A US Airways Acquisition of American is Getting Less and Less Likely

It’s been all over the news that American is looking at merger partners as part of its bankruptcy process, and that has plenty of people speculating that an American Airlines – US Airways deal might finally get done, that it’s looking inevitable since American is willingly coming to the table.

I don’t believe that’s what this move means at all, I don’t think a US Airways acquisition of American has become more likely. I believe it’s a necessary part of the process while American’s management would prefer not to be acquired. And the progress that American has already made makes them an increasingly costly acquisition target. Which means that any odds of acquiring American must be going down, not up.

There are three reasons American is becoming increasingly costly to buy:

  1. American is making money. That’s easy to dismiss, since everyone’s planes are full. But when everyone was making money months ago, American was losing it. Perhaps American had the most low hanging fruit, but they’re eating some of it, their revenue picture is improving.

  2. They’re getting labor deals done. And it even looks like the mechanics may be getting a better deal than what US Airways was offering them.

  3. They’ve got more cash. About a billion dollars more on hand than when they filed for bankruptcy.

American looked especially weak (and thus cheap) when they filed for bankruptcy. Now US Airways will likely have to pay more than they would have when the airline entered Chapter 11. That makes the acquisition less likely.

Don’t get me wrong, US Airways will still try. Doug Parker wanted to merge with United (reports were that deal fell through earlier in the last decade because he wasn’t going to be given the helm of the combined carrier). He wanted to acquire Delta. So far he’s only been able to take America West, and with the help of a new co-branded credit card issuer (Juniper Bank, since acquired by Barclays) he did manage to buy US Airways. All of his talk about how strategic American is for US Airways, Parker seems to want an acquisition — any acquisition.

And mergers rarely work out as well as they’re promised on paper.

  • This one would raise US Airways labor costs. And if there’s been a knock on American, it’s that they’ve had just as much of a revenue problem as a (labor) cost problem, so it’s hard to imagine earning a sufficient revenue premium across the entire network to justify raising that whole network’s costs.

  • The cultures are hardly compatible, US Airways still has their former America West and legacy US Airways pilots operating under different terms. The only way to square this is to give them all a raise.

  • They have huge overlap across the hubs (e.g. US Airways based in Phoenix with American having a large operation in Los Angeles, American with a huge operation at JFK while US Airways has its transatlantic hub at nearby Philadelphia). US Airways spins this that they are ‘big’ in their major markets, but they’ll do nothing but overflying their own hubs.

Which isn’t to say it won’t happen. It didn’t make sense to be before, it’s hard to imagine it makes sense for US Airways shareholders now that American will be pricier to acquire. But Parker may want to run the largest airline badly enough that he’ll overpay, -overpay dearly, his shareholders be darned.

But the news that American is looking at merger partners as part of the bankruptcy process doesn’t mean this is more likely, and I believe the progress American has made already in bankruptcy makes it less likely.

American has to look at merger options if they want a blessing to go it alone. Publicly stating that they’re looking at options doesn’t mean those options are more likely than before. American has even made noise that they could be the acquirer, though outside of ‘in name only’ or in the acquisition of a much smaller partner, that doesn’t seem likely.

The ‘smart money’ is supposedly on American merging. And much smarter money than mine, for sure. But the simple story that US Airways gets the unions on board, files a competing plan and buys them out of bankruptcy, all while creating labor harmony — and generating more profits because of the combined ‘network strength’ and because US Airways management is just so much darned smarter than everybody else.. that just doesn’t seem plausible to me.

I’ll be prepared to eat my words, of course!

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. […] of an independent American, so I’m always worried I might be biased by such news.  But, View From The Wing has some of the same thoughts regarding the likelihood of a merger. Share this:LinkedInFacebookTwitterPinterestLike this:LikeBe the first to like […]

Comments

  1. American’s unions believe they would rather be managed by a dozen names chosen at random from the Dallas telephone book than current American management. But like the bankruptcy judge said, they are stuck with each other. It is sad – AA has had poor labor relations at least as far back as when I worked for them in the summers going to school (late 60’s).

