US Airways Said to Develop AMR Merger Plan to Fix Revenue Gap
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Frank Szabo
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While in the Navy (very early 70s) at NAS Cecil (outside of Jacksonville FL), Delta was about the only game in town but the saying was "one could fly to hell but would have to stop in ATL".
WorldTraveler
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Understanding what is likely to happen in the industry is not personal and it touts no one's personal agenda.... it is about recognizing that financial strength will determine the next steps for consolidation in the industry - and affect AA.
As J Kat notes, DL took the first step in this round of consolidation in the industry, did it nearly flawlessly, and has used the fruits of that merger to continue to address the strategic needs DL had -which included a larger presence in NYC.
DL's remaining strategic needs include greater access to LHR, a larger presence in Latin America including from the key MIA gateway, and a stronger west coast presence.
DL will focus on addressing those strategic needs - but they will also defend what they have right now, including DL's position on the east coast.
But make no mistake that DL's strategic goals also include ensuring that US does not join the list of the big three and in reality both DL and UA's interests are best served by keeping AA and US separate and weak.
Thus, DL will do what it has to do to keep US particularly from increasing its size on the east coast and in the industry overall. Nothing personal but just corporate positioning.
I'll go on record as saying that unless US decides to bid on AA/AMR, DL has no interest in doing anything with AA. DL's best interests are if AA remains independent (which is still the most likely option) or if it seeks a non-US airline equity partner such as BA or TPG.
DL can accomplish its strategic objectives w/o touching AA but I will bet that DL will keep the threat of an AA acquisition on the table until it is apparent that AA will successfully restructure on its own - and then will go after AS.
And there really are not the antitrust issues between AA and DL that some would like to make them out to be... NYC is the primary issue and DL can selectively spin off whatever needs to be removed to create antitrust problems. AA and US have just as serious overlap issues at DCA; in fact, an AA-US merger might require that the combined airline operate at DCA solely with the amount of slots US current has.
UA clearly is preoccupied with its own current merger and has more overlap than DL so is happy to let DL fight the strategic battles - which help UA as well.
But it also comes down to the fact that DL has a finished merger, the financial strength, and the intitiative to fix its strategic necessities while preserving and protecting what it currently has which makes any potential US bid for AA alot less likely than Parker and co. would like to believe.... as FWAAA notes, US has yet to pull off a merger with a big 3 carrier.
As J Kat notes, DL took the first step in this round of consolidation in the industry, did it nearly flawlessly, and has used the fruits of that merger to continue to address the strategic needs DL had -which included a larger presence in NYC.
DL's remaining strategic needs include greater access to LHR, a larger presence in Latin America including from the key MIA gateway, and a stronger west coast presence.
DL will focus on addressing those strategic needs - but they will also defend what they have right now, including DL's position on the east coast.
But make no mistake that DL's strategic goals also include ensuring that US does not join the list of the big three and in reality both DL and UA's interests are best served by keeping AA and US separate and weak.
Thus, DL will do what it has to do to keep US particularly from increasing its size on the east coast and in the industry overall. Nothing personal but just corporate positioning.
I'll go on record as saying that unless US decides to bid on AA/AMR, DL has no interest in doing anything with AA. DL's best interests are if AA remains independent (which is still the most likely option) or if it seeks a non-US airline equity partner such as BA or TPG.
DL can accomplish its strategic objectives w/o touching AA but I will bet that DL will keep the threat of an AA acquisition on the table until it is apparent that AA will successfully restructure on its own - and then will go after AS.
And there really are not the antitrust issues between AA and DL that some would like to make them out to be... NYC is the primary issue and DL can selectively spin off whatever needs to be removed to create antitrust problems. AA and US have just as serious overlap issues at DCA; in fact, an AA-US merger might require that the combined airline operate at DCA solely with the amount of slots US current has.
UA clearly is preoccupied with its own current merger and has more overlap than DL so is happy to let DL fight the strategic battles - which help UA as well.
