JUSTICE DEPT SUES TO BLOCK US/AA MERGER

[USFlyer]

The DOJ conference call today was a bit strange, to say the least. It definitely seems like this is more of a political move than anything else. To say that there are no conditions under which this would be approved isn't a stand that's likely to survive longer term. A judge will sort through this now and ultimately decide whether the merger goes through as-is or what concessions will be needed. ... As someone who works for the federal government, I can tell you EVERYTHING these days has become highly political -- way more than it has been in the past. Every meeting, every action, etc. is all looked at through a political lens and doing what is most likely to result in the least political drama on Capitol Hill, which is often not the best or right thing to do.

 

[AANOTOK]

Cheerio's guy here! 🙂

 

[AANOTOK]

The DOJ conference call today was a bit strange, to say the least. It definitely seems like this is more of a political move than anything else. To say that there are no conditions under which this would be approved isn't a stand that's likely to survive longer term. A judge will sort through this now and ultimately decide whether the merger goes through as-is or what concessions will be needed. ... As someone who works for the federal government, I can tell you EVERYTHING these days has become highly political -- way more than it has been in the past. Every meeting, every action, etc. is all looked at through a political lens and doing what is most likely to result in the least political drama on Capitol Hill, which is often not the best or right thing to do.

+1

 

[AANOTOK]

Call it what you want, but the deal was all about market concentration. That's never been a good think for anyone in the long run.

There's another wildcard I'd overlooked while peeing in glee (according to the last post).

It would appear the 18 month exclusivity clause is now expired.

By the letter of the law, it would appear an unsolicited and competing bid can be submitted by outside parties, e.g. Indigo or TPG.

That would be the ultimate pissing in someone's Wheaties, no?

You, six state attorneys, the DOJ and a few other employees on both sides tend to agree with you. But most experts do not.
Having said that, I guess the Judge will ultimately decide who's cereal is pissed on!

Now could someone please bump me back up to 170, a number I have maintained for quite some time!

 

[WorldTraveler]

Yes, AA's 2d quarter mainline CASM was higher than DL's, but not by much. If you add back the DL profit sharing that DL likes to exclude (and since AA's unions gave away their profit sharing, it's not an expense that will burden AA), the difference between AA's CASM and DL's CASM was de minimis.

What happens to AA's mainline CASM if AA adds all that capacity within five years like Horton planned in early 2012? Looks to me like that will drive down the mainline CASM by quite a bit. More ASMs against which to spread those fixed costs.

Further, AA doesn't have to have the lowest CASM, merely a healthy, large enough spread between its revenues and its costs to generate profits. As AA's mainline yield in 2012 was almost half a cent more than UA's mainline yield, and that spread continued for the first half of 2013, looks to me like AA will have little difficulty taking revenue away from UA even if AA struggles to take revenue away from DL. As AA grows its 2-class RJ operations, its regional yield should improve as well.

UA's costs are climbing and so are the costs at US. So far, the FAs have received raises. If the pilots figure out how to squeeze Parker for raises (even without a merger), then the costs at US will skyrocket.

Sure, DL could stymie AA's plans by growing its operations substantially, but so far, that doesn't look likely.

First, you are absolutely correct that AA had momentum coming out of BK either with or without US that would have been a threat to UA whose costs are rising very rapidly as a result of their still quite unfinished merger.
But UA’s revenue is improving, in part because they are making the tough decisions to cut capacity and get rid of unprofitable routes. Every airline has them and as much as you want to believe otherwise, AA has them too. I have discussed them enough that it isn’t necessary to go into it again but AA has not addressed the network deficiencies that other carriers did in their restructurings and until they do, AA cannot operate at its optimum level.
Yes, AA’s costs are not THAT much lower than DL and it is standard to exclude special items and profit sharing because they aren’t consistent between companies; running the basic operation is.
AA’s plan all along was to add capacity in order to force down costs but the question still remains as to where they are going to be able to profitably grow. We have consistently seen that the only place where AA has been able to add capacity and still be profitable is Latin America. This year’s international additions to Europe and Asia were all in highly competitive markets – and in most of them AA is the significant underdog whether we are talking about ORD-Germany, DFW-ICN, or JFK-Ireland. There is ample evidence that other carriers have been very successful in limiting AA’s growth in those very markets in the past but AA believes their costs would be low enough this time to overcome a significant market share disadvantage (which does translate into decreased average fares.) Remember BRU and a host of other European cities? AA’s costs at best will be ON PAR with other carriers which isn’t a very strong position when they have much stronger market position.
AA also is still facing significant strategic challenges that no other carrier is facing including the opening of Love Field to nationwide flights, Open Skies in most of Latin America, and the DL/Virgin Joint Venture – each of which are targeted at some of AA’s most profitable markets. The only competitor that faces a significant strategic challenge is UA’s loss of TAM in the Star Alliance – and that is much smaller in scale than any of the strategic changes AA is facing.
As for costs, DL already had a plan to cut its costs based on more efficient use of its own people and growing its own network at the expense of its regional carriers; that is precisely what the RJ for 717 plan is about. And DL is still getting 100 739ERs plus whatever additional M90s so their costs will go down. And lest you think I am only favoring DL, UA is also retiring significant numbers of its 757 in favor of 737s as well. WN is adding 738s while removing the 717s. etc. Other carriers are doing things with their fleets that will give them many of the same advantages AA would get by growing.
Yes, AA’s growth of more cost efficient large RJs will help AA’s costs but they still have to be able to find places to place their own aircraft. The notion that AA can add a bunch of large RJs and ALSO significantly grow AA’s mainline operation is something that no other carrier has ever done before and also very hard to imagine that AA can do.
Remember also that AA’s labor unions supported Parker because he intended to diminish the cuts that AA execs said needed to be done. Horton’s plan clearly recognized that AA mainline could not grow at the rate necessary to keep all of its current people while also adding hundreds of large RJs.
Somehow we are back to asking if Horton’s plan is effectively back on the table.

