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Is a Merger Between American Airlines and US Airways a Good Idea? Six Views

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US Airways has shown its keen interest in merging with the bankrupt American Airlines. It's even gotten the support of American's labor unions. But will a merger be good for all involved?

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MINYANVILLE ORIGINAL American Airlines (AAMRQ.PK) might have recently been crowned the airline with the best frequent flyer program, but that was about the only piece of good news in recent weeks as the ailing company continues to work out a plan to emerge from bankruptcy.

While the company has indicated that it prefers to exit Chapter 11 as an independent company, three of its biggest labor unions, including the Allied Pilots Association, or APA, came out to publicly state their support for a merger with US Airways (LCC), much to the surprise of pretty much all industry watchers.

But perhaps it should have been expected that the Allied Pilots Association, the Association of Professional Flight Attendants, and the Transport Workers Union (who together represent 55,000 employees of American) would support US Airways' hopes of a union with American. After all, while American is seeking to void labor contracts (i.e., pension plans) in court and has plans to cut annual labor costs by $1.25 billion, which would entail the loss of some 13,000 jobs, US Airways has offered relatively generous terms for union workers in exchange for their support in its merger bid.

However, is a merger between American and US Airways a good idea? And who would benefit? Such a potentially industry-changing development has, of course, garnered a lot of media attention, with opinions being put forth both in support of and against a merger. Here's a look at what some of the experts are saying.

The Bigger-Means-Better-Service View
Over at the Wall Street Journal, Scott McCartney argues that a merger is crucial because both American and US Airways will be unable to compete with the larger and more efficient Delta (DAL) and United (UAL) in the long run. He also believes that while customers might have to suffer higher prices, they will most likely also enjoy vastly improved services with a merger. Besides, he notes that fears of price increases because of a lack of competition are overblown, since it's budget airlines like Southwest (LUV), JetBlue (JBLU), Virgin America, Spirit (SAVE), and Allegiant (ALGT) that keep pricing competitive.

A combination of US Airways and American could bolster the Oneworld Alliance, make frequent-flier programs at both American and US Airways more stable bets for long-term rewards and give employees at both companies more long-term job security. It likely could help US Airways solve the seniority integration problem at its pilots union, which has been unable to internally mesh together pilots from the old US Airways with pilots from America West Airlines. Moving them to a more lucrative contract at American with a much larger seniority list could be a strong incentive to settle that mess.

All those organizational issues impact travelers. Labor battles spill over into the aircraft cabin in the form of cranky flight attendants or pilot slowdowns and sickouts. Getting flights in on time and with baggage intact - in other words, an efficient operation - is a key to customer satisfaction. And being profitable means you can afford to upgrade planes, buy new aircraft and provide better in-flight service.

Head to the Wall Street Journal to read the rest.

The This-Is-Inevitable View
Robert Herbst of AirlineFinancials.com produces an in-depth analysis of the proposed merger, and surmises that a merger is necessary for the survival of both American and US Airways. Herbst also explains how American met with its downfall. In 2007, American was the US airline industry's revenue leader, but that was prior to the mergers of Delta with Northwest and United with Continental. After the mergers occurred, American swiftly fell from the largest airline to the third largest airline in the world, and more importantly, saw its passenger fare yield premium plunge as Delta and United nabbed higher-fare business passengers away from American. An American merger with US Airways would allow the company to be competitive in the battle for higher yield passengers.

In the end, any merger of American and US Airways must provide legitimate support for a competitive and profitable airline. AirlineFinancials.com believes that can and will occur and here's why:

  • Reducing US Airways core costs to what American currently has would provide $500-$700 million in cost savings synergies. Note American's core costs are likely to go down at the other end of their bankruptcy reorganization.
  • American's current labor costs, via the bankruptcy reorganization, are likely to be reduced by $700-$800 million per annum.
  • American's capital/financial costs due to reorganization are estimated to be reduced by $300-$500 million per annum.
  • The merging of American and US Airways will be a much stronger global competitor to both United and Delta. We estimate this will provide the needed incentive to regain some premium/business revenue increasing annual revenues by 1-2% ($350-$450 million per annum).
  • Due to the older age of both American and US Airways pilot groups, pilot labor costs into the future will become 20-30% lower. Note: Over the next 5-10 years, thousands of the most senior pilots for American and US Airways will be forced to retire. They will be replaced by significantly lower cost new pilots.
  • Aircraft orders for both American and US Airways will move American from having one of the oldest most fuel/maintenance inefficient fleets to one of the youngest and most fuel efficient fleets. Fuel expense will be reduced by 10-20% as the new aircraft replace the current old fleet.
Head here for more.

The It's-a-Lose-Lose-Situation View
While most experts see synergy in the merger, Gary Leff, co-founder of the frequent flyer community MilePoint.com believes that an attempted acquisition of American by US Airways would leave both airlines severely weakened and ready to be picked off by their rivals. He points out that American's creditors, specifically Boeing (BA), will not be so supportive of a merger since American currently buys Boeing planes while US Airways uses Airbus equipment. Leff also says that in going public about their talks with US Airways, the workers' unions of American are not so much looking forward to the merger as they are trying to weaken the bargaining position of American's management.