But it also comes down to the fact that DL has a finished merger, the financial strength, and the intitiative to fix its strategic necessities while preserving and protecting what it currently has which makes any potential US bid for AA alot less likely than Parker and co. would like to believe.... as FWAAA notes, US has yet to pull off a merger with a big 3 carrier.
You may be correct if you limit your thinking to domestic routes. I doubt that the EU and the US governments would go along with just two viable worldwide alliances, and that would be the result if DL acquired AA, either whole or major pieces. I think the antitrust authorites would have a cow.
Note that I didn't mention the Japanese; my experience in advising and helping form US-Japan corporate joint ventures is that antitrust principles get lip service in Japan merely to appease the US. Japanese care about antitrust as much as China and Viet Nam care about piracy of music and movies. Recall that Japan insisted that the USA-Japan Open-Skies treaty be conditioned upon JAL and ANA receiving antitrust immunity with their USA partner airlines. The US and the EU would never make such an outlandish demand before approving an Open Skies treaty.
Sure, there may be little domestic overlap that would cause antitrust problems in a hypothetical DL-AA combination, but that would not be the concern. The EU doesn't care about competition in the USA domestic market, but they care a lot about competition across the Atlantic. And I'm fairly certain that the EU and the USA would not bless with antitrust immunity a system consisting of just two alliances.
eolesen
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Agree with a lot of what was said in last two posts by WT and FWAAA.
And let's not forget that this isn't just a matter of US or DL. I wouldn't expect a deal with AS to come from AA, but there are two or three other combinations that could be just as interesting --
AA+WN, while far out there, would have zero issues for the EU to consider.
AA+B6 has already been punted here, and a variation on that theme would be AA+B6+VA (some people forget that several of VA's top management team came from AA). Again, no EU issues, and not a whole lot of competition issues.
On the WN earnings call, Gary Kelly didn't get asked directly about doing a deal with AA, but he was indirectly, and his answer doesn't exactly rule anything out:
And let's not forget that this isn't just a matter of US or DL. I wouldn't expect a deal with AS to come from AA, but there are two or three other combinations that could be just as interesting --
AA+WN, while far out there, would have zero issues for the EU to consider.
AA+B6 has already been punted here, and a variation on that theme would be AA+B6+VA (some people forget that several of VA's top management team came from AA). Again, no EU issues, and not a whole lot of competition issues.
On the WN earnings call, Gary Kelly didn't get asked directly about doing a deal with AA, but he was indirectly, and his answer doesn't exactly rule anything out:
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Not to mention that Delta went through BK, averted a hostile takeover by USeless, merged successfully, and is still a leader in the industry. Aside from unions
Delta has it more together than the rest.
BoeingBoy
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Not having so many unions sure made it easier, since the only big issue was the FA's - the pilots learned from US...Aside from unions
Plus being the first big merger post-bankruptcies didn't hurt. They got the merger done with and got busy doing what needed to be done before the other legacies. UA is in the midst of merger-related expenses while DL has that mostly behind them.
I'll admit it is funny how WT, in his latest post on AA's future in the AA forum, mentions DL 16 times but AA only 12 (and 4 of those are in the context of an AA/US merger that DL will prevent from happening). Plus glosses over the problems that DL would have getting regulatory approval for a merger with AA while making it sound like AA has no chance with anyone else.
Jim
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AA's best and most likely outcome - and in my opinion best for the overall industry - is to restructure independently and emerge as a standalone carrier. Everyone else - make no mistake - wants to get out of AA - or block someone else via AA - from accomplishing what they want.
Despite AA being last in line to restructure and facing obstacles that they will have to face as being the only carrier in BK, AA deserves the right to restructure on its own - and I have repeatedly said that.
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That said, justice doesn't always hold true when financial interests are at stake. It still remains that AA's future will not be determined by what makes the best sense strategically or what foreign governments might like but by which proposal returns the greatest value to AA's creditors; everything AA does until it emerges is for the intent of maximizing recovery for the creditors.
