So if you're not a self-anointed aviation expert, why should we associate a whole lot of credence to your post, or are you inferring that we should accept that you are indeed a true recognized aviation industry expert? Please produce some reference to substantiate your claim that PHL is NOT a profitable hub for US and/or that CLT is more profitable? Since there is essentially zero growth capability out of JFK during prime departure/arrival segments because of slot controls, how do you propose that AA strengthen their relatively weak East Coast -Trans-Atlantic service ?
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So if you're not a self-anointed aviation expert, why should we associate a whole lot of credence to your post, or are you inferring that we should accept that you are indeed a true recognized aviation industry expert? Please produce some reference to substantiate your claim that PHL is NOT a profitable hub for US and/or that CLT is more profitable? Since there is essentially zero growth capability out of JFK during prime departure/arrival segments because of slot controls, how do you propose that AA strengthen their relatively weak East Coast -Trans-Atlantic service ?
BoeingBoy
Veteran
- Nov 9, 2003
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- #107
Some points.
1 - you can't just add the two revenues together and say "This is the revenue the combined carrier will take in." Any merger of larger carriers will result overlapping service which results in cutting some service, less passengers, and thus less revenue than the two carriers combined. Heck, just AA's bankruptcy will result in less revenue as they return some planes and cut some service. A stand-alone AA would obviously hope to cut costs more than the revenue it loses, meaning more profit, but a merger clouds that simple issue.
2 - No matter what Tempe tries to peddle, US is still a higher cost carrier. As much as they try to get everyone to focus on mainline CASM, Express is expensive and US is stuck with a lot of 50-seaters for years. Even if AA can cut it's costs in BK to what HP had before the US/HP merger (unlikely since even the low cost carriers have higher costs now), combining the two doesn't produce a low cost carrier any more than the US/HP merger did.
3 - Revenue is not be all and end all - expenses matter too. The debt necessary for US to acquire AA increases interest expense. Even if revenue was the combined total (which it wouldn't be), more of that revenue goes to pay expenses, hence less left for profit.
Those that would make the decision on a merger, the creditor's committee, would have to consider these and more before agreeing to a merger proposal.
Jim
1 - you can't just add the two revenues together and say "This is the revenue the combined carrier will take in." Any merger of larger carriers will result overlapping service which results in cutting some service, less passengers, and thus less revenue than the two carriers combined. Heck, just AA's bankruptcy will result in less revenue as they return some planes and cut some service. A stand-alone AA would obviously hope to cut costs more than the revenue it loses, meaning more profit, but a merger clouds that simple issue.
2 - No matter what Tempe tries to peddle, US is still a higher cost carrier. As much as they try to get everyone to focus on mainline CASM, Express is expensive and US is stuck with a lot of 50-seaters for years. Even if AA can cut it's costs in BK to what HP had before the US/HP merger (unlikely since even the low cost carriers have higher costs now), combining the two doesn't produce a low cost carrier any more than the US/HP merger did.
3 - Revenue is not be all and end all - expenses matter too. The debt necessary for US to acquire AA increases interest expense. Even if revenue was the combined total (which it wouldn't be), more of that revenue goes to pay expenses, hence less left for profit.
Those that would make the decision on a merger, the creditor's committee, would have to consider these and more before agreeing to a merger proposal.
Jim
BoeingBoy
Veteran
- Nov 9, 2003
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That's not what he said. He said that PHX/PHL bring nothing to AA (personally, I'd say little instead of nothing). Neither did he say that CLT was the most profitable US hub, just that it was profitable.
Oddly enough, AA has about the same trans-Atlantic service as US. A few cities are different - AA has TA service from BOS/MIA while US has it from PHL/CLT and some of the European destinations are different. But the amount of TA service isn't that much different.
JFK expansion ability? That's an argument for merging with B6, not US.
While PHL is obviously of value to US, do you really think US would have not put the hub in NYC or WAS if there weren't already hubs in those cities? PHL was the best hub location left when US decided it needed a bigger city for a hub with TA flights than PIT/CLT. The only reason CLT would be of value to AA is that it offers better connecting opportunities for east coast traffic than MIA/DFW/ORD/JFK. That is the missing piece in the "4 corners" strategy of AA.
