AMR’s goofy merger explorations

So AMR says it will explore merger opportunities as part of its bankruptcy process.

The choices of potential partners are odd, indeed. According to The Wall Street Journal, AMR’s choices for a potential combination with American Airlines are US Airways, JetBlue, Alaska Air Group, Republic Airways Holdings’s Frontier Airlines, and Virgin America.

The Wall Street Journal notes: Besides US Airways, none of the others has publicly expressed a desire to merge with American. JetBlue and Alaska Air have indicated they prefer to remain independent, and people familiar with closely held Virgin America also said the company isn’t interested. Asked about that, Mr. Horton said: “If somebody’s not interested, they’re not interested.”

The choices, aside from US Airways, are pretty goofy. None is a network carrier that would add a system to American. JetBlue and Alaska Airlines would certainly beef up the East and West coasts, respectively, where American is weak. JetBlue would add strength to American’s JFK international hub. But neither brings a network to the airline.

Frontier Airlines and Virgin America wouldn’t bring even the attributes offered by JetBlue and Alaska. Frontier’s Denver hub competes with United Airlines and Southwest Airlines. Does American really want to get into this fight? We think not.

Virgin America, which regularly posts huge losses, isn’t strong in San Francisco where it is based and neither is American. We don’t understand why this airline is even mentioned.

The only airline that makes sense for consideration among those mentioned is US Airways. US Airways has a network, strong East Coast presence, and a sharp management, which wants to be in control and this seems to be the biggest obstacle for the AMR/American management.

And it only makes sense for the US Airways management to be the surviving one.

American has a dismal record of handling mergers and acquisitions. Consider:

  • AirCal: This airline was acquired to give AA major presence on the West Coast it lacked. AA then proceeded to dismantle to extensive AirCal system are redirect it around the then-new San Jose (CA) hub. This hub didn’t work and was later dismantled. AirCal’s route system disappeared long before San Jose did.
  • Reno Air: another attempt to bolster the Western operation. Another failure.
  • TWA: We never did understand this one. St. Louis is just down the road (so-to-speak) from Chicago. AA’s second largest hub was in Chicago. TWA’s only hub was in St. Louis. St. Louis wasn’t much of an O&D market, a requirement for a viable hub for a legacy carrier. This was doomed from the start. 9/11 accelerated the process. AA eventually down-sized and dismantled St. Louis, returning it to a spoke-city status.

American’s current management is largely the same one, and successors, to the management teams that screwed up AirCal, Reno Air and TWA. We shudder to think how badly it would screw up JetBlue and Alaska, both of which have proved to be competitive. In the case of Alaska Airlines, it has a special function with its service to and within the State of Alaska. A network carrier such as American would never maintain this service. (See Western Airlines and Pacific Northern Airways or Delta Air Lines and the remnants of Western’s service to Alaska.) We shudder to think how badly this American management would screw up Alaska and the State of Alaska service.

Frontier and Virgin America simply don’t bring anything substantial to AA and we view inclusion of these airlines as red herrings.

US Airways is the only combination that makes sense, but only if US Airways management is the surviving one. You can argue that the labor situation remains a deterrent, but we view this more of the intramural fighting between the two pilots unions than anything management has or has not done.

As for flight attendant contracts, we don’t see anything her that is out of the ordinary in typical labor-management relations.

Service? Yep, US Airways service is awfully pedestrian but as a million-miler on American, we can tell you American’s service is awfully pedestrian, too. In fact, no US airline can boast about its service any more; they’ve all been reduced to mass transit standards. Neither JetBlue nor Frontier offer the service levels they used to (we haven’t flown Virgin America). Even Southwest is now going to reduce legroom to add another row of seats in its 737s and we never have liked its boarding system, old or current.

The best outcome for American is a merger with US Airways with Doug Parker and his team in charge. Parker makes a persuasive case that a combination is in the best interests of both airlines.

American’s team proved it doesn’t have what it takes anymore.

25 Comments on “AMR’s goofy merger explorations

  1. A merger between US and AA would be very bad for the paying passengers….neither one has been providing ‘customer service’ in a very long time. I agree AA’s management has proven it doesn’t have what it takes anymore, but the same can be said for US’s management, too. Neither has recongnised that good customer service really does effect the ‘bottom line’, nor has the unions of these carriers.

