Are American and US Airways Really Just Haggling Over Timing and Price?

Scott Mayerowitz interviews American’s CEO Tom Horton and comes away with some interesting tidbits — such as that the first merger discussions with US Airways were initiated by American, before they filed for bankruptcy.

The first conversation the two had about a possible merger took place in September, when Horton was still just American’s president. Horton wouldn’t say where they met but two people familiar with the situation said it was at the A Bar A Ranch, a 100,000-acre retreat in southern Wyoming during an exclusive gathering of top airline executives informally known as “conquistadores del cielo,” or the conquerors of the skies. The people spoke on the condition of anonymity because the executive meeting is supposed to be a secret. The discussion between Horton and Parker occurred during a barbeque lunch along the banks of the North Platte River.

“I said to Doug, standing by the river, I think there could be the potential for value creation in a combination,” Horton recalled. “I made that pitch. We nodded heads to one another.”

That doesn’t much change the calculation, but it does suggest American sees the same strategic benefits to a merger that US Airways has been talking up.

But American doesn’t want to go cheap. They argue that US Airways needs the merger even more than they do, which is why US Airways is being so aggressive in pursuing one. The reason for the claim is US Airways’ labor problems, and expectations of higher costs, which make the revenue potential of a merged carrier strongly attractive to Doug Parker.

Certainly that’s one way to look at it, I also still believe that Parker would be willing to merge with General Motors if GM called themselves an airline.

American’s management wants to exit bankruptcy as an independent company, or if it merges as part of its reorganization it wants to do so as the acquirer. Certainly increasing revenues and reducing costs help its prospects for doing so, and make any acquisition of American more expensive for an another airline.

A higher price for American after exiting bankruptcy will be great for holders of American’s new equity. But during the bankruptcy process it’s the holders of existing debt who are in the driver’s seat. Roughly speaking, the key question is under which plan do those debtholders get paid back the largest amount that is owed to them?

Management and US Airways could get into a bidding war with the debt holders, or debt holders could see equity in the newly emerged company as their most valuable play. And in that sense long-term value still matters.

Also important is management’s incentives, they’ll benefit financially with a stake in the company if they exit bankruptcy independently. And clearly that’s what they want to do — exit independently, either acquire another another afterward or be acquired on better terms.

The better American performs in the interim, the more likely it is to be able to do that.

American’s performance and their steadfast opposition to a merger through the bankruptcy process has Mayerowitz quoting some well-regarded airline analysts as saying a merger is less likely than they had previous thought. One quoted in the piece,

Ray Neidl, a Maxim Group airline analyst who met with Horton at the breakfast, said he was swayed by Horton’s determination to keep American independent. “I reduce (the) odds of a merger happening from 90 (percent) to less than 50,” he said.

I actually see American’s belief in the combination, evidenced by the claim that they are the ones who suggested it first, as increasingly the likelihood of an eventual merger.

To bastardize the apocryphal Winston Churchill story, we’ve now established what kinds of airlines they are, “now they’re just haggling over (timing and) price…”

Me, I think the price is too high. I don’t think American can afford it. So he question is whether Doug Parker is bothered, or constrained, by overpaying.

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, 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. Ugh. This doesn’t seem like a great arrangement for AA to me. I’d much rather see them just emerge from bankruptcy as independent airline and then gobble up B6 or AS to beef up their domestic route network.

  2. There was awhile where I thought a merger with US was likely before emerging from Chapter 11. Now, I don’t think so. AA’s results have improved markedly as they have rejected leases and restructured contracts. And fuel prices have cooperated somewhat. In the last three months operating income went from -$15 mil in April, to $55 mil in May to over $200 mil in June. Unrestricted cash is $5 billion. Financially, their bargaining position is stronger, and the price that creditors will be seeking has gone up.

    Additionally, AA has now reached agreements with its unions. Five of the 7 TWU groups have already come to an agreement. The pilots union has recommended a vote to its members, and the AFPA has too. The savings from these new contracts should only improve the results. The tentative “deal” that US had with AA’s unions will be moot once AA finalizes its deals with the unions.

    I think US realized they had a window shortly after the bankruptcy to acquire/merge with AA when it was cheap. If AA’s results continue to turn around, I think that window will close. AA’s creditors will start to believe in the financial viability of a standalone entity, and choose to emerge independently in order to see the cost savings flow through. When AA’s valuation reflects this strength, perhaps then they’d discuss a merger.

  3. Can you say collusion? A meeting of top airline executives in a secret location in Wyoming called “conquistadores del cielo” should launch a Department of Justice antitrust investigation, hearings on Congress, and outrage from consumers groups.

  4. Anon, this type of conference is quite common in large corporate enterprise, and well known by government watchers. No too different than conferences well covered by the trade press, like the one Paul Allen hosts.

    The key is for the participants to assure that the discussions do not swing into areas such as pricing strategy. However think about generalized subjects that are of mutual interest/concern. Here are some examples: DOT, FAA, TSA, slot restrictions, world oil prices, etc.

    Further, if two rival company executives cozy up over a drink and discuss how a merger could benefit their respective enterprises, what’s wrong with that. If they were not conveniently together in Wyoming, who says that same discussion wouldn’t occur over a discrete breakfast at a diner in Peoria?

  5. AA gobble up b6 or AS? Somebodys not paying attention to the numbers if they think that is possible. AA is in deep trouble they wont be taking anyone over.

  6. “Conquistadores del cielo” is a longstanding event and is not limited to airline execs. Airframe and pwerplant manufacturer execs attend too. I promise you that each exec attending such an event is well schooled on the dos and don’t when communicating with execs from competitors.

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