AA and US merger?

[FWAAA]

FWAAA,
let's see how it plays out but we still have this notion that AA is going to walk away from its leased fleet and its owned older aircraft fleet which amounts to about 200 aircraft. I just don't see the creditors allowing to walk away from that many viable assets... and remember that according to AMR's financials, the entire AE fleet is owned.... we are talking billions of dollars worth of OWNED aircraft which you and others are saying AA will walk away from, on top of the leases they are going to reject, and somehow all of these creditors are supposed to receive some sort of restitution for these losses?

I'm not talking about abandoning viable assets. I'm talking about walking away from owned MD-80s that have essentially zero value. Additionally, maybe abandoning some older 757s and 763s and forcing the creditors to renegotiate. That's what bankruptcy is all about.

You do know what happens if what creditors can expect to recover is too low - or claims are too high relative to the value of the enterprise? It can be decided that it is better off to liquidate the company and distribute the proceeds from liquidation to the creditors than it is to restructure the company. Or worse yet, the company could be worth more sold to someone else.
You just can't dump all the legacy parts of a company and expect to be able to restructure it and remain independent.

Somehow I doubt the unsecured creditors' committee will liquidate the company just because some secured creditors take haircuts on debt secured by relatively worthless collateral (like MD-80s, older 757s and older 763s), but maybe you're right. We'll see.

 

[gaucho99]

To the dozen or so posters who keep repeating that US brings nothing of value to AA as a merger partner, let me point out that you are missing the point. While this is technically true when considering the route network....(very little international exposure, no Asian routes etc.)....this is not the reason why a merger between AA and US will be considered. For example, if someone told you it was a dumb idea to offer service to Cancun Mexico in the winter because they have no ski resorts down there...you would think the guy was nuts.....obviously there is no snow skiing in Cancun, but he is missing the point...there are warm, sunny beaches, endless partying, cerveza etc. Likewise, while US does not bring a massive route structure for AA to grab on to, that is irrelevant...it is not why a merger is being considered...just as the lack of snow in Cancun is irrelivant.

A merger between AA and US is a very distinct possibility because AA is going to need to come out of bankruptcy with lower costs but will also still need to attract premium fares to become profitable. Having to compete against DL-UA and US would be a big stumbling block to their goals. US has a pretty large order of wide bodies arriving in the next few years and has already stated that South America is their target growth market. CLT-GIG has been operating for about 2 years now and CLT-GRU will start next year. With the arrival of new planes, US will most likely start CLT-EZE and maybe SCL and LIM. These added seats will have a negative impact on the yields in South America, an area AA relies on.

AA would be much better off combining with US...because a combined AA-US certainly would not need a CLT-South America operation when they have Miami. This would keep fares at a high enough level needed by AA to secure large profits. Also, US brings the north-south flights up and down the east coast....the most heavy air traffic area in the world. This would be something AA would want.

If AA emerges from bankruptcy as a solo carrier, either UA or DL will latch on to US eventually leaving AA farther behind. Doug Parker is on record as stating that US could merge with any of the 3 other legacy carriers without creating any regulatory issues that could not be worked out.

I give the chance of a merger between AA and US better than 50-50 chance and it will not be a hostile takeover. AA will see the value in the added combined revenue to remain competitive and would not like the alternative of seeing DL or UA further strengthen themselves by adding US.

 

[Toothy Grin]

mmm hmmm. You could be right. Though wouldn't it be something if DP brings the offer to the court for AA and then suddenly a bidding war erupts over US between United and Delta? Anything can happen at this point. Nothing or Everything or a little something inbetween.

Do not underestimate corporate greed and the desire to make the money now, not later.

 

[mikey60]

There will soon be fewer planes in the sky but that will have nothing to do with mergers. Sorry to say but I think this Ch 11 will be swift and painful. Despite the rhetoric about US employees hoping for a merger with AA most of us at US want nothing to do with another merger. Been there. Done that.

Good luck to all.

And dont forget that you will have to put up with underhanded, backstabbing, lying, thieves like this phx jerk.

 

[damajagua]

mmm hmmm. You could be right. Though wouldn't it be something if DP brings the offer to the court for AA and then suddenly a bidding war erupts over US between United and Delta? Anything can happen at this point. Nothing or Everything or a little something inbetween.

Do not underestimate corporate greed and the desire to make the money now, not later.

No offense but a bidding war for US. Seems a little bit of a stretch.

