FlyUs
Veteran
- Jul 28, 2004
- 610
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The one the company gives to them
AA and US merger?
- Thread starter LUVJAMESC4EVER
- Start date
BoeingBoy
Veteran
- Nov 9, 2003
- 16,512
- 5,865
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- #167
All employees have a contract. It may be by agreement between the union representing the employees and the company, it may be by agreement of the individual employee and the company, orit may be only only verbal - "Hey kid, I'll pay you $20 to mow my lawn" ... "Gee mister, that's swell" is a contract.
Jim
Flying low
Veteran
- Jul 19, 2011
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If AA/US merger is a bad idea, why does everyone recommend it?
http://seekingalpha.com/article/311736-american-airlines-bankruptcy-the-endgame-solution?source=yahoo
http://seekingalpha.com/article/311736-american-airlines-bankruptcy-the-endgame-solution?source=yahoo
BoeingBoy
Veteran
- Nov 9, 2003
- 16,512
- 5,865
- Banned
- #169
Because AA is the last of the "Big X" (insert number 3,4,5,6) that hasn't merged with anybody and US is the next in size. Putting them together supposedly gives the merged carrier the size to be able to compete with DL and UA. But this isn't boxing where a welterweight has little chance against a heavyweight. But if a carrier offers a decent product it can be successful as long as it's costs aren't out of line, almost no matter what it's size.
Jim
Jim
WorldTraveler
Corn Field
- Dec 5, 2003
- 21,709
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Probably not….
According to the most recent quarterly filings, AA’s non-fuel costs were 32% higher than B6’s. The chance of being able to reduce costs 32% by the time it emerges from BK is slim to impossible without a significant change in the business model. If AA guts its employee costs and contracts out most of its maintenance on top of replacing the vast majority of its fleet, it is conceivable to reduce its costs 30% relative to today within 3-5 years. But in order to do that, AA’s debt levels will go through the roof – and that is the real concern long-term. It is possible to reduce costs low enough but that comes at a high price to the balance sheet. I don’t believe the creditors will allow AA to take on that much debt when it could pass its network competitors with a smaller 20% cut in costs – which probably does not require replacing 450 aircraft, but probably closer to 250.
Note that AA’s costs per ASM ex-fuel are presently about 18% higher than DL’s but only about 10% higher than UA’s and a bit more than US. Note than DL’s CASM is lower than WN’s so even if AA reaches DL’s CASM, it would have lower CASM’s than both traditional archrival UA as well as WN which will be attempting to gain the Dallas/Ft. Worth as the Wright Amendment ends.
AA 9.05
DL 7.35
UA 8.15
US 8.06
WN 7.5
B6 6.43
There is no reason for AA to attempt to bring costs down to B6’s level, and B6’s costs will go up as its workforce ages, in the same way that has happened with WN.
The whole notion that AA would merge with US is also highly unlikely when you consider that in order to bring costs down to DL’s levels – and AA cannot afford to come out of BK w/ a CASM higher than any of its nationwide competitors – DL, UA, or WN – AA would be merging with a carrier that has a HIGHER CASM – not exactly a smart decision after all the efforts it will take to get AA’s costs down.
Even considering DL’s longer haul network, US’ costs are more than 5% higher than DL’s – which is also why notions that US can succeed in a market share contest against DL are erroneous.
While some here think that my faith in DL is overzealous, you need only look at DL’s CASM relative to the industry to realize why DL has been able to defend its markets and gain market share from so many competitors.
AA has to be at least in a position to match the CASM of its lowest big 3 competitor.
.
As to the question of which carrier – US or B6 adds more strategic value to AA, the real question will be what the competitive situation looks like when AA emerges and what other carriers have done strategically during AA’s BK.
Let’s not forget that DL has for all practical purposes finished its merger with NW while UA and WN will be working through theirs for at least the next six months or more on labor and network integration and probably a lot longer than that. DL’s strategic aggressiveness over the past 5 years and its relatively strong financials leave it positioned to fix whatever it feels it needs to do strategically and those moves in all likelihood will be focused on AA and US much more so than UA – and the highest likelihood of actions will focus on LHR or Latin America. There are strategically important international markets in which either DL or UA could acquire carriers or implement strategic initiatives that would make it very difficult for AA to succeed in whatever plans it might implement.
If B6 were so certain they would merge with AA, they would likely not have spent $70 on slots at LGA and DCA, where AA will still hold significant slot holdings.
AS and VX are both still AA competitors and have growth plans that could intersect w/ cuts AA will have to make or add service in markets where AA has strength.
WN and UA are certainly not going to sit still competitively even during their merger integration.
.
