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:
- 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.
- 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.
- 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!