Jim
CLT is a great city and a big hub for US. So is Philly. So is PHX. Combine US and AA and suddenly it looks like there's a surplus of hubs, especially in the smaller, sleepier markets. Take CLT and the flight to GIG. Local traffic (O&D) to GIG from CLT is practically nonexistent, so that flight only works because of extensive connections. MIA has substantially more O&D to GIG (and everywhere else in Latin America) than does CLT. US sticks with CLT because US doesn't have a hub in MIA - but would the combined airline try to fill one daily flight to GIG (and maybe GRU) from CLT with all those commuter flights?
PHX will likely never see nonstops to Asia - LAX is the more likely gateway. Of course, being relatively small at LAX, if standalone US ever flies to Asia, it will be from PHX or PHL, because it lacks any significant presence in the gateways where O&D to Asia is stronger (LAX, SFO, SEA, ORD, NYC, etc).
Similarly, US has built up its European schedule at PHL (and CLT) because it is not big at JFK or IAD, both of which feature lots more European O&D. AA is nonexistent at IAD (and not all that big at DCA), leaving IAD to UA the way UA left JFK to AA and DL. Would a combined US-AA keep the PHL schedule (which relies on numerous small commuter flights) or de-emphsize PHL?
PHX will likely never see nonstops to Asia - LAX is the more likely gateway. Of course, being relatively small at LAX, if standalone US ever flies to Asia, it will be from PHX or PHL, because it lacks any significant presence in the gateways where O&D to Asia is stronger (LAX, SFO, SEA, ORD, NYC, etc).
Similarly, US has built up its European schedule at PHL (and CLT) because it is not big at JFK or IAD, both of which feature lots more European O&D. AA is nonexistent at IAD (and not all that big at DCA), leaving IAD to UA the way UA left JFK to AA and DL. Would a combined US-AA keep the PHL schedule (which relies on numerous small commuter flights) or de-emphsize PHL?
Jim,
I couldn't agree with you more. Revenue and market share post any merger will be determined after all synergies are accounted for. And to that, revenues will only be estimates and often times are never realized; just look back to the AOL/Time Warner merger....ouch! If you use one of the three discounted-cash flow (DCF) methods to value a merger, revenue and costs are the drivers. AA's cost structure isn't known now and won't be until their reorganization plan is finalized. However, AA is right where DP wants them for now because if the cost structure falls to a level combined with US's cost structure going forward and resulting free-cash flows are positive, a merger will be proposed.
I'm sick and tired of people saying US brings nothing to the table because it shows a complete misunderstanding of what is driving mergers today....revenue, costs, and market share. Even the Boyd group seems to be missing this point. This is one of the most mature industries in existance. In order to grow revenues horizontal mergers are necessary, so long as cost structures are compatable. And, how the hell can the Boyd Group call CLT bogus? There is a HUGE market east of the Mississippi that travels north/south and much of it are corporate contracts. This is the bread and butter of US...sorry PHX, but it's the truth. We compete seat for seat and flight for flight with DL in this market. How much of this market does AA have.....uh....close to ZERO!!!!
I understand AA has MIA and that's a much better hub for East coast to South America/Carribean. I'm referring to NE to SE travel.
I couldn't agree with you more. Revenue and market share post any merger will be determined after all synergies are accounted for. And to that, revenues will only be estimates and often times are never realized; just look back to the AOL/Time Warner merger....ouch! If you use one of the three discounted-cash flow (DCF) methods to value a merger, revenue and costs are the drivers. AA's cost structure isn't known now and won't be until their reorganization plan is finalized. However, AA is right where DP wants them for now because if the cost structure falls to a level combined with US's cost structure going forward and resulting free-cash flows are positive, a merger will be proposed.