The bottom line is that it is impossible to predict what will have competitively in the next 18 months when AA will have limited ability to respond but when it will still have a high degree of control over its destiny.
.
Predicting that US will acquire AA is full of reasons why it makes no sense – and CASM relative to the industry is yet one more.
.
We can all speculate for 18 months what will happen but I will go on record – and put cash on the line to say that US will not succeed in acquiring AA at least during the next 18 months – and probably for a much longer term.
I invite anyone that is so certain that US will succeed to agree to the same terms I offer: If AA is acquired during the next 18 months while it remains in BK, I will send a $25 gift card of their choice to the first 10 people who will agree to the same terms and do so by December 7, 2011.
.
Anyone who is so certain about their position should be willing to back it up.
Bet.. I will send you a gift card .
johnny kat
Senior
- Oct 11, 2011
- 343
- 330
This article makes a good point: http://us.rd.yahoo.com/finance/external/pssa/SIG=12qnc4tft/*http://seekingalpha.com/article/311736-american-airlines-bankruptcy-the-endgame-solution?source=yahoo
johnny kat
Senior
- Oct 11, 2011
- 343
- 330
THE END GAME:The airline industry’s long and winding road from deregulation to sustained profitability is not complete with the bankruptcy of American (AMR). The industry still has much more work to do before it is fit for long-term investment. In my estimation, this effort will require more uneconomic capacity pulled out of the system. American will likely reduce its domestic capacity by 10-20% as it restructures in an effort to achieve economic sustainability.
Regardless of the ugly nature of merging two suboptimal business models and different unions, American's best option is to merge with US Airways. This further consolidation will effectively move the industry's structure to one that can price the product at a level that can potentially attract and maintain shareholder support. My best guess is that US Airways will present a reorganization plan that produces a value that will exceed that which is presented by AA management if it attempts to remain independent. If AA management has the creditors' best interest in mind, it will present a plan that includes a merger with US Airways and one that brings in Doug Parker to run the new airline that emerges.
The benefits of deregulation, to the air-transportation consumer, are reflected in the $70 billion (inflation-adjusted) net losses the industry reported over the 2000-2010 period. In other words, the value produced by the industry went to the consumer (and employees), not the owners of the assets. The legacy airlines competed on price to maintain market share, which was effectively bought at a loss. This focus on market share over profits is why the industry produced 8-10% too much capacity, on average, in the industry over the last 10 years.
Legacy airline managers had to maintain market share because of the belief that shrinking would raise unit costs more than it would benefit revenues. Moreover, the changing composition of the industry, as so-called low-cost airlines made up an ever-growing share of the market, drove down average fares and unit revenues, making that perception of the cost penalty vs. unit revenue tradeoff of shrinking capacity even harder for legacy airline managers to justify. In addition to depressing unit revenues, faster-growing airlines lower [relative] unit costs and, in turn, increase the cost disadvantage of those airlines that do not grow or shrink over time. It’s a prisoners’ dilemma for the industry in game theory terms.
This change in industry composition has resulted in an industry concentration that is too low for these overleveraged and high-cost airlines to earn their capital costs. The solution has included mergers and [alliance] joint ventures that produce cost and revenue synergies that would not exist otherwise. Given the massive restructuring that has occurred since 9/11 and will continue with the bankruptcy of AA, a case can be made that the industry will, over the next 10 years, enjoy its highest level of profitability since deregulation. This is why we have recently made the case [to our fund clients] to buy the networks and several of the LCCs near their recent 52-week lows.
Many, especially airline employees, blame management incompetence for the failures of their airlines when the structure − bad industry fundamentals − is what really creates the bad economics. Hence, the structure had to change via mergers and consolidation. Even the very best CEOs could not produce profits at the big network airlines over the last two decades − outside of bankruptcy.
Against the backdrop of all of the above factors, AA and US Airways have become disadvantaged against the more profitable United (UAL) and Delta (DAL), who were able to use bankruptcies and mergers to reduce their competitive problems. As a result, they are left with too much leverage, inadaquate investment in competitive resources, and a workforce that is demoralized because it feels unfairly compensated. Unhappy employees hurt the top and bottom line of the business, resulting in a loss of market share over time as customer service quality suffers.
American risks being broken up and sold piecemeal if unions are unwilling to accept concessionary agreements that allow the airline to emerge from bankruptcy as a viable business worthy of investment. Alternatively, if the company emerges without the required cost structure, it risks a second bankruptcy at some point in the future as stronger competitors move to increase share at AA’s expense. A merger with US Airways would make American a larger, lower-cost, more appropriately leveraged airline that can profitably retain market share. Without a merger, it will emerge from bankruptcy as a much smaller, still-high-cost, and over-leveraged competitor that will continue to lose market share over time. The go-it-alone strategy risks further demoralizing employees because they will be at the bottom of the industry’s list in terms of total compensation. This resulting outcome would be a continuation of poor management and labor relationships and sets the stage for another showdown during future contract negotiations.