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Given that employees will undoubtedly and unfortunately pay a huge price in AA's restructuring, some of the largest claims might be by employees - who will be much more disposed to remaining independent than getting involved in a messy merger and in the case of their unions, running the risk of losing representation, whether by DL or in elections necessitated by mergers with other carriers.
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The idea of 3 alliances comes from the 3 US and 3 EU megacarriers - but no other region of the world has 3 comparable competitors... therefore, I don't think at all that alliances will be a factor other than that some of the oneworld carriers might decide to pony up hard cash to help AA if need be - and that would be the least toxic proposal to AA employees and AA's ability to continue to operate on a standalone basis. The issue will be market dominance and the only international region where would be an issue is Japan - and DL could easily solve the problem by divesting all of AA's landing slots - which DL could easily replace with newly available slots if it chose to do so. AA and DL - as with AA and US - have very different transatlantic networks.
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WN makes an interesting case but there is still the legal issue that WN cannot operate out of DFW... there are regulatory issues involving any combination of the large carriers. Like DL, I suspect WN is really only interested in any asset divestitures, most likely slots in the NE.
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Mergers involving more than one carrier or multiple entities that would become equity partners are highly unlikely.
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Further, the reality is that successful low fare carriers know what they do - and they don't do widebody and longhaul service - and taking on a business model like AA's is highly unlikely. If AA becomes the surviving airline, it is possible they could merge with a low fare carrier - but AA is not in the position to be picking merger partners.
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While AA's future will influence the shape of the US industry, what happens with AA will not be the last strategic move anyone can make... it is still possible that US could pull together a merger with someone else and become the US anchor for one of the alliances.
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Finally, it is worth noting the market caps and stock performance for the industry now that all of the carriers have reported.
LCC has had one of the strongest stock increases since the beginning of the year - but LCC is still 1/7 the size of UAL, DAL, or LUV... they simply are not in the same league and that will be a factor should they choose to compete for AA - and I suspect their statements are an acknowledgement of that fact.
DAL has been second strongest performing of the big 4 listed airlines and DL has now managed to put over a billion dollars of market cap distance between itself and LUV and UAL.
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What is clear is that the industry is stabilizing and AA is the exception in not reporting profits... that is exactly what restructuring is supposed to fix... and only if AMR/AA fails to restructure does everyone else get a shot at them.
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Still doesn't mean that a number of other strategic moves won't take place around AA that could make it more difficult - such as mergers/asset acquisitions/or deepened JVs involving key AA competitors... but AA's best strategic outcome will very likely be in AA's hands, not those of its competitors.
Despite AA being last in line to restructure and facing obstacles that they will have to face as being the only carrier in BK, AA deserves the right to restructure on its own - and I have repeatedly said that.
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That said, justice doesn't always hold true when financial interests are at stake. It still remains that AA's future will not be determined by what makes the best sense strategically or what foreign governments might like but by which proposal returns the greatest value to AA's creditors; everything AA does until it emerges is for the intent of maximizing recovery for the creditors.
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Given that employees will undoubtedly and unfortunately pay a huge price in AA's restructuring, some of the largest claims might be by employees - who will be much more disposed to remaining independent than getting involved in a messy merger and in the case of their unions, running the risk of losing representation, whether by DL or in elections necessitated by mergers with other carriers.
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The idea of 3 alliances comes from the 3 US and 3 EU megacarriers - but no other region of the world has 3 comparable competitors... therefore, I don't think at all that alliances will be a factor other than that some of the oneworld carriers might decide to pony up hard cash to help AA if need be - and that would be the least toxic proposal to AA employees and AA's ability to continue to operate on a standalone basis. The issue will be market dominance and the only international region where would be an issue is Japan - and DL could easily solve the problem by divesting all of AA's landing slots - which DL could easily replace with newly available slots if it chose to do so. AA and DL - as with AA and US - have very different transatlantic networks.
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WN makes an interesting case but there is still the legal issue that WN cannot operate out of DFW... there are regulatory issues involving any combination of the large carriers. Like DL, I suspect WN is really only interested in any asset divestitures, most likely slots in the NE.
