The Wall Street Journal had a decent piece today on US Airways’ latest offer for American Airlines. (HT: Pizza in Motion)

It suggested deal terms under discussion much like those I wrote about 3 weeks ago, that US Airways was offering American’s creditors 70% of a combined airline while some of those creditors were using an 80% share as a negotiating position.

The Journal says we’re not near a deal.

The discussions among American, its creditors and US Airways are expected to continue into next year, and the dynamics of the negotiations haven’t changed much since mid-November, said people close to the process.

But it seems as though American’s management now believes that a deal is going to happen, watching the way rhetoric has changed. When it became clear that there was real momentum behind a US Airways merger, American management shifted from dismissing it to suggesting they thought of it first.

Management’s incentives are to stay in control of the company, or at least emerge from bankruptcy independent, at least those are the default positions which align most with their financial interests.

Now, though, they seem to be toning down the bluster about the bright future as an independent airline, and also about their myriad strategic options.

Instead, I thought the latter portion of a letter from American Chairman Tom Horton to employees today sharing announcing that pilots had agreed to a new contract, was revealing about Management’s near-acceptance of a future combined with US Airways:

As we bring our restructuring to a close, we are also completing our review of strategic alternatives. As you know, we have been evaluating the merits of a combination under a non-disclosure agreement with US Airways. While we are confident the new American will be very strong, we are evaluating whether such a combination could create value for our owners and a positive outcome for our people and our customers. We expect to have a conclusion on this soon.

Regardless of the outcome, I hope you share my optimism and can feel the recovery that’s started.

No mention of other possible strategic combinations besides US Airways. No bluster about how they don’t need a partner. And conclusions like, “Regardless of the outcome.”

I was skeptical early on about the wisdom in a US Airways-American merger, primarily from a US Airways shareholder value perspective — potential acquirers usually overpay, mergers rarely generate the sort of synergies that are predicted, and they’re more costly and disruptive than anticipated. And I didn’t really take another takeover attempt from Doug Parker seriously, after his failed two bids for United and his failed bid for Delta (he’ll buy anything larger than his own airline). Although I’ve resigned myself to expect a merger since early summer.

And now it certainly does seem like American’s management now expects a merger with US Airways as well.

  1. JBG said,

    Gary, if a merger happens which alliance would the “new” company be a part of? One world or Star?

  2. Cory said,

    So, these constant matching USAirways purchased promotions could actually end up being matching AA miles.

  3. Gary said,

    @Cory and plans for a revenue-based US Airways program could ULTIMATELY be plans for a revenue-based AAdvantage one. Though I think any merger will forestall major change in that area for awhile.

  4. Mark said,

    I enjoy your obsession with this merger. But, saying the deal basically is going to happen shows you have never worked in finance. Stick to blogging out travel amenities and deals. These things can– and often do– fall apart.

  5. Gary said,

    @Mark – I think you’re misreading me. What I’m saying here is that American’s management now appears to believe it will happen. Their public statements seem to have changed. Which doesn’t deny the point that it could fall apart.

  6. Gary said,

    @JBG in all likelihood oneworld

  7. Joe said,

    Should I buy the 2x US miles today?

  8. Gary said,

    Depends

  9. Ken Y. said,

    It’s amusing all you bloggers have this vendetta against D. Parker. It’s unlikely that any one of you knows him on a professional or personal level. What if he believes fervently that consolidation is the only path to survival in the US airlines industry, and this is not about his ego at all.

  10. Carl said,

    I think this merger will happen. At the end of the day, I don’t think it will end up being very good for the combined employees or the elite travelers of either airline or for consumers generally. The integration will be painful, but more importantly after some initial time period they will start to elminate the unprofitable parts of the operation. While DFW, MIA, CLT, DCA and PHL seem fairly safe as they have high market dominance and some limitations on competition, I would consider PHX, LAX, ORD and LGA/JFK to be vulnerable to downsizing over time, no matter what anyone may say today.

  11. PedroNY said,

    Thank you for your update. I personally enjoy reading your opinion and speculation regarding this matter, great summary and analysis. You provide a great variety of posts through out the week, and not a lot of other blotters are able to do just that… variety!