US Airline Pilots Association, America West pilots at US Airways, and Allied Pilot Association pilots at American are the three pilot groups that will have to deal with seniority issues that arise if there is a merger between American Airlines and US Airways. These three pilot groups, when combined, will enjoy a much higher level of total compensation via a merger between American and US Airways than would be the case if both companies remained independent. If the pilot unions, whose leadership struggles to lead effectively because they have to reflect the views of the majority of pilots who elect and direct them, could internalize a combination that creates more value for all stakeholders and the industry, they would support a plan that helps their members and the business that must be profitable if it is to support their livelihoods.
The majority of pilots and employees in general are unsophisticated by way of corporate strategy and finance and narrowly focus their leaderships' efforts on achieving leading industry wages and benefits. This myopia inhibits the creativity and out-of-the-box thinking that encompasses a more holistic approach and takes into account what the business needs to be competitive within the broader marketplace. If costs are too high, the business cannot grow, yet growth is required to survive over the longer term. If debt levels are too high, growth is not possible, because the required level of profitability cannot be attained. These descriptions fit both American and US Airways.
AA’s new Chairman and CEO, Tom Horton [and the Allied Pilot Association] should work toward an endgame solution to American’s competitive problem by developing a restructuring plan that includes a merger with US Airways. If he does not, US Airways’ Doug Parker has an opportunity to present the winning plan that solves both companies' competitive problems, and at the same time, increases industry concentration to a level necessary for it to cover capital costs over a full business cycle. It is not clear what Horton’s feelings on this subject are at this point, but a case can be made for a reorganization of American Airlines that can turbocharge future stakeholder returns if it includes a merger.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
This article is tagged with: Services, CFA charter-holders, United States
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Regardless of the ugly nature of merging two suboptimal business models and different unions, American's best option is to merge with US Airways. This further consolidation will effectively move the industry's structure to one that can price the product at a level that can potentially attract and maintain shareholder support. My best guess is that US Airways will present a reorganization plan that produces a value that will exceed that which is presented by AA management if it attempts to remain independent. If AA management has the creditors' best interest in mind, it will present a plan that includes a merger with US Airways and one that brings in Doug Parker to run the new airline that emerges.
The benefits of deregulation, to the air-transportation consumer, are reflected in the $70 billion (inflation-adjusted) net losses the industry reported over the 2000-2010 period. In other words, the value produced by the industry went to the consumer (and employees), not the owners of the assets. The legacy airlines competed on price to maintain market share, which was effectively bought at a loss. This focus on market share over profits is why the industry produced 8-10% too much capacity, on average, in the industry over the last 10 years.
Legacy airline managers had to maintain market share because of the belief that shrinking would raise unit costs more than it would benefit revenues. Moreover, the changing composition of the industry, as so-called low-cost airlines made up an ever-growing share of the market, drove down average fares and unit revenues, making that perception of the cost penalty vs. unit revenue tradeoff of shrinking capacity even harder for legacy airline managers to justify. In addition to depressing unit revenues, faster-growing airlines lower [relative] unit costs and, in turn, increase the cost disadvantage of those airlines that do not grow or shrink over time. It’s a prisoners’ dilemma for the industry in game theory terms.
This change in industry composition has resulted in an industry concentration that is too low for these overleveraged and high-cost airlines to earn their capital costs. The solution has included mergers and [alliance] joint ventures that produce cost and revenue synergies that would not exist otherwise. Given the massive restructuring that has occurred since 9/11 and will continue with the bankruptcy of AA, a case can be made that the industry will, over the next 10 years, enjoy its highest level of profitability since deregulation. This is why we have recently made the case [to our fund clients] to buy the networks and several of the LCCs near their recent 52-week lows.
Many, especially airline employees, blame management incompetence for the failures of their airlines when the structure − bad industry fundamentals − is what really creates the bad economics. Hence, the structure had to change via mergers and consolidation. Even the very best CEOs could not produce profits at the big network airlines over the last two decades − outside of bankruptcy.
Against the backdrop of all of the above factors, AA and US Airways have become disadvantaged against the more profitable United (UAL) and Delta (DAL), who were able to use bankruptcies and mergers to reduce their competitive problems. As a result, they are left with too much leverage, inadaquate investment in competitive resources, and a workforce that is demoralized because it feels unfairly compensated. Unhappy employees hurt the top and bottom line of the business, resulting in a loss of market share over time as customer service quality suffers.
