I found a rather odd story on the Seattle Post Intelligencer aviation related blog (found HERE) referring to American Airlines indication of interest in possibly having Alaska Airlines as a merger partner.  There were two things of interest in this story but before I go on, I’ll just comment that I found it amusing that Alaska Airlines basically replied with a polite response that amounted to “Yeah, we’re happy with where we are today.”  And they should be since their own market cap is an order of magnitude greater than AA’s is presently.

The other item is odd.  It mentions AA showing interest in Southwest Airlines as a merger candidate.  First, I hope Herb Kelleher didn’t choke too hard from laughing.  He’s a nice guy and I wouldn’t want to think of him hurting himself.  Second, that isn’t a merger, that would for damn sure be SWA taking over *everything*.  Third, SWA is much smarter than that and knows how to responsibly represent its shareholders interests in the marketplace.

I hope that the reference to SWA was a mistake on the journalists part.  If it wasn’t, then if I were a financial analyst, shareholder or member of the unsecured creditors committee, I would start questioning just what the hell the company leadership is thinking.

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There is a report floating around that CEO Tom Horton was actually the first one to suggest a US Airways / AA merger and that he made the pitch to US Airways CEO Doug Parker last September.   It’s entirely possible that a union was discussed in September between Parker and Horton.  I will suggest that US Airways has been aggressively evaluating merger partners and options for industry consolidation since 2006.  You can bet that AA has always been a part of those discussions.  I will point out that even US Airways didn’t really find the AA option that attractive but did find both the United and Continental options very attractive as well as the opportunity to buy Delta out of bankruptcy.   In short:  I guarantee you that US Airways knows much more about mergers and has done real homework on the subject of American Airlines.  The same is not true from the perspective of AA and Tom Horton.

AA has announced new aircraft and seating for transcontinental flights.  It will use its A321 aircraft order to replace existing (and very old) 767-200 aircraft on these flights.  Curiously, AA is promising things like seat back video and lie flat seating for business and first class.  It’s also notable that all the other airlines have not gone that far in their product and have not seen revenue consequences for that decision.  I have a feeling that this AA on a PR campaign which will see *some* of these options realized.  Also notable is that these domestic trans-con 767 have about 168 seats and the new A321 aircraft will have 102 seats.  That’s a drastic reduction in capacity for routes that are robust earners for all classes of seating.  Either AA will boost frequencies which is somewhat challenging given that some of those trans-continental flights depend on slots at restricted East Coast airports or AA is hoping that just serving business and first class customers will result in a better revenue and profit yield.  This is what people are referring to when they say that AA has as much of a revenue problem as a cost problem.   The scenario of great reduce capacity on these routes doesn’t coincide with how  the industry is executing on those same routes and earning money.

Finally, US Airways gets to crow about record quarterly profits.  It’s a timely endorsement of the US Airways management and I have no doubt that American Airlines executives reached into their desk drawers for their roll of Rolaids upon learning of US Airways success.

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American Airlines’ CEO Tom Horton is now playing the PR game in the media making it sound, at first glance, that AA is being responsible in its consideration of merger partners.   The big sound bite from last week is Horton declaring that American Airlines merger fate won’t be dictated by others.

Problem is, it will be dictated by others, in large part.  I have a problem with American Airlines acting as if it has complete control over its destiny today.  It ignores creditors and the financial markets entirely and, frankly, this is part of the problem AA has in general.   When analyst Jamie Baker asked Gerard Arpey if that was all he had during quarterly financial results a few years ago, it spoke volumes.  It still does today.

No case is being made for how American Airlines will conduct itself upon exit from bankruptcy.  There have been no giant changes in leadership at AA.  Yes, some leadership has been let go but that which remains is still the legacy management.  the same philosophies and practices exist today.

So why should anyone believe that AA will do better given what AA has achieved today?

I’ve admired Delta CEO Richard Anderson’s attitude since his return to the airline business which is that an airline he runs will be run with an eye to returning an appropriate profit in both good times and bad.  He’s largely succeeded in that goal.  Anderson recognized that the old models of business were done and that it was time to make change happen in ways that made financial sense as well as sense for employees.

American has been desperate to be able to point to other airlines and recognize that labor costs and productivity would rise to AA’s level in short time.  The problem is that that hasn’t happened and there is nothing pointing to that happening any time soon.  Even AA’s neighbor, Southwest, is aggressively addressing its costs in order to remain competitive while engaging in practices to grow revenue to support sustained profitability.

And when it comes to revenue growth, neither of those two airlines are doing it by grabbing market share at any price.  Both are continually evaluating all their routes and where they do not make sustainable financial sense, they’re being cut.  New opportunities are being sought over and over again and many of those new opportunities are coming at the expense of AA.

Both external and internal forces are shaping AA’s merger options as we speak.  Ignoring those forces and continually declaring that Things Will Be Better is foolhardy.  Playing a PR game that clearly indicates interests on the part of AA management reside in being the dominant merger partner to reap rewards is foolish as well.  Those who have influence, aren’t so stupid as to not notice that play.