    But, we have not yet given Tom Horton a chance to prove his management skills in turning AA around. He became the CEO the same day AMR filed for bankruptcy, about 8 months ago. It is clear that AA needs strong leadership, much like what Crandell brought when he ran AMR. Horton may be just that type of guy as he grew up at AA under Crandell.

    BTW, Doug Parker also cut his airline teeth at AA, he was a senior VP from about 1980 to about 1990 before he left for the CEO job at America West (I beleive he also worked at NW in between his AA and HP jobs). Parker has not shown any indication he is willing to work with the unions at US (a problem shared with AA), and has not been able to settle a workable plan to satisfy the pilots from the former HP and US pre-merger. Nor, does he really seem interested in doing that. Now throw in the pilots union from AA and you have a new airline that is set up for a CFIT situation.

    • US Air’s service standards are below”no standards”. However, I believe you will find the pilot union troubles at US Air are due to a group of pilots (ex-US Air) refusing to abide by an agreed mediation solution. The case is working its way through the courts and eventually the US AIr pilot union will be found in violation. This issue is not Doug Parker’s fault.

  2. There is nothing “goofy” about this. AA Management has a fiduciary duty to take a look at all available options-be it from “goofy” mergers/acquisitions to complete liquidation of the carrier.

    Personally, I expect AA to eventually possibly merge with US, but post-BK and on AA’s terms.

    I agree with KC135TopBoom, lets see what Horton can do. He’s more than a capable CEO and lets not forget, Horton was Vice-Chairman/CFO of ATT and was responsible for the “reformation” of ATT with the merger of ATT and SBC (both former “Ma Bell” companies).

    Being a 975k-miler on AA, I’ve haven’t really seen too many bad flights the past few years-certainly not on domestic and certainly on the past 7-8 months. While “soft-service” isn’t that of Asian/Middle East carriers, I’ve flown European short-haul flights on both the majors and LCC’s and those weren’t anything to brag about either.

    • ACTUALLY, TO THIS POINT THE COURTS HAVE LOOKED FAVORABLY ON THE POSITION TAKEN BY THE STILL US AIR PILOTS AND IT MAY WELL BE SOLVED IN THEIR FAVOR. THE PROBLEM IS THE SENIORITY INTEGRATION REJECTED BY THE US EAST PILOTS HAS THE SAME EFFECT ONLY WORSE ON THE THE AA PILOT GROUP AND THEIR REACTION TO IT IS EXACTLY THE SAME.

  3. Your assessment of AA’s management is subjective and based on mergers that happened 10+ years ago by other managers. I would not look at US Airways, their product or their union relationships, as a dramatic improvement over AA management.

  4. I look at US Airways and it seems that they never really completed the US & American West merger, certainly the union issues are still thorny. Would adding another merger into this work better?

    The NWA and Delta merger has worked better but I still wonder how being bigger leads to better or more importantly, profitable. I just hope my favorite airline, Alaska stays away from the siren call.

  5. My point about Horton isn’t subjective. Besides my comment of “more than capable”, none of my comments about Horton are false. Also, the new ATT is a much larger company than AA, so in terms of capabilities, he can certainly manage large companies.

    Point is, its only been 8-9 months since Horton has been “running the show”. So far, ostensibly, it doesn’t seem as if the judge/creditors have a problem with reorganization plan. My point about AA possibly “merging” with US post-BK stands.

    • jacobin777 :
      My point about AA possibly “merging” with US post-BK stands.

      Whether AA merges with US (or anyone else for that matter) before emerging from bankruptcy is really a decision for the creditors, not for the AA management.

      • Actually thysi, it all comes down to the BK Judge who will decide whether or not he will allow any merger of AMR, with anyone else. I doubt he would make any decision until after he hears from the FEC and DOJ about a possible merger with US. Post BK is a different story and both Horton and Parker know that. This is why Parker is talking to AA’s unions and filling them with promises he may not be able to keep because of the US and HP unions he is still dealing with.