    Best,

    PedroNY

  12. Gary said,

    I’ve met him. Have you? (And I sat on a panel with Scott Kirby earlier this yearq too — not that my view is driven by personal interaction)

  13. Gene said,

    Gary — Besides Delta, is US Airways the other program that Randy Petersen is expecting to switch to a revenue-based system in 2013? I sure hope not.

  14. Gene said,

    @Carl — no way in hell LAX and JFK go anywhere. PHX, definitely. ORD, possible.

  15. Ken Y. said,

    No, I only worked as the chief of staff to one of the Fortune 10 CEO’s. So what does it matter?

  16. Glenn said,

    So… assuming this does happen is there a way to play this? I assume there’ll be lots of time between when an announcement of a merger takes place and when the two airlines actually become one and the other’s frequent flyer program, credit cards etc disappear…

    Is it easier to get status matched to US?

    Should you consider getting US credit cards even if you don’t have any use for US miles and only fly AA?

    Etc.

  17. David said,

    Hi Gary! Do you think we will get notified before it happens? Just wanna have time to spend all my miles… Thanks

  18. Gary said,

    @David it will take a long time to combine airlines and frequent flyer programs, no worries

  19. Gary said,

    @Glenn you can do a status challenge all the way to top tier with US Airways and you can even buy status all the way to top tier. You get both sets of airline’s credit cards, etc.

  20. Gary said,

    @Ken Y you seemed to suggest that only if you know them can you have an opinion. I’ve met them, don’t know them well at all, but I don’t think that’s relevant.

  21. Gary said,

    @Gene yes that is the other one. I say the third possible is Alaska

  22. Gene said,

    @Gary — Hopefully Alaska will at least wait until after they start EK F redemptions! Where’s that long-promised award chart, anyway?…

  23. Unhappy 1K said,

    I just don’t see the synergies available here, both have a poor/non-existent route network to Asia, it gives US south american routes, but not much else.

    Just seems like merging to merge. Now Alaska and American makes sense, but this just does not and they’d have to leave StarAlliance which US loses all the UA ppl that fly on them, so loses, what I consider, a larger elite base.

  24. Gary said,

    I don’t see hubs in PHX and LAX, in PHL and JFK making sense. You don’t make money overflying your hubs.

    Although I probably benefit as a DCA-based American elite.

  25. Jacob said,

    As an SFO-based elite flyer who switched to AA from UA/CO after getting fed up with the post-merger integration mess, I REALLY REALLY hope AA and US don’t merge. That’s all.

  26. Brian L. said,

    This merger is more about Dougie’s ego than it is about the best interests of AA or US.

  27. jfhscott said,

    Gary,

    IIAL, and I understand that you are not, but otherwise well informed. Do you have any speculation as to whether such a merger will pass DOJ/FTC muster?

  28. Gary said,

    @jfhscott – I’m not an attorney, let alone specializing in anti-trust law. But I haven’t seen any particularly good arguments that it WON’T. I could see a requirement that they divest some slots at DCA [funny, they'll have a special interest in goings-on there]. Delta got their merger, the current administration signed off on UA/CO. They’d never sign off on, say, AA-UA with both airlines’ strength in the New York, Chicago, and Los Angeles markets. But as I say there will be some hurdles. But in the end I’d be surprised if they couldn’t get through..

  29. Lastplace said,

    So if I am lifetime plat with AA and Centurion gives me US plat am I pretty safe? Do you think Citi takes over or will Amex still be able to offer status? How about Barclay’s?

  30. Steve said,

    Gary, imagine you have the power, how would you pair AA DL UA US NW and CO?

  31. Nick said,

    AA with a stock symbol of LCC just doesn’t make sense to me…

  32. MDAccount said,

    So as a newbie miles maven who managed to earn Chairman’s with US this year, what might this mean? I’m SFO-based and went with US because I was 100% for upgrades and knew I probably wouldn’t come close to that with United. (A transcon in F, even with a connection, is better than a direct flight in steerage.)

    I’m guessing a merger with AA will eventually mean a combined program, and way more elites trying to claim space on fewer flights. Overall, am I right to think the continued consolidation weakens the value of elite status?