And acting as if Alaska Airlines, JetBlue, Frontier or Virgin America are solutions to your problems is just insulting those who understand the industry.

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US Airways announced that they had bought a small amount of American Airlines holding company AMR’s debt.  They purchased $1 million in debt for $600,000.  This enables US Airways to have status as a creditor of AMR in court and, potentially, gain more insight into AA’s bankruptcy strategy.

It gives US Airways a seat at the table in a more formal sense and is enough to be taken seriously without being so much as to alarm the markets.

But AMR couldn’t resist speaking out against it.  American Airline’s spokesman told the Dallas Morning News that it was a publicity stunt and nothing more.  I would suggest that American Airlines play that publicity game very, very carefully.  Ridiculing a suitor and the only viable suitor for a merger and while you are under bankruptcy protection with creditors who already aren’t sure you’re acting in their interests or your own, seems foolish.

Acting snide can have the effect of making the financial markets and creditors think you’re behaving above your position in this bankruptcy.  While it is a company who is in bankruptcy and it is other companies who are the creditors (with the exception of large labor groups), the people participating in this process are all human beings.  Human beings are capable of being offended or annoyed and those human beings control the destiny of American Airlines in large part.

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It is being reported that American Airlines is now considering 5 merger partners and they are US Airways Group Inc., JetBlue Airways Corp, Alaska Air Group, Republic Airways’ Frontier Airlines, and Virgin America.   There  are interesting choices here but at the same time one can see a less than enthusiastic theme here.

Alaska Airlines is a great airline and has a great operation on the West Coast of the United States.  That said, be 100% sure that Delta isn’t about to let Alaska Airlines get away without a fight.  I would rate this opportunity rather low.

JetBlue is another interesting option in that it would bolster American Airlines in its cornerstone market strategy as it applies to New York City with its operations centered on JFK.  I think that JetBlue is rather stagnant and while it offers market share, there is nothing else here to be gained and given AA’s history of buying airlines and then not knowing exactly what to do with them. . . this merger could happen but it adds little value to AA overall and certainly doesn’t bring American Airlines back into United and Delta’s scale.  All it does is leave existing AA management in control of AA.

Frontier and/or Virgin America?  No value added here.  There is no great complementary system found here, the management of either airline isn’t doing very well and the most that happens is that AA eliminates a tiny bit of competition on some profitable mainline routes.   These are red herrings in my opinion and I think there is very little probability of a real merger with either of these airlines.

US Airways:  Enough said already.  There are complementary systems, there are good executives who know how to make money and there is enough scale to compete effectively with United and Delta.   It’s interesting to me that US Airways’ Doug Parker says that he still hasn’t been contacted by anyone with American Airlines.  This is the least attractive merger path for AA executives and, yet, the one that makes the most sense.

I think the intent in leaking these potential merger partners to the press is to appear to be doing something about examining all options while focusing all the real effort and work on a stand-alone emergence from bankruptcy.  While that gives people like Tom Horton a chance to realize extremely beneficial financial rewards and an opportunity to keep their jobs, I’m not sure that it means that US Airways can’t be the dominant merger partner.

AA is almost certainly going to emerge with a higher market capitalization than US Airways presently has.  However, that doesn’t mean that they have very much maneuvering room against US Airways who has been building cash holdings and operating their business both profitably and sensibly.  AA’s current cash holdings are almost certainly going to be reduced in this bankruptcy and will be needed to finance both operations as well as aircraft purchases.   Furthermore, creditors and shareholders aren’t likely to be amused at the notion of using those cash holdings for a purchase of US Airways.

I would like to see a conversation about AA’s ability to be a dominant merger partner today.  This is an airline that has essentially dismantled every purchase and just made it go away.  Reno Air, TWA and Air California all were airlines purchased by American and removed from the competitive landscape without adding any real value from the purchase with the exception of some aircraft.  They were, for all intent and purpose, minor asset purchases.

Is that what creditors and shareholders want to see out of the next merger?  My guess is that won’t fly with anyone.

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American Airlines CEO Tom Horton says the company is ready to explore merger options with all suitors now that the picture of AA’s health is more clear going forward.  Likely part of this is driven by the half steps it’s gained in negotiations with the unions and its greater certainty of what court rulings might be.

I’ve pondered this development and announcement since yesterday and wonder if Tom Horton isn’t going to make a play for a merger with US Airways that sees AA as the dominant carrier going forward.  The best defense is a good offense comes to mind.

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Ryanair has launched another takeover bid for Aer Lingus offering a 50% premium over the current share value in the marketplace.  Its previous bid was shutdown by the European Union on anti-competitive grounds.  Etihad has expressed some interest and now Turkish Airlines is pondering an acquisition as well.

Oddly enough, no major airline group seems that interested in Aer Lingus.  No other major European airline other than Ryanair seems interested.   It’s down to scrappy outsiders who want a piece of the airline.

