Why Does Parker Get to Run the Show at a Combined US Airways/American Airlines?

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):

  1. Because US Airways is really acquiring AA even though AA is the more valuable entity.
  2. 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).
  3. 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.

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 InsideFlyer.com, 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. Maybe, they will eliminate meals on sub 3.5 hours flight and go a la US Airways serving plastic cups in F.

    The merger while good for a few, is bad for the industry as whole from a customer standpoint.

    EXP can expect to no longer see 90+% complimentary upgrades in maybe 2 years. Gutting of eVIPs. Watered down AAdvantage program [I give it until 2014 for you to hear the announcement and the diluted program to go into effect in 2015].

  2. I am relatively new to this ‘game’…

    Can you point me to a good overview of the DL / NW merger? DL is looking great right now (well, except for SkyPesos), but how did the merger go from merger date until now?

    I am a UA elite, so know how that merger has been going.

    Thanks Gary,

  3. CEO bullies who make threats usually get their way. They say the cream rises to the top. In this case its the crap that rises to the top.

  4. I am having a hard time believing PHX will be dehubbed. AA is very weak on the west coast and their LAX hub domestic feeder traffic is laughable or almost non-existent. US is a lot stronger than AA on the west coast thanks to their PHX hub. I will perceive PHX similarly as DEN is for UA. Dominantly a domestic hub and leaves the other hubs to focus on international connections.

    LAX has little to no room to grow for AA.

  5. Does anyone know the approximate number of US elites versus AA elites? I figure AA has way more. I hope Parker will decide to P-O the fewest number by leaving AAdvantage alone as much as possible.

  6. Everyone who has ever doubted the management abilities of Doug Parker (and his perhaps even more brilliant sidekick, President Scott Kirby) has looked like a fool. Parker started as CEO of America West a couple weeks before 9/11 and inherited an airline that was flat broke shortly thereafter when the banks pulled the necessary financing due to the attack. Since then, Parker has pulled off one brilliant move after another (with the occasional setback, like the acquisition of Delta, which was thwarted by creditors not acting in their best financial interests). He’s taken virtually useless assets and made lots of money from them.

    Anyone who doesn’t think he’ll make money with AA’s assets — by far the best stuff he’s ever had to manage — doesn’t know anything about Parker.

  7. I’m a loyal AA flyer but sure am glad I’m not Dallas based anymore. I’ve geard from many people that dehubbing dfw down to just cornerstone cities is a done deal. That will not be fun.

  8. I’ve never understood the LAX/PHX hub duplication issue. AA at LAX has a few transcons (JFK/IAD/YYZ) and a good international routes, and then a huge Eagle base, which I have to guess is mostly feeder routes for the Int’l market. I don’t see too many people using LAX as a domestic transfer point – that’s what DFW and ORD are for. US has no international routes from PHX, it’s all domestic connections. These two hubs could co-exist without too much trouble.

    As a Reno-based EXP, this gets me a couple of additional PHX flights a day in addition to the DFW/ORD/LAX flights that I already get on AA. Hardly a big deal. I do hope the partnership with Alaska survives, as that’s my go-to airline in the west and has decent RNO service to SJC and SEA.

  9. Why is Dougie running things? It’s simple: 1)AA’s unions have an irrational hatred for current AA management, and Dougie’s used this to bribe them with contract promises that he won’t be able to keep in the long run. 2) AA’s creditors, and the aforementioned unions, are only seeing the short term benefits of letting Dougie run things (short term profits) and not seeing the long range challenges (US/AW merger still not done, etc).

  10. Not to make Doug out as a great American hero, but he’s probably the most qualified to run the integration:
    • US Air is profitable
    • Current experience running two airlines (US Air & Amer West under separate labor contracts)
    • Doug is an AA alumni from more glorious days

    And of course as Gary said, if Doug isn’t running it, then the merger isn’t happening and the merger is in the best financial interest of the bondholders.

  11. The fact is that the most profitable airlines – Delta and US Airways, have the most bogus mileage redemption and elite benefits. Plus add in the jetblues and Southwests of the world that have basically no elite benefits and poor mileage redemption.

    On the the flip side, the two worst performing airlines – United and AMR, offer the best mileage programs and best elite benefits. Yet both these airlines lost money this year.

    i think its pretty evident that these days, you can gut your elite programs and mileage programs and you’ll make money. What reason is there for Parker to maintain the current service levels of AAdvantage? I’m afraid the historic program will be watered down to something shitty within a few years.

  12. It’s simple. It’s better to be the buyer than the bought.

    Next will be the speeches about how US isn’t just buying the routes, equipment etc but they are getting great people at AA. Next will come shut downs and layoffs. We’ve seen the effects of these types of mergers in STL. I think we are down to 4 AA gates from a once hub city at TWA.

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