I don't think this will block future mergers. Keep looking to AT&T-TMobile as a parallel. Two companies in the top 5 trying to merge got shot down. T- Mobile with a smaller firm was OK.

DOJ's logic is pretty clear:

consolidation by smaller carriers = good
consolidation by larger carriers = bad

Looking back at the failed UA-US attempts, AA management now has an out clause they didn't have before. They were pressured into this by outside forces, and the unions.

They can choose not to push as hard if they want to, and the DOJ becomes the scapegoat. Or, they can try to make meaningful concessions to appease the DOJ, but I don't get a sense from DOJ's filing that there are concessions to be had which would do so. This isn't as easy as handing over a couple pairs of slots for auction.

Some of my more DC connected friends think this may just be the DOJ trying to appear like it is doing its job (as opposed to all the other examples lately where they're doing anything except upholding and following the law), and that they'll negotiate a settlement. Time will tell if that results in a deal so bad nobody wants to eat it.

It's going to be interesting to watch, though. Too many people were assuming this was a done deal and a slam dunk from the get-go, and watching the deal get stopped dead in its tracks is a bit rewarding to the pessimists who were repeatedly smacked down... 😉

The DOJ made it very clear that the biggest issues are the very uncompetitive statements that they discovered between AA and US execs, esp. from Parker and other US execs. They do not believe that there are any concessions that could meaningfully save the merger because of the comments that were uncovered.
Yes, the crowd quickly jumped into Parker’s court when “it’s not over until the fat lady sings” and she wasn’t even on the stage.
It will take time for the next phase for AA to become apparent but I would really hope they don’t spend a lot of time trying to save it because doing so will cost them precious time in figuring out to make AA viable for the longterm as a standalone.


AANotOK,
the level of politics hasn't changed but the fact that all manner of electronic communications is now completely open for all the world to see is the new reality.
Parker and others somehow didn't grasp that reality.
Forwarding emails in which US execs discuss the impact of a triple miles promotion on the industry, including back to the airline that initiated the action? What WAS he thinking?

 

[eolesen]

AA's 20% growth could still happen thru codewhoring. Nobody ever said it would be organic...

The other impact that's not really been noticed (or has been buried in text elsewhere) is the benefit of the new aircraft showing up. That's what will ultimately fund the MD80 retirements (or at the least, standing them down into the desert for a while), which has been done at a slower pace up until now. Their ownership costs will definitely rise accordingly, but the fuel expense will start to drop disproportionately to the positive. It's a step that both UA and DL went thru already, and AA's the one catching up in that area. Thus, there's only so much that either UA or DL can do to get back to parity.

 

[WorldTraveler]

codesharing doesn't reduce AA's CASM... it might increase revenue but AA's real issue is to figure out how to grow in ways that will keep its costs from going up.

DL and UA are just now beginning their major refleeting projects so again AA doesn't have a refleeting advantage that others can't duplicate.

AA has to both grow revenues and reduce CASM to a level that gives it an advantage over its competitors. It has not announced any plans that would do that and the months that were involved in pursuing the US merger - forced by the creditors - have only delayed AA's ability to do what it needed to do in BK - and which Horton said needed to be done months ago, even if labor didn't want to hear it.

Keep in mind that AA's two major domestic codesharepartners - B6 and AS - both have divided loyalties. In B6's case, they are feeding other int'l carriers, some of which directly compete against AA and/or BA, and B6's growth has often come at AA's expense. AS is locked in a battle with DL and AA for exclusivity. The best thing that this merger might do WRT AS is that neither AA or DL will see a merger as viable to the DOJ so will be forced to grow - but AA and DL have an uncanny ability to get into each other's shorts more so than other airlines.

