COULD AMERICAN BAIL ON THE MERGER?
By Joe Brancatelli
September 4, 2013 --The future of the U.S. commercial aviation system will be decided on November 25, the trial date a Washington district court judge set as the beginning of the Justice Department's attempt to squash the $12 billion merger of American Airlines and US Airways.
Unless, of course, it's not.
The two airlines and the Justice Department could negotiate an out-of-court settlement that addresses the issues the government raised in its anti-trust lawsuit. Assuming Justice is amenable, the carriers can cede an appropriate number of take-off and landing positions at Washington's Reagan National Airport, one of the nation's few "slot controlled" airports. US Airways could also agree to retain Advantage Fares, its lower-than-industry-standard prices on thousands of one-stop routes.
Or ... bankrupt American Airlines can walk away from the merger, first announced in February. The nation's third-largest airline can renounce the deal without incurring break-up fees on December 13 and go back to charting its own course out of Chapter 11 as a stand-alone carrier.
Hadn't thought of that last option? That's okay, most of the chattering classes and talking-head experts haven't, either. They are, as usual, blinded by the conventional wisdom, which is almost always wrong in the airline business.
The logic of an American Airlines opt-out is oh-so-tantalizing now, starting with the timing, something that until lately has favored US Airways chief executive Doug Parker, the driving force behind the merger and head-honcho-in-waiting.
Parker's fast-track strategy, which has his much-smaller US Airways (NYSE: LCC) reverse merging into American (OTC: AAMRQ), was originally due to culminate before the end of this month. DOJ upended that timetable when it announced its anti-trust suit last month. And Parker and his legal team went ballistic when the DOJ suggested a trial date next March.
The government's schedule "would place the merger at risk," claimed the US Airways-American response, which demanded a trial date of November 12. A trial next year "inherently puts the transaction at risk because two independent companies can be asked to stay in limbo for only so long before they need to make independent plans."
Judge Colleen Kollar-Kotelly rejected the Justice Department's timetable. But she also refused to give Parker what he wanted. She ruled last Friday that the trial would begin on November 25, the Monday before Thanksgiving. Assuming the 10- to 12-day trial that both sides contemplate, that puts the case, and any potential ruling, smack up against the December 13 deadline. If December 13 arrives and the case is still undecided, American can walk away and publicly claim that the uncertainly of prevailing in court forced it to act.
So why, you wonder, would American choose to bolt? Consider:
—American's management never wanted the merger. Until they were blindsided by Parker's private deal with its own labor unions, American's middle- and top-level managers were vehemently opposed to a combination with US Airways. They publicly suggested that Parker was delusional and privately dished him as "the ugly girl," a term first used in 2010 by then-Continental chief executive Jeff Smisek to woo United Airlines away from US Airways. Their subsequent support of the merger has been legally proper and publicly appropriate—but hardly enthusiastic or even particularly upbeat.
—American's key managers would keep working. Should American walk away from a merger, the airline's top managers keep their jobs. Most of them, including American chairman and chief executive Tom Horton, are out if Parker gets control of the two carriers. As Horton wryly noted after Parker announced his post-merger brain trust, "the new leadership team is composed mostly of leaders who have worked closely with Doug." If the merger closes, Horton himself may not even get his $20 million severance package since the U.S. government has opposed the payout in bankruptcy court.
—American is prospering in bankruptcy. After shedding a generation of high costs, burdensome debt and unfavorable union contracts, American has been flying high since it filed for Chapter 11 on November 30, 2011. It recorded its best second quarter in history and put out giddy statements after a sterling showing in July. "We are completing one of the most successful turnarounds in aviation history. We are building a strong, competitive and profitable new American poised to lead again," putative lame duck Horton crowed.
—American can go it alone. Although a stand-alone American would be smaller than United Airlines (NYSE: UAL) and Delta Air Lines (NYSE: DAL), it would also be a formidable global player. It's got a $6 billion war chest, bankruptcy-aided lower costs and hundreds of new aircraft in the pipeline. Its Miami hub dominates US-Latin America travel, its Dallas/Fort Worth hub is strong and it is competitive in New York, Chicago and Los Angeles. It and joint-venture partner British Airways dominate U.S.-U.K. routes, the world's most profitable international runs. And via the Oneworld Alliance, American has strong links with Qantas, the big dog in Australia; two strong Asian carriers (Cathay Pacific and Japan Airlines); the dominant carrier in Latin America (LAN); and access to continental European hubs via Iberia of Spain, Air Berlin and Finnair. Oneworld is also adding Qatar Airways, one of the fast-growing Gulf Coast upstarts.
—US Airways is still available. Ironically, if American bows out of the merger agreement with US Airways, it might not hurt either carrier. Politics and practicalities would require a non-merged US Airways to leave the Star Alliance, where it has always been the distinctly junior U.S. partner to United Airlines. US Airways would then land in Oneworld and probably forge a code-share and other business links with American Airlines.
Of course, you won't hear any of this from American Airlines just now. Since the merger has been approved by all of its stakeholders, American management has a fiduciary responsibility to support the combination. It is even pressing its bankruptcy court to approve its reorganization plan, which is predicated on the US Airways merger.
But watch the calendar, fellow travelers. If the merger is not a done deal by Friday, December 13, it will get awfully interesting, awfully fast. It would be Doug Parker's worst nightmare and a dream come true for those of us who believe more independent competitors is good for our lives on the road.
ABOUT JOE BRANCATELLI Joe Brancatelli is a publication consultant, which means that he helps media companies start, fix and reposition newspapers, magazines and Web sites. He's also the former executive editor of Frequent Flyer and has been a consultant to or columnist for more business-travel and leisure-travel publishing operations than he can remember. He started his career as a business journalist and created JoeSentMe in the dark days after 9/11 while he was stranded in a hotel room in San Francisco. He lives on the Hudson River in the tourist town of Cold Spring.
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