        AMR’s biggest creditor, Boeing, will fight this merger tooth and nail. They do not want to loose any more future sales to an airline that is almost totally in Airbus’s hip pocket. I can see Boeing making AMR an “offer they cannot refuse” post BK.

        I see Horton as AMR’s best chance at surviving as a stand alone airline. I do not see Parker as their “knight in shining armor riding to the rescue on a white horse” for AMR at this point in time.

        • In situations such as this, we are told (and we asked specifically) that Boeing (and Airbus in similar circumstances) recuse themselves for all the obvious conflicts. However, we don’t doubt the preferences are made know through other channels, such as McNerney expressing an opinion on an earnings call.

          Parker already said a merged airline would need all the Airbus and Boeing orders outstanding.

          • Didn’t Airbus bail US out of bankruptcy, twice, in the last 10 years?

  6. KC135TopBoom :
    Actually thysi, it all comes down to the BK Judge who will decide whether or not he will allow any merger of AMR, with anyone else.
    AMR’s biggest creditor, Boeing, will fight this merger tooth and nail. They do not want to loose any more future sales to an airline that is almost totally in Airbus’s hip pocket. I can see Boeing making AMR an “offer they cannot refuse” post BK.
    I see Horton as AMR’s best chance at surviving as a stand alone airline. I do not see Parker as their “knight in shining armor riding to the rescue on a white horse” for AMR at this point in time.

    True on the judge — but the role of the judge is to look after the interests of the creditors, not those of the management teams.

    As for the pockets, I think in this case there are two airlines, and each one has found a comfortable pocket with a different aircraft manufacturer.

  7. My view is that a merger of AA with US is both unwelcome and yet more and more likely inevitable. I will say that I have to begrudgingly admire Doug Parker’s pursuit of AA. He’s wooed the unions over to his side (although it was probably also a negotiating ploy by AA’s unions to get a better position). He’s bringing the appropriate creditors over to his side, and he’s also working the rest of the back room deal makers to line up the appropriate financing.

    Regrettably, if he is successful, it could be a Franken-line that is ugly, angry and unloved by the public. Can the unions really all get a long or will the animosity spread and perpetuate US’s customer-comes-last point of view throughout the AA network? Will Boeing ever be able to win a new contract with the merged entity or will it remain locked out of future orders from US?

    I did think AA’s plan to remain a stand-alone company had a decent chance of working if the economy had turned around and growth was on the upswing. But with the economic forecasts looking the way they do it will be tough for many business to succeed in the immediate future much less one in a poor competitive position. That’s a shame because I believe that AAs plan to transform it’s fleet and revamp it’s operations could had eventually attracted more customers while reducing costs to make a truly competitive airline. But the timeframe is simply too far out in these economic times.

    • Maybe a look at US’s most recent history (2000-2012) will show how dumb this deal really is;
      2000 US attempted to merge with UA (the largest airline in the world at the time), but the deal fell apart because the unions and management could get along in the end.
      2002 US filed for their first bankruptcy.
      2003 US began demanding much lower landing fees and terminal leases from PIT, the airport refused because it could not give the same deal to all airlines at PIT (it is the law). In retalitation, US began to de-hub PITto the point PIT isn’t even a focus city for US anymore.
      2004 US decided it sould compete head to head against AA by offering flights to Latin and South America from FLL. This failed as AA had an extensive Latin and South America, plus the Caribbean from the more popular airport, MIA.
      2004 US and HP began their first talks about a merger, which failed.
      2004 US enters their second bankruptcy in just over two years.
      2004 the famous “Christmas sickout” by US union employees throws the airline and passengers into chaos who were making Christmas trips to be with family and friends, thousands of peices baggage (most containing Christmas gifts) were ‘lost’.
      2005 US exits bankruptcy and merges with HP.
      2006 US makes a hostial bid to merge with DL and gets rejected.
      2007 A Consumer Reports survey of 23,000 readers in June 2007 ranked US as the worst airline for customer satisfaction. US Airways ranked last out of 20 domestic airline carriers for systemwide on-time performance in March, April and May 2007, according to DOT figures. US is the leader in service complaints with 4.4 complaints per 100,000 customers.
      2008 US starts talks of merger with AA and UA (again), in response to the DL/NW merger.
      2009 US 1549, under the command of Captain Chesley Sullenberger, flying from LGA to CLT ditched into the Hudson River shortly after takeoff. Capt Sullenberger (Sully) and his crew are heros.
      2010 US closes focus cities BOS, LVS, and LGA.
      2011 the pilot’s union, USAPA, purchased a full page advertisement in the USA Today newspaper, questioning US Airways management’s commitment to safety.
      2012 US makes a second bid to merge with AA, but this time AA is in bankruptcy and is fighting to survive on its own. This could set up a repeat performance of the PIT situation at DFW should US and AA merge.

