It is rare for me to discover that I’m unaware of a development in the airline industry here in the US but . . . I am. It’s bag tracking and it ain’t sexy but it is very interesting.
The Daily Traveler via Brett Snyder Aof the Cranky Flier has this story about US Airways quietly rolling out its own real time tracking system. Now, each time a bag enters or departs a major entity (primarily an aircraft), it gets scanned and reported into the system. Delta apparently has this too!
I am thrilled about this for so many reasons. It’s not perfection in tracking as your bag still could get lost between an airplane and a baggage claim area, for instance.
But now you can see where your bag(s) are and keep things honest about what is going on with them. It has been my experience that airline employees are particularly untruthful about the location of a lost bag much of the time. Lost bags are hot button problems for passengers and baggage agents don’t want those problems.
I also think this will actually help to tighten airline responsiveness to lost baggage problems. It’s a good thing and a system that absolutely should be carried over into American Airlines asap.
U.S. Bankruptcy Trustee Tracy Hope Davis is objecting to American Airlines CEO Tom Horton’s Platinum Parachute of $20 million in compensation for stepping down shortly after the US Airways / American Airlines merger is complete.
Actually, she doesn’t like the plans for severance and retention payments being made to many managers at American Airlines and she wants it changed. Davis points out that AA should show “the payment is part of a program that is generally applicable to all full-time employees and the amount of the payment is not greater than 10 times the amount of the mean severance pay given to non-management employees during the calendar year in which the payment is made.”
Most will assume that this won’t pose a problem for American Airlines in front of the judge and that the objections will be ruled against or a compromise found shortly. I’m not sure this is true.
Emotions about such payments runs high these days and federal law changed how that kind of compensation might be given quite some time ago (2005 during the Bush Administration). Personally, I find the payments being discussed fairly egregious.
I do not like seeing executives of a company receiving extraordinary compensation for having done a mediocre to poor job in managing that company. Gerard Arpey is gone, that’s true, but the the entire executive team being compensated in this manner, including CEO Tom Horton, were all on duty when mediocrity was being executed.
American Airlines’ bankruptcy is somewhat unusual in that they executed it when the company still had a great deal of cash holdings (which is really the right time to do a bankruptcy, to be honest) but there remain some facts that should be kept in mind. American Airlines was clearly headed towards bankrtupcy. AA had no positive relations with any union whatsoever. AA had been unable to reduce costs (not just labor but elsewhere too) for years.
And regardless of Tom Horton’s claims that the idea for the merger was his, it wasn’t. Why should mediocrity be rewarded? To get them out of the way? I have an idea: Let’s deliver a letter that says “I’m sorry but your services are no longer needed.” Why should the executives be paid to leave and not make trouble when regular employees will simply be told their services are no longer needed?
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.
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.
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.
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.
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.
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:
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?
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?
Why are AA’s interests valued so highly in this merger and US Airways interests so low?
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?
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?
Terry Maxon with the Dallas Morning News is reporting on the Aviation Blog there that the solid rumour is that Tom Horton will be non-executive Chairman and Doug Parker will be CEO of a merged US Airways and American Airlines.
Since Terry rarely gets things wrong, I believe that this is the almost certain outcome.
It’s likely that I will take flak for this but I don’t like it as an idea. Tom Horton as non-executive chairman would have seemed like a good compromise last May or even last July. Not now.
Horton & Company have clung too hard to their ideas and I fear that even as non-executive Chairman, he’ll wield too much influence if only by being able to second guess Doug Parker and his team.
Let’s not forget that, according to Horton, Tom Horton was the guy to think of a merger long before Parker.
And then there is the branding fiasco and multiple superfluous announcements about change, often scheduled to take place in 2017 or later.
Sorry but I think Horton interferes and prevents success more than he helps. And the Board of Directors as well as the unsecured creditors would be wise to find another non-executive Chairman before letting this happen. Ask Gordon Bethune to do it. Ask Doug Steenland to do it. Ask someone else.
In fact, I think that finding someone else to serve as non-executive chairman could be the very best thing for this company. I really do. But Tom Horton should not be the one to serve in that role. He’s a lightening bolt for controversy among employees and a potential critic of Doug Parker as he sets off to do something very, very hard in the best of circumstances.
Let me point out that if it is about wanting to reward Horton for something, there is nothing preventing the company from awarding him stock and/or options in this deal. Nothing really. Horton will work again, too. He is a very, very talented finance guy and there are companies who need his skills.
It will be much cheaper to bribe him away from this than it will be to have him hovering over Doug Parker and trying to wait in the wings hoping Parker will fail and he can take control again. Seriously, don’t do this. It hurts the chances of the merged company and at best it doesn’t help.
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.
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.
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.
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.
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.
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.
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.)
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.
