A US Airways & American Airlines Tie Up … revisited

Following the mergers of Northwest Airlines and Delta Air Lines followed by Continental Airlines and United Airlines talk of further airline consolidation was rampant. Discussions of ‘the next’ merger was frequently fueled by US Airways’ CEO Doug Parker, with the logical tie up being a US Airways and American Airlines merger.

 

Now, as American Airlines enters into Chapter 11 Bankruptcy Protection the talk of a US Airways – American Airlines merger has once again surfaced. Much like when Flying With Fish addressed a mash up, and it would be a mash up, of the two airlines back in May 2010, the benefits of the two airlines merging remain minimal.

 

The obvious place to start when looking at an airline merger is routes, an area in which very little benefit exists by merging US Airways and American Airlines.  Both airlines have extensive overlapping mainline and regional service throughout North America; both airlines are strong with service to Europe, overlapping in many destinations, each with extensive code-share networks in Europe; both airlines overlap in the Caribbean, with American Airlines having a larger presence; American Airlines offers stronger service to South America; American Airlines offers service to Beijing, Shanghai, Tokyo and Delhi where US Airways offers service to Tel Aviv.

 

Combined, both airlines would offer travelers direct access to four continents, where as their primary competitors, Delta Air Lines and United Airlines, offer passengers direct access to six continents. A combined airline should open up the world to compete with the primary competitors rather than stay penned into the current route limitations of both airlines.

 

As a combined airline labour is a huge issue. American Airlines has a rough relationship with its labour and the labour situation internally at US Airways is as peaceful as a firefight in the streets of Mogadishu, with the ‘east’ and ‘west’ still not being integrated … six years after US Airways merged with America West. Merging these two airlines’ would be the pairing of two of the most discontent labour-management situations in the industry, potentially creating a four-way brawl, the likes of which have not been seen before.

 

In terms of fleet there is not much compatibility at this time for one very significant reason … American Airlines does not own the vast majority of its fleet. To squeeze every cent of liquidity out of American Airlines, AMR leveraged its fleet, with its aircraft financed through operating leases, publicly issued secured debt instruments, capital leases and private bank mortgages. While American Airlines has a substantial fleet its lack of ownership brings nothing to the table should a merger occur.

 

Of course a huge factor is airline alliances. US Airways is a member of Star Alliance, along with United Airlines in the United States, where as American Airlines is in OneWorld, with no alliance partner in the United States. Star Alliance is significantly larger than One World, however American Airlines is a joint venture with British Airways and Iberia for transatlantic traffic.

 

 

While American Airlines is in Chapter 11, and reorganizing, US Airways could approach its creditors and make a bid for the carrier. Should American Airlines’ creditors feel that US Airways’ offer to take over American Airlines is in their financial best interest there would be no need to merge the two airlines, it would be a flat out corporate takeover. US Airways buying out American Airlines would allow for carrier consolidation while allowing US Airways to dispose of American Airlines’ assets and personnel in virtually any manner it saw fit to ensure maximum profitability and return-on-investment was achieved.

 

With shares in AMR, American Airlines’ parent company, trading at just US$0.37 per share this morning an investor would need to sell off approximately 17.62 shares just to purchase a Big Mac Value Meal at McDonalds. With shares being sold for pennies, the potential for American Airlines to be taken over rather than merged is substantial.

 

US Airways, love them or hate them, has a capable management team that has successfully navigated its airline out of bankruptcy, managed to keep an airline operating smoothly despite merging two incompatible corporate cultures and turns a profit despite volatile labour relations and the perception of a lower customer service standard when compared to its competitors.

 

Should US Airways be able to take over American Airlines, US Airways would hold all the cards when it came to hiring, firing or retaining American Airlines’ roughly 10,000 pilots, as well as the rest of its employees. The reduction in financial liability due to not being required to honor old contracts and union agreements, if negotiated in to the purchase, would be a boon for US Airways.

 

American Airlines’ lack of ownership of its current fleet is an advantage to US Airways in a takeover. US Airways would have the ability to retain the aircraft it wanted to expand its route network and grow, while instantly shedding incompatible or inefficient aircraft by opting to not making them part of the purchase.  Leaving certain aircraft out of the purchase would allow US Airways to not pay for these aircraft’s leases, loans or storage saving the carriers millions upon millions of dollars.  This strategy would give US Airways access to a substantial international fleet without waiting for aircraft or assuming the financial liability of unprofitable aircraft.

 

American Airlines offers something else that US Airways wants … high value slots at multiple airports.  Slots would provide US Airways with not only access, but revenue as well for those it chooses to sell or lease … and slots at airports such as London’s Heathrow Airport earn money even if not used.

 

Do I foresee US Airways taking over American Airlines?  With Doug Parker at the helm of US Airways anything is possible … and keep in mind Parker was American Airlines’ from 1986 to 1991.

 

Happy Flying!

 

@flyingwithfish