  2. Gary, if you eat your words will see your customary photo of the plate?

  3. I hope you are right Gary. I for one would like to see both carriers remain stand alone.

    AA is so easy to score mile on, great for CX redemptions.
    US is also easy, great for some wonderful *A airline redemptions.

    Granted that isn’t a business case for being stand alone…

  4. They have huge overlap across the hubs

    Disagree strongly.

    US Airways based in Phoenix with American having a large operation in Los Angeles

    AA has 25 n/s destinations from LAX.
    US has 64 n/s destinations from PHX.

    Saying AA/US has disadvantageous overlap at PHX/LAX is like saying UA has disadvantageous overlap at SFO/LAX. PHX and SFO are true hubs and LAX for both airlines is just a focus city (though UA is closer to hub status at LAX than AA!). LAX is a focus city for most of the airlines and hub for none, simply because they have enough O/D to support it. (UA has 78 n/s from SFO, ~61 from LAX.)

    American with a huge operation at JFK while US Airways has its transatlantic hub at nearby Philadelphia

    Huge is a huge overstatement.

    AA has 48 n/s from JFK.
    US has 73 n/s from PHL.

    Once again, has it harmed UA to have EWR and IAD very close? No. NYC has enough O/D to protect against that. Plus, PHL is very much a domestic hub in the true sense of the word while JFK is more of an int’l gateway ala MIA.

    That’s one of the weird things about AA’s network that I’ve never quite understood. JFK and MIA are more int’l gateways that true hubs, while ORD and DFW are true hubs with int’l and domestic mix.

    United and Delta don’t really have that distinction of true hub vs. int’l gateway, though both DL and UA have micro-int’l gateways at SEA.

    I’m open to correction on any of that. My knowledge is incomplete.

  5. I would LOVE an AS/AA merger – reasonably compatible route maps, gives AA a west-coast domestic presence, and a SEA hub isn’t going to cannibalize many of AA’s other domestic routes.

    Never going to happen, but I can dream…

  6. I would also love AS+AA. Stockholders in AS would probably hate it. It would be a huge roll of the dice for AS in a casino where there have been very few winners.

  7. All 6 are now fully in play. AS, US, B6, Frontier, Republic and Virgin
    Either US does some acquiring and becomes larger
    or WN buys up more and sells their planes like Airtran.
    I am hoping a 5th carrier besides WN remains so we have at least 5 choices.

    My hope is DL+AS, AA+US +/- B6 (20% owned by LH)
    I can also live happily with AA+AS+B6 and DL+US
    Someone has to give the UA/CO a run for their money with network coverage

  8. As a US elite, I’ve been hoping for some time that this does not happen. I like US just the way it is, and I’m happy to have many folks overlook them. I’ll take the consistent on-time performance and very frequent upgrades any day over the mess that a combined US-AA would become.

  9. The NYTimes had a good article earlier this week noting the HUGE financial incentive for AA management not to merge during bankruptcy. Basically, they lose millions of dollars in stock options by doing so. No doubt this factor contributed to DL management’s previous hostility to being acquired by US.

    Other than this, the merger question comes down to whether US’s management will more profitably utilize AA’s assets than AA management. It seems like you can find some frequent flyers who believe this is untrue, but it’s almost impossible to find any Wall St. analysts who doubt this proposition.

    So then it comes down to the creditors. They will be listening to the financial analysts (and certainly not the frequent flyers!), but they also have parochial interests. Some can, perhaps, make more money with an independent AA than with an acquired AA.

    My best guess is that US manages to buy AA in bankruptcy, but it’s certainly no sure thing.

  10. I think your characterization of AA being a more costly acquisition target is quite overstated. In terms of unrestricted cash, which is what really matters to an airline (and should be about 15% of annual revenue for a viable airline), AA only has $371 million. This is equivalent to only 2% of their 2011 revenue. AA had a lot of obligations coming up related to pre-delivery payments for their large Boeing and Airbus orders that will burn through much of this cash. Sure, it’s better than it was before the merger, but the liquidity picture at AA is still not good. In terms of asset quality as well, what matters much more to a potential buyer (more than whether they are making money now), AA is unchanged, with the main bright spot being its NY routes and associated antitrust immunity with BA/Iberia. This is probably what US Airways cares the most about.