American risks being broken up and sold piecemeal if unions are unwilling to accept concessionary agreements that allow the airline to emerge from bankruptcy as a viable business worthy of investment. Alternatively, if the company emerges without the required cost structure, it risks a second bankruptcy at some point in the future as stronger competitors move to increase share at AA’s expense. A merger with US Airways would make American a larger, lower-cost, more appropriately leveraged airline that can profitably retain market share. Without a merger, it will emerge from bankruptcy as a much smaller, still-high-cost, and over-leveraged competitor that will continue to lose market share over time. The go-it-alone strategy risks further demoralizing employees because they will be at the bottom of the industry’s list in terms of total compensation. This resulting outcome would be a continuation of poor management and labor relationships and sets the stage for another showdown during future contract negotiations.
US Airline Pilots Association, America West pilots at US Airways, and Allied Pilot Association pilots at American are the three pilot groups that will have to deal with seniority issues that arise if there is a merger between American Airlines and US Airways. These three pilot groups, when combined, will enjoy a much higher level of total compensation via a merger between American and US Airways than would be the case if both companies remained independent. If the pilot unions, whose leadership struggles to lead effectively because they have to reflect the views of the majority of pilots who elect and direct them, could internalize a combination that creates more value for all stakeholders and the industry, they would support a plan that helps their members and the business that must be profitable if it is to support their livelihoods.
The majority of pilots and employees in general are unsophisticated by way of corporate strategy and finance and narrowly focus their leaderships' efforts on achieving leading industry wages and benefits. This myopia inhibits the creativity and out-of-the-box thinking that encompasses a more holistic approach and takes into account what the business needs to be competitive within the broader marketplace. If costs are too high, the business cannot grow, yet growth is required to survive over the longer term. If debt levels are too high, growth is not possible, because the required level of profitability cannot be attained. These descriptions fit both American and US Airways.
AA’s new Chairman and CEO, Tom Horton [and the Allied Pilot Association] should work toward an endgame solution to American’s competitive problem by developing a restructuring plan that includes a merger with US Airways. If he does not, US Airways’ Doug Parker has an opportunity to present the winning plan that solves both companies' competitive problems, and at the same time, increases industry concentration to a level necessary for it to cover capital costs over a full business cycle. It is not clear what Horton’s feelings on this subject are at this point, but a case can be made for a reorganization of American Airlines that can turbocharge future stakeholder returns if it includes a merger.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
This article is tagged with: Services, CFA charter-holders, United States
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Isn't that the same guy that called for LCC's liquidation last year?
WT, you should be ashamed of yourself. Taking candy from a baby like that!
johnny kat
Senior
- Oct 11, 2011
- 343
- 330
Just passing this along. I think everybody needs to calm down and take a break from all the hubbubb. It doesn't hurt to rationalize a little about the possibilities. Cooler heads will prevail. From chaos comes order. Cheers
You might be right and may be why WT is so emotional and vocal about this whole thing; although he does make a few good points about CASM. However, since AA is in bankruptcy, anything can happen.
Right now AA has JFK and MIA and both are doing well to South America and the Carribean. But there still is alot of untapped market for AA between those two cities. US has CLT which is doing well for NE/SE travel and to the Carribean. It could fill the void AA has up and down the east coast. In addition to this, consider the current hub operations with strong O&D traffic in the NE: DCA, IAD, PHL, EWR, LGA, and JFK. Right now AA can only claim JFK as its hub. UA claims EWR and IAD. DL is about to claim LGA and JFK. And, US has PHL and soon DCA. An AA/US merger puts AA with a JFK/PHL operation on better competitive ground with UA's EWR/IAD operation and DL's LGA/JFK operation. In fact, I would argue AA/US would be stronger than DL and on par with UA because AA/US can run both domestic and international operations from both PHL and JFK. DL can only run international ops from JFK. Also, EWR/IAD and a potential JFK/PHL have far better reach than does JFK/LGA which is completely concentrated on the NYC market; albeit the hugest of the markets. Throw in CLT, DCA, and MIA and DL will have a real run for their money...not to mention SW in ATL.
Don't be too quick to say US brings nothing to the table. Our product is lousy. Our reputation is lousy and our employee relations are even worse than yours at AA. Any merger between AA/US will be a labor nightmare, but that's about it. It really does make strategic sense overall. Our operation combined with AA's JFK and MIA will make a powerhouse operation east of the Mississipi along with a few challenges for DL. Add to that US's market share (net some overlap) and AA now is on equal ground with UA and DL.
....And the rationale to support your pontification?