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Mergers involving more than one carrier or multiple entities that would become equity partners are highly unlikely.
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Further, the reality is that successful low fare carriers know what they do - and they don't do widebody and longhaul service - and taking on a business model like AA's is highly unlikely. If AA becomes the surviving airline, it is possible they could merge with a low fare carrier - but AA is not in the position to be picking merger partners.
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While AA's future will influence the shape of the US industry, what happens with AA will not be the last strategic move anyone can make... it is still possible that US could pull together a merger with someone else and become the US anchor for one of the alliances.
.
Finally, it is worth noting the market caps and stock performance for the industry now that all of the carriers have reported.
LCC has had one of the strongest stock increases since the beginning of the year - but LCC is still 1/7 the size of UAL, DAL, or LUV... they simply are not in the same league and that will be a factor should they choose to compete for AA - and I suspect their statements are an acknowledgement of that fact.
DAL has been second strongest performing of the big 4 listed airlines and DL has now managed to put over a billion dollars of market cap distance between itself and LUV and UAL.
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What is clear is that the industry is stabilizing and AA is the exception in not reporting profits... that is exactly what restructuring is supposed to fix... and only if AMR/AA fails to restructure does everyone else get a shot at them.
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Still doesn't mean that a number of other strategic moves won't take place around AA that could make it more difficult - such as mergers/asset acquisitions/or deepened JVs involving key AA competitors... but AA's best strategic outcome will very likely be in AA's hands, not those of its competitors.
BoeingBoy
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I assume you've not been through a bankruptcy before. The above sounds good on paper but that's the only place. Decisions will be made on forecasts since that's all there is. If AA convinces the creditors that it's POR will be better for them than other's, the creditors will support AA. If someone else does a better job of convincing the creditors, guess who will get the support. Also keep in mind that the creditors aren't a monolithic block. From unions to banks to small vendors, each will make their own judgement of what's best for them.
Plus, if you think the foreign regulators don't have to power to stop/impose conditions on any merger that affects Europe (and it's large carriers) you're severely ill-informed. Foreign regulators could have a large influence on any merger attempt and thus on the creditor's decision.
Couldn't go a post about AA without throwing kudos to DL...
And you were doing so good for a few paragraphs...Like I said, DL has the advantage of being the first big merger completed for all intents and purposes. US did well in 2006/2007 too. Let the dust settle, UA/CO complete their merger and AA exit bankruptcy and complete whatever is going to happen, then we'll see how the comps look. Until the big 3 or 4 (or whatever it turns out to be) are on equal terms the comps don't mean much.
Jim
WorldTraveler
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forecasts are made based on actual historical data... on that basis, it is certainly possible to show that one party has a stronger potential to deliver returns than another.
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Your point is valid in that not all carriers are at the same point - but it is precisely that inequality that one carrier can use as a competitive advantage.
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The reason why I speak out so strongly in comparing US and DL is because they are the closest match in terms of time since merger... yet US still does not deliver comparable levels of profitability.
Of the 3 solvent network carriers, US' operating margin for 2011 was the lowest at 3.2%... DL was 2.5X better. It isn't a question of my cheerleading - it is a basic fact that despite US employees being paid far less than their network carrier peers, US still doesn't deliver profitability on par with its peers... those are the questions that analysts are gong to ask in any merger proposal.
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I am fully aware that regulators in all countries can block mergers but mere size is far less proven as an obstacle compared to market concentration.... on that basis, AA's European network is heavily built on the UK while DL and US are far stronger in continental Europe.
And even with the AA-BA JV (which is a revenue merger), the requirement was to diverse slots to allow market access... most of the continental Europe airports have plenty of int'l slots available -as does Japan.
We can argue about the details, but I still don't believe that DL will ultimately go after AA - but will hold the option out there as long as US expresses any interest. In the absence of a DL bid for AA, DL will work on the strategic imperatives DL has - all of which can be done for a whole lot less than a costly and potentially messy merger with AA.