It is precisely because DL and UA and WN have all moved forward with their own strategic plans while AA is now left having to reshuffle the deck that AA's position is just as at risk as it was when they entered BK, and perhaps even more so now.

AA has to move very decisively and quickly to rewrite a viable business plan.

And it has no time to worry about trying to salvage a merger which the DOJ - fresh off antitrust wins against Apple and AT&T (far richer companies than AA or US) says it wants dead - not just dressed up in new robes and trotted out again in a few months.

BTW, good to be chatting with you again, E. 🙂

 

[traderjake]

And it has no time to worry about trying to salvage a merger which the DOJ - fresh off antitrust wins against Apple and AT&T (far richer companies than AA or US) says it wants dead - not just dressed up in new robes and trotted out again in a few months.

The DOJ approves Delta and United mergers but won't approve American USAir?

What a bunch of crooks.

Hopefully this goes to trial and we get an honest judge.

 

[MCI transplant]

Call it what you want, but the deal was all about market concentration. That's never been a good think for anyone in the long run.

There's another wildcard I'd overlooked while peeing in glee (according to the last post).

It would appear the 18 month exclusivity clause is now expired.

By the letter of the law, it would appear an unsolicited and competing bid can be submitted by outside parties, e.g. Indigo or TPG.

That would be the ultimate pissing in someone's Wheaties, no?

"outside parties"? ------ Like, Carl Icahn ? Now that would be ironic!

 

[WorldTraveler]

The DOJ approves Delta and United mergers but won't approve American USAir?

What a bunch of crooks.

Hopefully this goes to trial and we get an honest judge.

if the issue was simply "they got it and we should too" then AA/US could win.
Have you read the statements about competition and future price increases that the DOJ unearthed in its investigation? It will be very, very hard for AA/US to argue they won't increase prices or harm competition when there are so many statements that have said consolidation would force up fares in the industry.

Remember the DOJ took on Apple and AT&T quite recently and won.

TPG and other investors might well be back in play again - but labor sure won't support them.

 

[Glenn Quagmire]

if the issue was simply "they got it and we should too" then AA/US could win.
Have you read the statements about competition and future price increases that the DOJ unearthed in its investigation? It will be very, very hard for AA/US to argue they won't increase prices or harm competition when there are so many statements that have said consolidation would force up fares in the industry.

Remember the DOJ took on Apple and AT&T quite recently and won.

TPG and other investors might well be back in play again - but labor sure won't support them.

You are spot on here WT.

The exec's here have shot themselves in the proverbial foot.

IMHO, this deal is toast.

Should I start a B6 + ASA marraige thread now... 😉

 

[Frank Szabo]

The problem with the airlines for quite some time has been the outsourcing of their maintenance to save money and get the worthless executives a bonus but it can't be denied fares/prices need to rise to a more reasonable level above costs. That's what has caused so much grief in the industry.

It's rather evident Heinrich Holder and his so-called "Justice" department isn't interested in airline fares moving toward a level that would sustain US maintenance once again rather than financing the rise of third-world countries.

 

[Glenn Quagmire]

The problem with the airlines for quite some time has been the outsourcing of their maintenance to save money and get the worthless executives a bonus but it can't be denied fares/prices need to rise to a more reasonable level above costs. That's what has caused so much grief in the industry.

It's rather evident Heinrich Holder and his so-called "Justice" department isn't interested in airline fares moving toward a level that would sustain US maintenance once again rather than financing the rise of third-world countries.

This has nothing to do with "sustaining US maintenance once again". Nor does it have anything to do with Holder or the Obama adminsitration. Did you notice the states that joined the suit? They are not exactly in the Obama/Holder camp.

I am amazed at the bubble some live in in the airline world today.

Now that I have stepped away and look from afar, it is easy to see that I was once just like you.

 

[ContUNITEus]

Sorry I'm late to the party.... Where is the champagne to celebrate this?... I'm ecstatic... This is awesome news for consumers if US/AA falls apart.

 

[WorldTraveler]

You are spot on here WT.

The exec's here have shot themselves in the proverbial foot.

IMHO, this deal is toast.

Should I start a B6 + ASA marraige thread now... 😉

oh go ahead.

and comparing what the DOJ ^did^ for DL/NW or UA/CO or WN/FL doesn't matter. Those execs didn't tout that they were going to remove capacity and force up fares. In fact, DL said it intended to keep its hubs - all of them - which turned out not to be true. But fuel prices increased and DL had that excuse - and the DOJ can't go back and undo a merger that had already occurred.

But also remember that the very reason why US failed in its takeover of DL was because Parker talked about rationalizing capacity even back then. That went over like a lead balloon but he has been saying the same thing - and now we find out even sending emails to his competitors' execs scolding them for being pro-consumer.

The reason why this merger is dead - concessions or not - is because it is impossible now to get those words off the record.