 

[BoeingBoy]

Somehow I doubt the unsecured creditors' committee will liquidate the company just because some secured creditors take haircuts on debt secured by relatively worthless collateral (like MD-80s, older 757s and older 763s), but maybe you're right. We'll see.

You're right, including "owned" but mortgaged assets (EETC's). Both leased and mortgaged assets have the payments (lease or interest) set based on the difference between the value of the underlying assets when the lease/loan begins and when it ends, plus a profit margin for the lessor/lender. Payments don't decrease over time as the value of the underlying asset decreases - they are fixed unlease the lease is renotiated or EETC matures and another issued. And that is why there is room to negotiate lease/EETC payments downward in bankruptcy - the current value of the older underlying assets won't support payments as high as they currently are if the lessor/EETC holder has to take possession of the asset and least it to someone new or sell it.

So despite AA's writedown of "owned" asset values over time, it is not just possible but likely that the lease payments or EETC debt payments can be lowered in BK. US did it twice within 5 years.

Jim

 

[damajagua]

APA,TWU and APFA are member of the creditors committee.

The creditors committee also would play a critical role in any potential takeover of American. US Airways Group Inc. (LCC) withdrew its $9.75 billion hostile takeover bid for bankrupt Delta Air Lines Inc. (DAL) in January 2007 after its creditors committee refused to support the move. Delta management convinced the panel the carrier would be stronger if it emerged from bankruptcy independent.
Delta Pilots
“Clearly the Delta pilots found significant value in being on that creditors committee,” Howie Schack, a pilots union spokesman, said in an interview. “We have to be a part of that committee to steer the company toward building the airline as opposed to alternatives that aren’t of interest to our pilots.”
US Airways has been named by analysts as a potential partner for American, which fell from being the world’s biggest airline when Delta bought Northwest Airlines Corp. and United Airlines (UAL) parent UAL Corp. merged with Continental Airlines.
The other members of the creditors committee are Wilmington Trust Co., Manufacturers and Traders Trust Co., Bank of New York Mellon (BK) Corp., the PBGC and Hewlett-Packard Enterprise Services LLC. The law firm of Skadden, Arps, Slate, Meagher & Flom LLP was named to represent it during bankruptcy.
Moelis & Co., the investment bank founded by Kenneth Moelis, was named as the financial adviser for the creditors committee, said a person familiar with the matter who wasn’t authorized to discuss it publicly and didn’t want to be identified.
Andrea Hurst, a spokeswoman for New York-based Moelis, declined to comment.

 

[WorldTraveler]

You're right, including "owned" but mortgaged assets (EETC's). Both leased and mortgaged assets have the payments (lease or interest) set based on the difference between the value of the underlying assets when the lease/loan begins and when it ends, plus a profit margin for the lessor/lender. Payments don't decrease over time as the value of the underlying asset decreases - they are fixed unlease the lease is renotiated or EETC matures and another issued. And that is why there is room to negotiate lease/EETC payments downward in bankruptcy - the current value of the older underlying assets won't support payments as high as they currently are if the lessor/EETC holder has to take possession of the asset and least it to someone new or sell it.

So despite AA's writedown of "owned" asset values over time, it is not just possible but likely that the lease payments or EETC debt payments can be lowered in BK. US did it twice within 5 years.

Jim

that owned but mortgaged assets are renegotiated in BK is not in doubt.... the issue which I raise is that some people continue to push the idea that AA will dump significant amounts of OWNED assets in BK... while possible, it dramatically increases the likelihood that unsecured creditors cannot obtain sufficient recovery... and if they cannot reach acceptable agreements, then the likelihood INCREASES that the company will be sold or liquidated.
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In other news, B6 has announced that it will fly DFW-BOS = 3X per day beginning in May. The notion that a partner starts service using fares that will be lower than AA's in a market that is a core part of AA's network - and currently obtains very high fares - should put to rest once again any doubt that B6 is a competitor to AA. AA's partnership that it developed with B6 is simply an attempt to recover some presence in markets that AA has been forced to exit - largely because of B6's growth.

As I have predicted the competitive assaults on key AA markets will continue throughout BK... the network AA will have and the level of revenue premiums relative to the industry that remain will be absolutely key factors in determining AA's value to the industry.

 

[BoeingBoy]

the issue which I raise is that some people continue to push the idea that AA will dump significant amounts of OWNED assets in BK...

As I recall, you said that AA would reduce capacity significantly. How would they do that if they didn't dump significant amounts of assets. And what part of OWNED but mortgaged is hard to understand.