[The unions] have an extremely powerful card to play, but that they're playing it in public rather than simply calling for a vote and petitioning the Court says that they're looking for leverage rather than to give Doug Parker a quick deal.

In the end, US Airways is bidding up American's costs, and American management could be boxed into obliging to avoid losing control of the company. Whichever group comes out on top, they're likely to overbid and wind up with an American that has higher costs than it would have otherwise had out of a bankruptcy process. Which jeopardizes the airline as a going concern. My fear in all of this is that a successful transaction could jeopardize both American and US Airways when the latter airline inherits those high costs.

See MilePoint.com for more.

The It's-in-the-Creditors'-Interests View
An American Airlines and US Airways merger is all but inevitable, argues Brett Snyder, who blogs at CrankyFlier.com, in spite of the possibility that American will go solo post-bankruptcy. Why? Firstly, American's woes are not just due to high costs, but are also caused by a lack of revenue growth, which means merely laying off workers will not solve the problem. Crucially, of the nine seats of American's creditors' committees, three are workers' unions, who have already expressed their approval of a merger, and another two, Boeing and Hewlett-Packard (HPQ), will also be in favor, Snyder asserts, so there is a clear consensus.

The unions hold 3 of the 9 seats on the creditors committee, and clearly they support this move. Boeing sits on the committee as well. With US Airways affirming the orders on the books, Boeing should be happy since it hasn't sold an airplane to US Airways in years. This creates more opportunity.

The Pension Benefit Guarantee Corporation (or PBGC) is also a member. It has been downright angry about American's plans for its pensions, so you would think that US Airways would present a better option. And then there's Hewlett-Packard. American has been working with HP on a new reservations system but nothing has come of it yet. US Airways, however, uses SHARES, a system that HP owns. You think HP will be onboard? Oh yeah.

That's plenty of votes right there. If you have the creditors committee behind you, that's huge. Of course, we haven't seen what US Airways will offer yet, but you know that if it couldn't offer something compelling, it wouldn't be putting so much effort into this.

See The Cranky Flier for the rest.

The Customers-Should-Have-a-Say View
We learned about the possible US Airways-American Airlines merger through US Airways CEO Doug Parker, who slyly reached an agreement with American's three major labor unions without the knowledge of the beleaguered company's management. On its part, American pointed out that bankruptcy court has cleared the airline to decide its own fate. Meanwhile, American's creditors' committee, including Boeing and Hewlett-Packard, probably will want to have a say in merger talks. We've heard from seemingly every player in the game, says the New York Time's Ron Lieber, but what about the customers? Lieber proposes the inclusion of a customers' committee in the discussion of what American should do.

A customers' committee would have no legal standing. Frequent-flier miles, after all, are not real currency, so members of American's AAdvantage program are not creditors in bankruptcy court. But the airline does not exist or persist without its frequent travelers, and many of the people involved in the bankruptcy conversation seem to be taking their loyalty for granted.

So a customers' committee would gather enough of those frequent fliers in a membership organization and then negotiate on their behalf, whether it's for the continuation of valued perks if Mr. Parker or one of his competitors ends up controlling the airline or for the transfer of certain privileges to Delta Air Lines or United Airlines if the customer collective decides to take its business elsewhere.

The New York Times has more.

The Labor-Unions-May-Yet-Suffer View
Even though labor unions at American have signed off on a merger with US Airways, which ostensibly means US Airways must have offered them a good deal, Cyrus Sanati of Fortune is skeptical that a merger is in the best interest of workers. Sanati questions US Airways' assertion that synergy-created savings would help save thousands of jobs. He also points out how the Arizona-based company still hasn't completed integration of employees after its merger with America West seven years ago, and how it does not have the best of relationships with its own employees, which should be a warning sign for American workers.

US Airways continues to have a contentious relationship with its own employees. Perhaps no one was more surprised by how swift US Airways was able to come to an agreement with American's unions than its own unions. US Airways pilots have been pushing for a wage increase for years and have been negotiating a new contract with management since December of 2009. The flight attendants are also negotiating with the airline as their contract ran out in November of last year.

But US Airways claims the $1.25 billion in synergies that will come out of the merger reflects an increase in pay for its employees, which would bring them in line with American employees. It also claims that it would not significantly cut routes or eliminate capacity as a result of the merger, either. So for all this to be true, US Airways must be anticipating high revenue synergies through stronger growth or fatter profit margins. Unfortunately, there is little to no evidence that merged airlines end up experiencing significantly stronger growth rates relative to the rest of the industry.

Read more here.

(See also: Bankruptcy Bounce? American Airlines' AAdvantage Voted Best Airline Frequent Flyer Program & With Consolidation of Airlines, Is Elite Status a Thing of the Past?)

Twitter: @sterlingwong
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