Over at travelingbetter.com, EXP asks,
As a layman, this is what I don’t understand:
All of the reports that I’ve read indicate that rather than a merger, it’s actually AA that’s “swallowing” US. So, if AA is the stronger party (~75% equity vs. ~25% for US, keeping the name, the logo, the HQ, etc.), why does Doug Parker get to run the new company, essentially pushing out Tom Horton? If that’s indeed what ends up happening?
Back in July, American’s Tom Horton was spreading the word that the merger was really his idea.
That’s why July was the turning point for me in believing the merger was going to happen. Previously I thought it would be enough to forestall the merger that the combination wouldn’t actually make for a better, more profitable airline.
But the reasons why it’s Parker that would be in charge of the combined airline, with Horton being pushed aside, rather than the other way around (though the combined entity will be called American Airlines, based in Texas, and as a member of oneworld rather than Star):
- Because US Airways is really acquiring AA even though AA is the more valuable entity.
- Because a deal doesn’t happen otherwise (Parker wouldn’t agree, as I said in July he would merge with General Motors if they called themselves an airline and he got to run it).
- Because American’s creditors wouldn’t get 72% of the combined company out of Parker if Parker wasn’t going to be in charge.
An American-US Airways deal is probably the best thing for American’s creditors at the point where they get 72% of the company. Parker’s original offer, thinking he could steal it cheap when the Chapter 11 filing first occurred, was 50%.
But how do US Airways stockholders fare? Pilot costs go up across the board but dramatically so at US Airways. That can’t be good for the long-term profitability of the pre-merger US Airways assets.
How will the airline perform over the long-term?
- You get significant hub duplication at Phoenix and Los Angeles, and New York JFK and Philadelphia.
- US Airways does little to strengthen American’s weak position at Chicago O’Hare (which is why American is doing the big regional jet deal, to downgauge in the O’Hare market where they’re at a huge revenue disadvantage versus United).
- Charlotte will help with North-South connecting traffic on the East Coast but that can hardly be American’s biggest weakness (and there’s a reason they drew down Raleigh).
- You’re going to get a lot of integration pain over the next couple of years assuming this happens. There are going to be real IT costs. There will be disgruntled employees. There will be employee duplication mostly in management and from stations that get downsized.
And Yet I’m Looking Forward to This. As a Washington National-based Executive Platinum I will generally benefit, since US Airways is by far the dominant carrier there (though I would expect the combined airline to have to divest itself from some slots there as part of a deal).
I stand by my thoughts on what a combined frequent flyer program would look like, and I don’t see significant downside risk in the immediate term.
But I expect to see meal cutbacks (American is really quite generous in domestic first class) and I worry about the service culture, American employees have been almost universally friendly in my experience whereas US Airways employees have been far less professional, far less proactively helpful.
I don’t see this as a ideal for the long-term prospects of the combined airline, or particularly good for US Airways shareholders (since I think they’re overpaying, and since costs will go up).
But it’s probably the best possible deal for American’s creditors, which is why it’ll happen. And why I suppose it ‘should’ happen.
And Horton looks to get a pretty good payout for navigating the whole thing, he did a good job for the creditors in restructuring the airline and in getting a good deal for them if all goes as expected next week.