competing against.

US Airways may have its problems but it doesn’t have AA’s problems.  It attracts customers on price and it keeps them by doing what it contracts to do.  It competes against the likes of Southwest and Delta all the time and it makes money.  It makes money because it does deliver on the service and value propositions.

Ask yourself if the status quo that exists today at American is the status quo that wins in the marketplace here in the United States.  Consider that despite having a very senior and very well paid service staff and crew, Southwest accomplishes what AA can’t every day.  It does it day after day and has expanded its revenue growth and still has managed to earn a profit.

Contrast the experiences with Delta who is arguably kicking everyone’s butt in the business currently.  It is these intangibles that have always determined the success of an airline.

Yes, it’s important to be competitive on costs but you can’t win if you can’t compete on the service and value side.

Now, ask yourself if the status quo is who should be running American Airlines going forward out of bankruptcy.  Some say that the executive team has changed and that it is leaner and more responsive.  I would argue that we simply have Version 3.0 of the same leadership the airline has enjoyed for 15 years and that this version shows no evidence of being anymore sensitive to the service and value side of the business than the previous regimes.

AA needs new leadership and it needs leadership that can change those service and value propositions.  Even if that leadership is not US Airways management, those in charge today need to go and new people need to come in and change the airline to a model that wins.

Filed under: Airline Service by ajax
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As the clock ticks towards the end of the year, more and more people are weighing in on the potential American Airlines / US Airways merger that’s been cooking for a few months now.  I have a few thoughts on this:

1)  It is curious to me that Tom Horton continues to describe himself as neutral on the merger idea on the one hand but also argues for a post bankruptcy merger any time the door is theoretically closed at a meeting.

2)  The fact that the pilots have been engaged on this leads me to believe that an offer is imminent.

3)  If an offer is imminent, someone has found a way to let Tom Horton exit gracefully.  I’m guessing the plan here is something similar to what Glenn Tilton got in the ContiUnited merger.  I’m also guessing that Tom reckons that if Doug Parker blows things, he may yet be able to step into the CEO role again.

4)  Not all pilots are eager for this.  There is a new blog started by about 35 AA pilots, mostly captains and mostly from the DFW base.  The fact that most are captains from the DFW base leads me to believe that these are fairly senior captains who may feel a touch threatened with respect to retaining their seniority against similar US Air (EAST) pilots.

Seniority is going to be a touchy issue for pilots and other crew.  It won’t be Delta like in the integration largely because rational thought isn’t in place for either union involved (APA or USAPA).  If this were an ALPA/ALPA integration, the odds for a smoother integration would go up.

You know what?  Smooth or unsmooth, it doesn’t really matter.  US Airways has already proved it knows how to run a split operation.  Furthermore, there is now federal law that will govern a seniority integration in this case and that should prevent a USAPA-like embroglio.

Some pilots from both unions point to Doug Parker and US Airways not being able to integrate their employees in the previous merger and that’s not quite true.  There was an arbitrated decision that very senior US Air (EAST) pilots threw a temper tantrum over and tossed out by electing a new union organization.  Parker & company couldn’t even be sure who to negotiate with for the last several years much less solve a problem.

Parker & company keep making offers to US Airways flight attendants and they keep voting them down asking for more.  And who wins in those situations?  Parker & company.  Because the NLRB won’t let the crews strike and does keep the new agreements coming which proves that progress can be made and that therefore justifies not letting the unions strike.  Meanwhile, US Airways keeps paying the old rates.

At some point, you need to make the deal you can get, not the deal you want.  US Airways crews haven’t been able to get their act together to realize that much less make it happen.

I rate a merger announcement as 80% probable at this point but I’m not sure that I agree that it will happen before the end of the year.  I can see this deal getting announced in the 2nd week of January, however.

Filed under: Airline News by ajax
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