"Almost all of the Company’s owned aircraft are encumbered by liens granted in connection with financing transactions entered into by the Company."

Does that, from the 3rd quarter report, sound like AA has lots of OWNED but not mortgaged aircraft?

It seems that AA could attempt to negotiate the debt payments downward or just turn over the aircraft where unsuccessful.

Sometimes the Whole Truth does come out...

Jim

 

[NYCDelta]

I disagree. I think Horton and Co. are smart enough to lower costs and avoid the merger drama. If a competitor needs to be taken out let someone else do it. AA will have plenty on its plate with out the forever infighting "u".

That's why I said "if" they merge. I primarily believe that it would be mostly to make a few people very rich.

AA would be wise to go along with the merger ..... and then shut down a lot of the old US Airways. Would help themselves and the rest of the industry .... until capacity is removed the industry is sick .... and labor is screwed.

I'm not sure over capacity is the problem. Most airlines are running at >85% load factors. It's very difficult to non-rev today. Look at how much capacity has already been removed with BK's and mergers. DL, UA, US, AS, B6, WN-all have been profitable while AA has not. I don't think over capacity is the reason AA has not been able to turn a profit.

 

[FWAAA]

I'm not sure over capacity is the problem. Most airlines are running at >85% load factors. It's very difficult to non-rev today. Look at how much capacity has already been removed with BK's and mergers. DL, UA, US, AS, B6, WN-all have been profitable while AA has not. I don't think over capacity is the reason AA has not been able to turn a profit.

That's a common misunderstanding among airline employees. Yes, load factors are high, but they are high because the fares charged are still fairly low and reasonable considering the very high cost of fuel. If capacity were removed, fares would increase (that supply-demand thing), leading to better profits and eventually, profit sharing and higher wages for employees. At AA, for instance, it has filled the planes with fares that are far too low. Full planes at break-even or money-losing fares is not sustainable over the long term.

 

[NYCDelta]

That's a common misunderstanding among airline employees. Yes, load factors are high, but they are high because the fares charged are still fairly low and reasonable considering the very high cost of fuel. If capacity were removed, fares would increase (that supply-demand thing), leading to better profits and eventually, profit sharing and higher wages for employees. At AA, for instance, it has filled the planes with fares that are far too low. Full planes at break-even or money-losing fares is not sustainable over the long term.

But the airlines have cut capacity and most have been profitable, even with fuel surging and fares at current levels. DL, for example, was profitable and employees received profit sharing. Of course capacity could be cut further, and fares could double, but if people can't afford to fly, then it's a moot point. If you have an 85% load factor with an average fare of $200 or a 45% load factor with average fares of $400 then what have you gained? I'm not saying it would come to that, but for people who are price sensitive in an already bad economy, many would choose to not fly. Even businesses have curbed their travel budgets and would probably cut more if fares increased further. I will give you that airlines need to increase revenue to remain profitable, but just cutting capacity will not be the only way. If the fares AA was charging were too low, and it couldn't make a profit from those fares, it was because they were trying to compete with airlines who had lower costs than they did.
The fact is there have been over 100 airlines bankruptcies since deregulation and every time another files, the analysts all say there is "too much capacity". What will they say if the load factor reaches 98% and an airline files?

"Virtually every major US carrier has announced capacity cuts for the fourth quarter. Full year 2011 will clock in at best somewhere between half a percent below 2010 to about 1.5% above. And 2012 will not be a growth year, either.
Current prediction is that 2012 will be at least a 4.5% down year in North America. Globally, maybe a traffic dive. " -Aviationplanning .com

http://aviationplanning.com/HotFlash.htm

 

[767one]

FWAAA,
let's see how it plays out but we still have this notion that AA is going to walk away from its leased fleet and its owned older aircraft fleet which amounts to about 200 aircraft. I just don't see the creditors allowing to walk away from that many viable assets... and remember that according to AMR's financials, the entire AE fleet is owned.... we are talking billions of dollars worth of OWNED aircraft which you and others are saying AA will walk away from, on top of the leases they are going to reject, and somehow all of these creditors are supposed to receive some sort of restitution for these losses?
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You do know what happens if what creditors can expect to recover is too low - or claims are too high relative to the value of the enterprise? It can be decided that it is better off to liquidate the company and distribute the proceeds from liquidation to the creditors than it is to restructure the company. Or worse yet, the company could be worth more sold to someone else.
You just can't dump all the legacy parts of a company and expect to be able to restructure it and remain independent.

