American Airlines' woes could be factor in merger talks

Analyst: It depends on American’s moves, and how US Airways pitches the deal

Philadelphia InquirerOctober 12, 2012 

Do American Airlines’ recent troubles – loose seats, flight delays, increased maintenance reports and pilot sick calls – help or hurt a potential merger with US Airways Group, which has publicly promoted a combination with bankrupt American?

Many industry observers think a merger is likely, but whether it happens during bankruptcy reorganization or after – and who will run the merged airline – are the issues. US Airways wants it to happen before American exits bankruptcy, under a scenario that would have US Airways CEO Doug Parker and his team take the helm of the new American, which would rival United and Delta as one of the world’s largest carriers.

American CEO Tom Horton prefers to keep the company independent after bankruptcy, and then consider possible combinations. American has about 300 workers at Raleigh-Durham International Airport. The company’s biggest presence in the Triangle is a call center in Cary, where it employs more than 1,000 nonunion workers.

As American pilots resumed negotiations last week to try to hammer out a labor accord with management, the union representing the 10,000 pilots reiterated strong support for a merger with US Airways – with a new management led by Parker.

The 55,000 pilots, flight attendants, mechanics and ground workers “have stated loud and clear, ‘We want new leadership here at American,’ ” said Tom Hoban, spokesman for the Allied Pilots Association. All three major unions have signed conditional contracts with US Airways, should a merger occur.

American pilots overwhelmingly rejected management’s concessionary contract in August, which triggered the airline’s unilateral imposition of new employment terms, with approval of the bankruptcy court.

Workers at American have pent-up anger going back to 2003, when the carrier narrowly averted bankruptcy and extracted nearly $2 billion in annual employee concessions, said Hoban. “I lost 50 percent of my paycheck in 2003,” said the airline captain.

Pilot: ‘Size matters’

American’s unions believe a merger with US Airways would give the airline the heft to compete. Recent mergers of Northwest-Delta and United-Continental have left American “a distant third,” Hoban said.

“Corporate fliers, which make up your bread and butter, want a carrier that offers them the most options and bigger is better. Size matters,” he said.

Whether US Airways acquires American, or American acquires US Airways – or whether a transaction happens at all – “depends on how American proceeds, and what happens when US Airways makes its pitch to the unsecured creditors committee,” said Jeffrey Kauffman, analyst with Sterne Agee in New York.

On Aug. 31, US Airways signed a nondisclosure agreement to exchange confidential financial information with American.

Latest travel data awaited

Whether American’s woes have caused travelers not to fly the airline won’t be publicly known until October passenger traffic data are released, since most people book ahead. In the second half of September, 41 percent of American flights arrived late, and there were 1,391 cancellations, according to FlightStats.com.

Recently, seats came loose on some Boeing 757s, causing American to cancel 50 flights and pull 48 planes from service temporarily to repair a locking mechanism.

“I don’t think people are worried about safety, per se. I think it’s more: Is the flight going to be canceled?” said airline analyst Bob McAdoo with Imperial Capital LLC.

If American executives cannot get the cooperation and confidence of their own employees, that may send a signal to the creditors committee that different people should be running the place, McAdoo said.

The economics of a combined American-US Airways are “very strong,” said Kauffman, the airline analyst.

From a revenue and traffic perspective, a merged airline would be on par with Delta and United. “There is a synergy. US Airways serves a lot of small towns in the eastern half of the U.S. that American does not,” he said. Connecting some of those fliers through American’s main hubs would better fill American’s planes.

Staff writer David Bracken contributed.

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