I'm sick and tired of people saying US brings nothing to the table because it shows a complete misunderstanding of what is driving mergers today....revenue, costs, and market share. Even the Boyd group seems to be missing this point. This is one of the most mature industries in existance. In order to grow revenues horizontal mergers are necessary, so long as cost structures are compatable. And, how the hell can the Boyd Group call CLT bogus? There is a HUGE market east of the Mississippi that travels north/south and much of it are corporate contracts. This is the bread and butter of US...sorry PHX, but it's the truth. We compete seat for seat and flight for flight with DL in this market. How much of this market does AA have.....uh....close to ZERO!!!!
I understand AA has MIA and that's a much better hub for East coast to South America/Carribean. I'm referring to NE to SE travel.
Why hasn't LCC been granted full membership, ATI, JV with Star? If it's truly the cats meow, then UAL and LH would be brainstorming how to prevent the loss of LCC to Oneworld.
I think you can answer your own question....revenue. We haven't been offered all of the niceties in Star because of revenue. We don't bring enough revenue to Star's table compared to UA and LH to be a significant player. A US loss to Star would be meaningless to them. We do, however, bring enough revenue to AA's table in order for AA to be a significant player with UA and DL. B6 and AS don't. Even combined they don't.
There has been speculation that AA's revenue has been impacted negatively this year due to the ongoing fights with distribution. How much, I don't know. tens of millions... hundreds? Who knows. It's also important to note that is wasn't until last year that that AA/Oneworld parners BA and IB were granted ATI. JAL began just this year. Next year, there's a number of new European destinations in the hopper with the addition of Air Berlin joining Oneworld.
With the addition of the A319's or even just domestic code sharing with B6, some of that north south domestic traffic $$ you speak of,will migrate to AA's coffers.
It remains to be seen how durable the LCC Shuttle operation will remain over time as well now that the slot swap is complete.
With the addition of the A319's or even just domestic code sharing with B6, some of that north south domestic traffic $$ you speak of,will migrate to AA's coffers.
It remains to be seen how durable the LCC Shuttle operation will remain over time as well now that the slot swap is complete.
BoeingBoy
Veteran
- Nov 9, 2003
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- #114
None of which individually determine profitability.
I think the "US brings nothing to the table", which I could be accused of saying, applies to what US adds to AA. Not really any big TA/Latin/S America increases. Not trans-PAC. Not hubs except for possibly CLT as a N-S east coast connecter. Not low costs. Not a great product. Not low costs structure. Depending on what happens to scope in BK, maybe not a fleet of 78-90 seat RJ's. In short, what would US bring that AA couldn't do on it's own after exiting BK? Sure, there is additional revenue but also additional costs. So the extra revenue, whatever it might be, doesn't necessarily equal additional profits.
When all is said and done, the creditors will be looking at primarily two things, with emphasis on one or the other depending on each specific creditor - return on their claim and future business. The smaller unsecured creditors will want the most for each dollar they're owed. The big secured creditors will be looking more at future business. The only way to avoid that is what happened in the US/HP merger - the creditors had a choice of the merger or what anyone else might offer. But that requires AA to agree to a merger prior to development of it's POR so the POR assumes the merger.
Jim
WorldTraveler
Corn Field
- Dec 5, 2003
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- #115
US domestic carriers cannot legally share revenue. AA can buy seats on B6, sell Advantage miles, and presumably market flights higher than the price it pays to buy the seats from B6 but it cannot benefit from an overall improvement in the market without renegotiating the contract.
It is very possible that B6 could see a reorganized AA as a threat to its own existence and decide it is not worth codesharing.
.
It is doubtful that the slot swap will help AA in any way... there is no model where AA benefits.
B6 isn't going to enter the BOS-LGA-DCA market ... slots are too expensive and the shuttle is marginally profitable at best for either US or DL.
The potential downside to US might be that it loses the ability to connect anything at LGA because its oepration shrinks to a spoke plus Shuttle operation.
That loss might be offset if AA succeeds in codesharing on the US Shuttle as it says it wants to do.