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BTW, 3rd quarter DOT stats are out and they consistently support DL execs comments on their conference call that DL is advancing nicely in key AA competitive markets which DL has added recently. Based on that reality, there is little need for DL to engage in a merger when it can get its share of the market - at comparable fares - without a merger.
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Your point is valid in that not all carriers are at the same point - but it is precisely that inequality that one carrier can use as a competitive advantage.
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The reason why I speak out so strongly in comparing US and DL is because they are the closest match in terms of time since merger... yet US still does not deliver comparable levels of profitability.
Of the 3 solvent network carriers, US' operating margin for 2011 was the lowest at 3.2%... DL was 2.5X better. It isn't a question of my cheerleading - it is a basic fact that despite US employees being paid far less than their network carrier peers, US still doesn't deliver profitability on par with its peers... those are the questions that analysts are gong to ask in any merger proposal.
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I am fully aware that regulators in all countries can block mergers but mere size is far less proven as an obstacle compared to market concentration.... on that basis, AA's European network is heavily built on the UK while DL and US are far stronger in continental Europe.
And even with the AA-BA JV (which is a revenue merger), the requirement was to diverse slots to allow market access... most of the continental Europe airports have plenty of int'l slots available -as does Japan.
We can argue about the details, but I still don't believe that DL will ultimately go after AA - but will hold the option out there as long as US expresses any interest. In the absence of a DL bid for AA, DL will work on the strategic imperatives DL has - all of which can be done for a whole lot less than a costly and potentially messy merger with AA.
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BTW, 3rd quarter DOT stats are out and they consistently support DL execs comments on their conference call that DL is advancing nicely in key AA competitive markets which DL has added recently. Based on that reality, there is little need for DL to engage in a merger when it can get its share of the market - at comparable fares - without a merger.
BoeingBoy
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And how much historical data is there on AA post-bankruptcy? A number very close to zero comes to mind...
Only as long as that competitive advantage lasts. After that a carrier doesn't get have competitors with bigger integration costs, in bankruptcy, etc.
Jim
WorldTraveler
Corn Field
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There doesn't have to be data on every possible scenario to be able to forecast every event. What happened in an event similar to what might occur is valid data.
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Of course, US wants to pretend that what will happen with AA has never been seen in the industry before but DL will be able to show that how it handled the NW merger is highly predictive of how it used a former competitor's assets to enhance the combined two. The Western merger before was executed pretty flawlessly as well. The simple fact is that DL has a very strong record of making mergers and acquisitions work and adapting to the market in an industry where mergers and acquisitions have a pretty low long-term success ratio.
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It is precisely the job of a well-run company to KEEP the competitive advantage obtained from whatever action for the long haul. It is precisely because so many airline mergers are poorly executed that the competitive advantage is lost.
Remember that US/HP was based on becoming a LCC and they went so far as to stake their identity on it?... yet other full-service network carriers have lower costs and LCC has not become cost competitive with any true LCC.
It is precisely LCC's failure to achieve what it said it would do while others have that will be a factor in weighing any of their bids.
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Of course, US wants to pretend that what will happen with AA has never been seen in the industry before but DL will be able to show that how it handled the NW merger is highly predictive of how it used a former competitor's assets to enhance the combined two. The Western merger before was executed pretty flawlessly as well. The simple fact is that DL has a very strong record of making mergers and acquisitions work and adapting to the market in an industry where mergers and acquisitions have a pretty low long-term success ratio.
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It is precisely the job of a well-run company to KEEP the competitive advantage obtained from whatever action for the long haul. It is precisely because so many airline mergers are poorly executed that the competitive advantage is lost.
Remember that US/HP was based on becoming a LCC and they went so far as to stake their identity on it?... yet other full-service network carriers have lower costs and LCC has not become cost competitive with any true LCC.
It is precisely LCC's failure to achieve what it said it would do while others have that will be a factor in weighing any of their bids.
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