  33. Gary said,

    @MDAccount – American is a stronger program, it means you become an American Exec Platinum when the time comes,and SFO based you’ll still do very well with upgrades (as EXPs do everywhere anyway, except maybe based in DFW).. Plus think 8 confirmed international upgrades from any fare.

  34. Gary said,

    @Steve I wouldn’t actually pair them all down to 3, in some cases it makes more sense to grow an airline organically than to merge, often acquiring an airline brings you plenty of baggage but little you couldn’t replicate yourself.

    Sure, Southwest got some valuable slots and gates from Airtran. They couldn’t have just gotten those otherwise.

    Northwest had valuable Pacific routes which — even when there aren’t slot controls do require costly route authorities to negotiate — so had value though in many cases replicated things Delta already had but that would have been valuable to American or US Airways especially. And their Minneapolis hub with dominance in the Upper Midwest is certainly a *play* though again not one that a determined competitor couldn’t build (and isn’t THAT valuable). But who would decide to hub in Detroit if starting from scratch?

  35. Gary said,

    @Lastplace – Amex has lounge relationships with both US and AA, and Citi isn’t as dominant with America as Chase is with UA. So while there’s always risk to benefits, I don’t see a fundamental reason why your Centurion benefit has to drop off. It’ll be interesting to see how things play out between Barclays and Citi and I don’t know the details of the contracts in event of change of corporate control.

  36. Andy F. said,

    Hi Gary, how do you redeem international award tickets if the program is revenue-based? I understand for domestic tickets it’s based on how much the ticket is divided by cent-per-point (or point-per-cent) value, like what the southwest does. Do you think same rule applies intl award travel or DL will adopt different policy?

  37. traveler said,

    If Revenue based, when announced , do you think that all Delta skymiles in account will be grandfathered OR would will still have a chance to accumulate more delta miles under the old program? I hate to transfer 25k SPG to Delta within this month to have enough for a RT 100k low fare to Europe.

  38. Gary said,

    @traveler I expect an announcement with several months’ notice so you will not have to transfer on the if-come

  39. Dave said,

    As an east coast based person the thought of using Avios for the many, many US Air short hops is appealing.

  40. glen said,

    Regarding base downsizing after merger, you might think ORD would be a logical city for downsizing due to UAL. This however is directly contrary to statements made by Parker. What you will likely see is a reduction in regional jet service and an increase in mainline service with Parker at the helm. This is in direct contrast to AA’s current management that has dramatically reduced mainline flying and replaced it with Eagle RJ flying. Bottom line is that this will be very good news for the business flying who frequents ORD.

  41. Matt said,

    So you think that a merger is more likely now based on a change in tone that occurred in late July? That’s an interesting deduction… If I were an AA flier I would not be excited about this. The product offerings are vastly different. Integration would be considerably worse than UA/CO and DL/NW. As an elite flier on both UA and DL, I am well aware that those interrogations were / are anything but smooth. US/AA would be a disaster.

  42. FlyingBear said,

    @Ken

    We are still talking about D. Parker that had to bring his own security detail to tour call centers after the last merger he oversaw, right?

    Doug Parker sock puppet account is an interesting occurrence… Or, does sharing the same bathroom with him once make one an expert?

  43. Jim L said,

    Has anyone run an analysis of the US financials assuming they would have pilot and FA contracts like AA’s? US still has yet to sign contracts with two of the major unions. you can be certain AA is dong that, but I have not seen anything published. I think it will take quite a bit of shine off of US.

  44. Scott said,

    Gary- If US and AA were to announce a merger next year, would you expect the programs to also merge some time in 2013 or would it take much longer than that? I’m wondering about status accumulation from 2012 flights. I have about 50k in each program in 2012. Would this be viewed as 100k (ie EXP) in a combined program in 2013? Thx

  45. Gary said,

    @Scott if I had to guess the rough average time to merge programs is about a year. If they announced the merger in January I could conceivably see them fast tracking the merging of the programs for January 2014. More likely I think is interim steps where each airline begins recognizing status on the other after a few months, and an option to move miles back and forth between the two.

  46. Scott said,

    Got it. Thanks Gary- so not really worth putting any focus on 2012 tallies on a combined basis. Maybe 2013, but not likely 2012….

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