Lots of folks seem to think that a US Airways acquisition of American is a done deal, going to happen, here’s one example of a guess that it’s even announced today.
Allow me to offer a contrary view.
- I believe that US Airways wants to acquire American. They want it too badly that they’ll overpay to accomplish it.
- But the best scenario for US Airways is to attempt to acquire American and fail, because they’ll hobble American in the process.
- And the dance with US Airways benefits the unions, and American’s competitors, because it prevents American from achieving the cost savings they’re looking for.
First, a US Airways acquisition will not come today. American currently has the exclusive right to reorganize through September 28. The Unsecured Creditors Committee can ask the bankruptcy court to terminate that right, which would be a precondition for any deal prior to September. The unions, holding 3 of 9 seats on that committee, would presumably be a swing vote. Courting that group is an important strategy for US Airways to do a deal, but that deal will not happen today, the creditors committee first has to vote and then go to the court for a hearing. And there’s a big difference between union support through a press release and actually calling for a vote.
Second, there’s a lot of commentary out there about how great a management US Airways has and how that management would improve American. But doing a deal with American’s unions would presumably mean higher labor costs than what the airline could achieve through the bankruptcy process. That doesn’t make the airline more profitable, or reorganizing the airline better for non-union unsecured creditors.
A more generous deal with American’s unions than those unions could get from American management doesn’t just mean higher labor costs for American, it means higher labor costs for the existing US Airways operation as well since presumably the integration of the workforce would mean operating under more expensive contracts. That’s not just bad for American Airlines, it is bad or US Airways as well.
On the other hand, American’s labor unions are shrewd for announcing a deal — it suggests that ‘the industry’ (as represented by US Airways) doesn’t believe that the lower labor costs that American will be asking the bankruptcy court to impose are actually necessary. That makes it harder for American management to impose labor terms through the courts.
And throwing their weight behind a deal with US Airways is the ultimate hardball card that the unions can play against management. American management has been pushing for deep costs cuts, this action says there’s a limit to how far American management can go without losing control of the process. American’s management probably won’t back down, except to the extent they don’t see themselves prevailing in court, it’s certainly tough to develop better collaborative labor relations between current management and union leadership (though that likely wasn’t in the cards anyway).
From US Airways’ perspective, and while I believe they want to acquire American so much so that they’ll raise their costs too high to remain competitive, the best thing that could happen for US Airways could well be to play footsie with an acquisition, prevent American from cutting costs through the bankruptcy process as much as they’d otherwise be able to, and see an independent American emerge from bankruptcy too weak to prosper, at a continuing cost disadvantage.
Cranky Flier makes the strong case for acquisition, claiming that the combined airline not just has the ‘better’ US Airways management but also a stronger route network. They can promise growth rather than contraction.
I don’t buy it — there’s too much duplication between Philadelphia (US Airways) and New York JFK (American), between Los Angeles (American) and Phoenix (US Airways), and between Miami (American) and Charlotte (US Airways) – at least for the Caribbean routes. A combined airline will shrink more than the two airlines operating separately.
I also don’t buy that it’s such a no-brainer that US Airways can win the support of the creditors committee to terminate American management’s exclusivity that’s set to run through September 28.
The current committee is 3 union representatives, the Pension Benefit Guarantee Corporation, Boeing, Hewlett-Packard, and 3 trustees for unsecured bondholders.
US Airways can presumably bid up what the bondholders receive and offer a better pension deal reducing the PBGC’s liability. So that’s 4 votes.
Cranky thinks that Boeing would support US Airways if US Airways re-affirms American aircraft orders on the books. But American buys Boeing, US Airways buys Airbus, it’s not so obvious that Boeing can be bought so easily, Boeing probably sees their future sales stream as stronger with an independent American. The diverse fleet issue is also a big problem for a combined American-US Airways since it means higher costs for pilots, training, maintenance — higher than either airline has currently, and another reason why a merger isn’t such an obvious improvement on the cost side.
Cranky also thinks that Hewlett-Packard goes with US Airways because US Airways uses an HP reservations product. But American is hundreds of millions in future investment away from also using an HP product, and Ameircan-Sabre’s unpleasant litigation makes it all the more likely that an independent American means two rather than just one HP customer. With HP as an important creditors committee vote, American isn’t likely to pull out anyway. HP benefits from two customers more than one and so shouldn’t obviously support US Airways here.
Still, the unions become a swing vote on the creditors committee. They have an extremely powerful card to play, but that they’re playing it in public rather than simply calling for a vote and petitioning the Court says that they’re looking for leverage rather than to give Doug Parker a quick deal.
In the end, US Airways is bidding up American’s costs, and American management could be boxed into obliging to avoid losing control of the company. Whichever group comes out on top, they’re likely to overbid and wind up with an American that has higher costs than it would have otherwise had out of a bankruptcy process. Which jeopardizes the airline as a going concern. My fear in all of this is that a successful transaction could jeopardize both American and US Airways when the latter airline inherits those high costs.