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.