This is because the government owns a major stake in the airline and between it and Ryanair, there is a majority control issue.  You can’t control Aer Lingus without one or the other selling their stake.  Neither of those two parties is interested in selling their stake to someone that can either A) harm the Irish government politically or B) impact the competitiveness of the Irish airline industry.   Or both (Ryanair).

I think much is made about the Irish government selling its stake and I agree that the current government is sending louder signals than most but at the end of the day, I don’t think Aer Lingus is getting sold or merged into any other airline.

I think Ryanair is interested in Aer Lingus from a long haul perspective and it provides growth in an area where Ryanair has not so far moved into.  With such an acquisition, it gains not only the equipment but the know-how needed to execute a long haul international strategy.

Politically speaking, the Irish government has much to fear when it comes to politically fallout from such a sale.  The airline is heavily unionized and those unions carry power when it comes to local politics in Ireland.  Given the size of Ireland, all politics is local.  Jobs are important in an economy that has been impacted by the Euro crisis, debt and a lack of economic growth.

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Southwest Airlines and Airtran mechanics have agreed upon a new deal and found a way to merge seniority satisfactorily. I wrote about this in February when Southwest mechanics derailed the last agreed upon deal.  At that time, how seniority would be handled within the airline in general as well as in Atlanta was the primary issue.

Getting a new deal agreed upon and accepted since then is fast work by all those involved.  I suspect that Southwest was able to alleviate some of the concerns involved with its moves into new aircraft and international flying.  SWA has likely been able to find a way to ensure that all parties maintain some parity in their seniority and their quality of life is preserved.

Not every deal has been made the first time around in union integration in this merger but every deal has been done fairly swiftly compared to most any other merger.

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Doug Parker of US Airways came to the DFW area with AA union leaders in tow to do media interviews in both Dallas and Fort Worth and make the case for a merger between US Airways and American Airlines. I have to believe that American Airlines executives would have liked to have arranged for his plane into DFW to be diverted.

So far, AA hasn’t reached any agreements with either the pilots or flight attendants. The pilots refused to send the last and best offer to its membership and we’re not surprised whatsoever. At the end of the day, even with the contracts abrogated, AA *still* has to come to terms with its unions and it’s doing a very poor job of that. Even the bankruptcy judge has pointed out that both parties will be stuck with each other.

There is a perception in these struggles that unions are always about more money. It is often portrayed as more, More, MORE on the part of airline unions and the thing is . . . it isn’t true. More money is rarely the true issue with employees.

We hear over and over again that more money doesn’t make for a more happy employee or a more productive employee. It’s quality of life that does so. The secret to Southwest’s success with its employees and productivity isn’t the high wages (although they are very high), it’s the cooperation that exists between company and unions that provides high quality of life.

Furthermore, employees really do want to see their companies succeed. Company success provides more stability than anything else for employees. So when American Airlines union leaders start talking about how they recognize that concessions will be fairly drastic no matter what the bankruptcy outcome and that their chief focus is now on company viability, don’t go thinking that is a smokescreen.

It isn’t. American’s biggest problem with its labor is not money. It’s a loss of confidence. That loss of confidence didn’t happen over night and it didn’t happen accidentally. There is little leadership at AA and that has been true since Gerard Arpey took over many years ago. AA executives are very, very good at managing certain aspects of an airline. They manage finances and fleets very well. They can apply the science in running an airline with the best of people out there.

What they haven’t been able to do is inspire employees and bring about both revolutionary and evolutionary change. They haven’t been able to get their labor to start marching together and working together to compete. That’s leadership and leadership isn’t accomplished by cutting management ranks and consolidating responsibilities. It’s about finding one Great CEO who then has to find many great managers to execute a vision and leadership.

Believe it or not, US Airways and Doug Parker do this. They do it despite big problems with their pilots and flight attendants. Despite the bickering that exists in those two labor groups alone, they still operate an airline that has improved its quality in every area and dramatically so. They get employees to cooperate and to excel at their jobs. Look at the fantastic job done in cleaning up the problems in Philadelphia, for instance.

AA unions see that and recognize what’s been lacking in their own company for a long time: leadership.

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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 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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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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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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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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Here we go again.  United Airlines CEO Jeff Smisek has done very, very well in creating the world’s largest airline between his merger incentives and compensation.  Well enough to anger unions who represent labor forces that are touchy about executive compensation already.  His executive team has also done extremely well.

But UA still isn’t consistently earning money and it has had a rockier time in integrating the operations of United and Continental airlines.  Mot recently, the reservations migration provided a less than stunning experience for customers.

The standard for smooth mergers remains Delta/Northwest and one can hardly expect all of them to go that well.  But it will leave people asking if, once again, airline executive teams aren’t getting compensated a bit prematurely as well as for milestones that don’t show a consistently profitable airline.

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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.

Filed under: Airline News by ajax
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