      In the past 12 years US had tried to merge with another airline 7 times, including two times each with UA and AA and one unsuccessful and one successful merger with HP. The remaining merger attempt was one time with DL. They tried to bully one airport, , eventually closing their hob there, and closing their focus cities at 3 more airports.

      All of this mismanagement has been on Doug Parker’s watch, he has been with US since 1995.

      • US Air 2000-2005 was not headed by Doug Parker. Wrong, Kemosabe.

        Parker has not been with US Air since 1995. Wrong again, Kemosabe.

        One could list the problems, including severe labor problems, at American since 2000 as well and come up with an equally damning list.

        • I agree, AA is not the perfectly run airline, either. Parker was an AVP of the corproations group and later COO at HP, both positions are senior management. To make things clear, Parker’s tenure with US going back to 1995 is only through the connection of the US/HP merger in 2005. Since 2005, Parker has been the CEO of US Group. Between 2003 and 2011 the AMR CEO was Gerard Arpey, and he is the route cause of the mismanagement at AMR. Bob Crandell ran AMR, successfully up until about 1998, and after him came Donald Carty until 2003 when Arpey took over. It was under Carty that the AA/TWA merger disaster happened.

          What I am saying is you cannot merge two bad companies, run by bad management, into one successful company run by true professionals.

          • Parker had no involvement with US Air prior to 2005. Period. Any suggestion otherwise is in error.

          • According to yesterdays WSJ, Horton say that AA wants to remain an independent airline and not merged with US or anyone else.

            http://blogs.wsj.com/middleseat/2012/07/24/silver-bird-no-more-american-planes-likely-to-get-new-paint-scheme/?mod=google_news_blog

            “This is going to be a new airline,’’ Mr. Horton said at the Global Business Travel Association convention in Boston. He was referring to American’s plans to restructure independently, not to ongoing exploration and evaluation of a possible merger with US Airways Group Inc. or other airlines.

            “We’re working on modernization of the American Airlines brand and we’ll unveil something in the future. We’re also thinking about the look of our airplanes,’’ Mr. Horton said. “Stay tuned on that.’’

            It looks like AA is coming out with a new livery soon too. But that seems to have been the standard here with airlines when the exit BK. DL, UA, CO, US, all did it when the exited BK.

      • KC135TopBoom :
        According to yesterdays WSJ, Horton say that AA wants to remain an independent airline and not merged with US or anyone else.

        I think what he means is that AA management team wants to remain independent (and keep their jobs). Given the bankruptcy, the shareholders have been replaced by the creditors (as represented by the bankruptcy judge), and their main interest is to maximize the recovery of the debt owed to them, whether that’s achieved by merging with US, staying independent or chopping the airline into parts.

      • Oops, sorry about the excessive bolding … too bad there is no way to edit a post.

  8. ANA ground’s 787 over corrosion in the gearbox of the R/R Trent 1000’s but not on the G.E turbines.

    • It is not corrosion in the gear box, it is the corrosion of certain gears that were not properly coated by RR for the Trent-1000 engines. NH has ground 5 of the 11 B-787s, the grounding does not effect any of JL’s B-787s which are equipped with GEnx-1B engines. RR already has the new gears on their way to NH.

      • The gears were not properly coated by Hamilton Sundstrand. Rolls-Royce was not involved directly.

  9. I will bet on a three way merger between AAL, AWE and ASA (sounds familiar for AAL management). I see AWEASAAL more like an American version of LATAM – separate brandings, but common holding structure, common buying power, coordinating flying.

    Hope AAL management will do the right things this time.

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