WT has posted that some of AA's big losses in revenue (relative to UA and DL) are happening in NYC and ORD and LAX, all huge markets where US doesn't have a lot of revenue to add. NW brought a bunch of LGA slots that has helped DL. UA just added EWR, which gave UA an international presence in NYC. DL has added flights to ORD and LAX. By combining with CO, UA has strengthened its positions in CHI and LAX.
Maybe adding the PHL, CLT and PHX revenue of US to AA's revenue would help AA, but I'm guessing that AA's $24 billion of revenue helps US a whole lot more. It would make US a major player in NYC, CHI, LAX, MIA and DFW, among the largest air travel markets for business travel in the country. US just gave away most of its NYC presence by trading many LGA slots for a relative pittance of DCA slots. US is tiny in CHI and not very big in LAX.
Once DP makes his bid for AA, we'll see what the creditors think.
Maybe adding the PHL, CLT and PHX revenue of US to AA's revenue would help AA, but I'm guessing that AA's $24 billion of revenue helps US a whole lot more. It would make US a major player in NYC, CHI, LAX, MIA and DFW, among the largest air travel markets for business travel in the country. US just gave away most of its NYC presence by trading many LGA slots for a relative pittance of DCA slots. US is tiny in CHI and not very big in LAX.
Once DP makes his bid for AA, we'll see what the creditors think.
WorldTraveler
Corn Field
- Dec 5, 2003
- 21,709
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- #117
given that there are indications that Parker would love to shrink its presence at PHX (ie the proposed spin off of the western operations) and DFW is clearly a much more valuable hub, it isn't clear that there would be a lot gained via PHX.
CLT is a viable hub and is the most valuable part of US but AA still manages to be a larger carrier in many SE markets than UA/CO despite having no hub between NYC and MIA. AA has done a pretty good job of filling in the holes in its east coast network after closing the BNA and RDU hubs.
PHL is a strong local market but it duplicates network wise most of what AA does or could do at JFK... it is doubtful that having 2 NE hubs neither of which are as large as what DL has/will have at LGA/JFK or UA at EWR/IAD will solve AA or US' strategic issues.
.
It also is not at all clear how the market will shape up over the next 18 years - AA will undoubtedly have ot reduce some capacity which could open doors to competitors. The slot swap could shift much more revenue in the NE than US thinks including in other markets. Given that DL is gaining many more slots, the chances are very high that DL could further concentrate corporate revenue on the east coast, to the detriment of both AA and US.
Therefore, the hurdle that a combined AA/US would have to overcome become even higher - and it might happen that the combined entity cannot make enough of a difference in the key markets to be worth the cost of combinations. Investing in other strategies could provide a greater benefit.
I think we all agree PHX will be a non-issue in a possible AA/US merger. DFW and LAX will be the winners there. But if you combine all of the strengths you mentioned AA has in the NE, and I agree with you, with the strengths US has in CLT, net some overlap, you now have a huge competitor for DL. Also, as far as IAD, PHL, LGA, EWR, and JFK are concerned, all are very stronge O&D markets. If a merger should happen, all three UA, DL, and AA will claim two hubs with strong O&D on the east coast. UA has IAD and EWR. DL has LGA and JFK. And AA would have JFK and PHL. Right now AA only has JFK and MIA. There's alot of untapped market between those two cities for AA right now. With a little strategic tweaking and marketing, who's to say JFK and PHL won't work as well as EWR and IAD for UA or LGA and JFK for DL. Throw into that US's DCA presence and you now have some real marketing power. After saying this, I actually think the DOJ might have more trouble with an AA/US merger than people think.
US offers a lousy product, has a lousy reputation, and has lousy employee relations. People need to set that aside because all of that can be fixed with proper marketing and money. DP will need to through some money at the unions in order to make any merger work. And, you'll need some industry-leading marrketing to correct for the lousy image. But it is all doable if the numbers are there post-bankrupcty. My guess is DP is making sure right now they will be.
johnny kat
Senior
- Oct 11, 2011
- 343
- 330
Just passing this along...Vaugn Cordle:
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.
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.
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