767one,
your theory has historically been true but capacity discipline has been seen more in the past 2 years than it has been since deregulation has begun. There is enough desire to capture AA's unique revenue but it is not at all a given that there won't be alot of capacity come out of the system in the process.
You did notice that most other airline stocks are up based on schedules which AA and others have filed for the first half of 2012 showing capacity IS coming out of the system?

Capacity discipline has held and that has been more than a minor miracle but it only takes one airline to crack and we are back where we were before. I'm sure that someone's greed will some kick in and cause the whole industry to collapse.....again. Nobody ever seems to learn from history.

Bob

 

[FWAAA]

But the airlines have cut capacity and most have been profitable, even with fuel surging and fares at current levels. DL, for example, was profitable and employees received profit sharing. Of course capacity could be cut further, and fares could double, but if people can't afford to fly, then it's a moot point. If you have an 85% load factor with an average fare of $200 or a 45% load factor with average fares of $400 then what have you gained? I'm not saying it would come to that, but for people who are price sensitive in an already bad economy, many would choose to not fly. Even businesses have curbed their travel budgets and would probably cut more if fares increased further. I will give you that airlines need to increase revenue to remain profitable, but just cutting capacity will not be the only way. If the fares AA was charging were too low, and it couldn't make a profit from those fares, it was because they were trying to compete with airlines who had lower costs than they did.
The fact is there have been over 100 airlines bankruptcies since deregulation and every time another files, the analysts all say there is "too much capacity". What will they say if the load factor reaches 98% and an airline files?

You're right, most airlines will report decent profits this year (other than AA, which had numerous reasons for its loss). After I typed my response, I thought about it and you make good points.

But even the profitable carriers are cutting flights for next year because they fear that fuel is going to stay where it is or go higher, like all of DL's European flight cuts announced lately. One reason that AA was filling the planes at lower fares the competitors is that UA and DL have captured a fair amount of the higher revenue traffic in NYC and CHI and LAX from AA, and AA needed the cash, as all desperate companies on the verge of filing Ch 11 tend to do.

If fuel keeps going up and hits $4/gal or $5/gal, then more capacity will have to be removed unless everyone magically agrees to pay much higher fares. For airline employees' sake, I hope that fares can be increased without a large drop in quantity demanded.

 

[WorldTraveler]

Jim,
About half of AA's mainline "older generation" aircraft are leased - and those leases can indeed be rejected or renegotiated in BK... they have plenty of capacity that can be cut within the "norms" of BK... and as been noted, they will park some owned aircraft and write them down... but that is debt they have to cover somehow and secured debt has a higher rate of recovery in BK... which means that if AA dumps a bunch of owned capacity, then the recovery for unsecured creditors is much less certain. If the recovery for unsecured creditors sinks too low, then the alternatives increase for the company to be sold or "parted out".
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Revenue management for the US industry continues to be refined and it along with network management is more sophisticated in the US than any other part of the world... no one thought you could maintain 85% load factors for months on end and still run a reliable operation but that is exactly what is happening. Who knows what the limit is?
No one should assume that capacity can't be cut and LFs improved further.
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Sure one carrier could "crack" but let's remember that it is the healthy carriers that stand to lose by keeping unwanted/unprofitable capacity in the market - and that is now the vast majority of the market. They know full well what will happen if discipline breaks - and they for now aren't going there. If it happens, we can talk about it but I think the US industry has crossed a key inflection point. Even much less healthy carriers such as AA and F9 have been very careful about capacity and are indeed removing it in the months ahead.
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Also, DL and UA esp. are able to redeploy capacity in other parts of their network.. that is the benefit of being in a position where you have growth opportunities and your hubs have network potential.
Much of the capacity that DL cut this winter is coming back in the spring but with a much heavier concentration of service to/from AF/KL hubs instead of the seasonal point to point service which DL once added and then pulled down every year.
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We still haven't seen DL's expansion plans for 2012 yet they have about 6 less aircraft worth of widebody flying than last year and yet chose NOT to park 2 744s that they could have parked. Long term, DL still intends to keep growing and UA has not pulled back either. I think the same thing can be said about US in int'l markets.
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Overall, the US industry is shifting to be much more focused on profits than market share or capacity... given that DL and UA each control about 25% of the US market, there isn't a lot of need to be worried about pulling 4-5% when necessary - and let's keep in mind the US economy is in the toilet right now. A year from now, things will look differently - if only because Americans are tired of their economic situation and the prospect of change will be enough to provide improvements in the actual economy.
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