    As far as the mergers being a “bad fit,” as we’ve seen in the past (especially with DL-NW), having some geographically close hubs isn’t too much of an issue for merging airlines. The same goes for “compatible cultures,” which have also not stopped the merged Delta from doing some pretty amazing things. As for the hubs, you fail to note that AA’s three main hubs (DFW, ORD, MIA) are really nowhere near US Airways main hubs. Yes, AA has higher labor costs, but combining the two networks is likely to result in reductions in force and economies of scale that will lead to savings.

    The big elephant in the room here is the future. American will have a very difficult time surviving on an unconsolidated basis as merged United continues to capture merger synergies, as international partnerships become more common, as fuel goes up, and as the domestic market becomes more competitive. There’s been some talk of AA wanting to merge with the likes of JetBlue or Republic, but these moves are unlikely (because they actually are bad fits) to happen. AA management knows that a US merger is a way out of that, and if acquisition is the way out, so be it.

    And just so we get history straight, Doug Parker was the CEO of America West, and America West actually took over US Airways (why US Airways HQ moved from Pittsburgh to Phoenix). He has proven himself as a very competent leader and is unlikely to make a rash decision that doesn’t make sense.

  11. I beleive I was quite clear that Doug Parker ran America West and took over US Airways.

    I think you overestimate the likelihood of capturing these ‘synergies’ — such anticipated gains rarely materialize.

    My contention is that American becomes more costlier to acquire than it was when it appeared at its weakest, right when it filed for Chapter 11. It has more cash, it has higher unit revenue, and it has been putting to bed labor agreements — admittedly I haven’t read all the fine print but my sense is that the mechanics agreement will be costlier than what they’d have likely gotten under a merger.

    And I believe that driving up labor costs at US Airways through merged workforces, and the likelihood that they’d be overpaying to acquire American, make this a bad deal FOR US AIRWAYS.

    I’ve never actually claimed that American itself would be worse off for such a merger…

  12. Sorry….just saw you say that “he was just able to take America West” I thought you were referring to him “taking” America West as US Airways. Mea culpa.

    I think DL-NW and UA-CO have proven airlines’ ability to capture significant synergies from a merger, even when it didn’t appear likely. Everyone was criticizing DL-NW’s mixed fleet, polar opposite cultures, and closely positioned routes).

    Time will tell, and we’ll eventually know the outcome from all this. You’re right, a merger is less likely, but I just think you’re overstating how much less likely it actually is…

  13. @Gabe – Oh, I never gave the delta on percentages…. 😛 Just offering my somewhat contrarian take to all the frenzy!

    I could name tons of counterexamples to the successful mergers… The past year US AIrways has been profitable, but I think claiming even US-HP as a success remains in the ‘tentative’ column. American and Reno Air? American Airlines and AirCal? American Airlines and TWA (although this did give them Heathrow access before the airport was open to everyone, but it also gave them STL).

    Texas International and Continental, Eastern, Frontier, People Express?

    Pan Am and National?

    Lufthansa’s acquisition of bmi….?

    Just to name a few.

  14. In my opinion, and those of most in the industry, without HP, US would not be around today. I’d call that a success.

    Plenty of bad examples, but if you limit the sample to the “new” US airline industry of recent years, the track record has been very good (with the exception of Republic/Frontier).

    There’s always the black swan of course. We shall see…

  15. @Gabe I think your example that US is still around misses the point, question is whether HP shareholders are better off than would have been. As I say, i never argued that AA wouldn’t be successful—just that I don’t think the deal is good for US shareholders.

  16. @gabe I looked at the Amr operating report this week and the cash balance is much higher than the 371 mil you cited

  17. @bluto: Yes – that’s because when AA reports cash in their own reports, they include a short-term investments and restricted cash (pledged to other uses). If you look at their quarterly filing with the SEC, unrestricted cash at March 31, 2012 was $371 million.

    If you’re analyzing the finances of an airline, unrestricted cash is the most important number, and it should be about 15% of last-twelve month revenue. 10% is okay. 5% is not good. As I mentioned, AA is at 2%. Compounded with the fact that they have to use a lot of that for upcoming pre-delivery payments on their a/c, it is not a great picture.

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