Merger Relief for American Airlines: April 24, 2012

[Hopeful]

goldman sachs thinks and seem to believe they can get a better return and are urgin the other creditors etc to back a merger itsallgoing to be interesting to see how it all plays out over the next several months

Yes, But I think the judge is going to give AA the exclusivity period he granted until September.
The creditors committee can demand a changes to that period, but it's only a few months.
He does have a responsibility to give AA time.

But, once all the contracts are altered either thru abrogation or consenual agreements...The cost cutting that AA seeks will be in place and AA may then give the creditors more favorable terms.

 

[eolesen]

Against the backdrop of AA's dismantling of STL which began very shortly after that merger, DL employees had no problem convincing politicians that the US didn't need another merger in which one carrier bought another solely to be dismantled, even if that wasn't the intention AA had when it bought TW.

Your facts about AA & TW aren't even close enough to be called a half truth. It's also not 100% honest to say DL had no interest in a merger which resulted in dismantling part of the network.



AA and TW merged in April 2001. STL didn't see significant cuts until November 2003, some 30 months after the merger, which is when they went from 500 to 300 flights, which is still a sizable operation. Even in 2009, mainline @ STL was still running 41 flights a day.

Compare that to MEM ---- they had ~250 flights a day when DL/NW merged in September 2009, and it is already down to 100 RJ's and 35 mainline. 50% of its pre-merger size, and likely to shrink further with the Pinnacle bankruptcy.


What's probably closer to the truth is DL had no interest in a merger where they weren't in control of what gets dismantled.

 

[eolesen]

goldman sachs thinks and seem to believe they can get a better return and are urgin the other creditors etc to back a merger

You do realize that Goldman doesn't have a voice on the UCC, right? They're the 13th largest institutional shareholder (1.3%, http://www.nasdaq.com/symbol/aamrq/institutional-holdings)

 

[WorldTraveler]

It doesn't matter whether the intent was to dismantle a former competitor or not when the deal was done or not. The reality is that AA dismantled STL while reducing very little of AA's own network.
You mention MEM but fail to note that DL has pulled down CVG just as fast if not faster and both were built on the same business model of a percentage of connections on regional jets compared to other markets.
What is different between CVG, MEM, and STL is that DL has retained the local market even though the hub has been pulled down. Where connecting traffic changes plans is not important to an airline - even if the local governments care a whole lot. What does matter and what does determine profitability is the ability to determine and retain local market share and pricing.
The difference between what happened with the local markets in STL, RDU, BNA, BWI, and PIT.... compared to CVG and MEM is the difference between night and day.

 

[BoeingBoy]

The difference between what happened with the local markets in STL, RDU, BNA, BWI, and PIT.... compared to CVG and MEM is the difference between night and day.

Oddly enough, that night and day has a name - 911. When domestic traffic numbers fell off a cliff after 911 almost every carrier took drastic actions to stem the flood of red ink. Amont the actions AA took was the beginnings of the reduction in STL. DL's reductions at CVG and MEM had nothing to do with 911 but everything to do with hub/route realignment. Attempting to compare the two situations is akin to trying to equate WWII with 2 kids fighting during recess.

Jim

 

[mistified]

WT
Do you even read your own post before you send?
You try to dispute a statement with counter statements which end up supporting the original statement???
I think you just like to argue for the sake of it.

Over and out I'm done with you - your wasting my time.

mistified
-----------------------------------------------

Maybe ,maybe not. But labor sure saved Delta's ass when USair made a run on them.
You don't dispute that do ya? Yet you discount labors influence in this circumstance.
Inconsistant logic or just wishful thinking on your part?

mistified

no, contrary to CW, labor did not save DL's backside from US.

US' plan failed because US intentionally said that they intended to reduce the size of the airline and to do it at the expense of DL's non-union employees.
DL rallied a bunch of employees to go to Washington to argue about how back the SE would suffer as a result of a combined DL-US but the reason the US merger was DOA was because labor rose up against the cuts which they would be forced to make - but it came not because of the company's restructuring but thru a transaction over which the government had control - mergers. Against the backdrop of AA's dismantling of STL which began very shortly after that merger, DL employees had no problem convincing politicians that the US didn't need another merger in which one carrier bought another solely to be dismantled, even if that wasn't the intention AA had when it bought TW.


Combine the very real fear of cuts to capacity and the job losses that would come and then add in that DL's standalone restructuring plan provided superior results to the creditors and it became clear that US could not win.

Parker deserves credit for trying to save jobs with his plan and for not targeting AA employees for the eventual cuts that have to be made.
But what he can't change is that no one believes the combined AA-US can deliver all he says it will - less job cuts, pay raises for virtually everyone compared to the current US and AA's standalone plan, and revenue growth which is far larger than what either AA or US have generated as standalones - and it is obvious why the non-labor creditors are not onboard.

Saving jobs and restoring pay is great. Not targeting one group of employees for cuts at the hands of another is the law now (well sort of). But all of that still has to be backed by a plan that delivers what the creditors know will or will not provide an appropriate level of return.
Parker's plan now will fail on the basis of the underlying financials even if he has corrected several very grave parts of previous merger attempts. What doesn't change is that the creditors still control AA's outcome now and for months into the future and that they are not convinced that a plan has been proposed that can top the return they will receive - backed up by believable financials.
If Parker did that, I have no doubt the creditors would act - just as they would have with DL-US.

Because it's not about popularity or votes - it's about what's deep under the surface - the substance of the issue that matters.

 

[WorldTraveler]

AA made the decision to buy STL (or so they said) in order to have capacity to grow in the midwest as a result of the air traffic difficulties at ORD. They no longer needed that capacity post 9/11, true, but they still focused their pulldown disproportionately on STL.
It also doesn't change that AA was not able to defend its local market in STL and they didn't in BNA, RDU or SJC - all former hubs.
Whether people want to accept it or not, AA has a poor track record of defending and maintaining its own local markets. IN fact the only other carrier that has turned over as many local markets that were former hubs to competitors is US.

Labor helped defend DL - but if you think that labor can save a bad business plan, then you will be equally as disappointed with the results of AA-US being driven by labor.
AA plus ANYONE or AA alone will happen because it will be driven by the best business plan - one that the creditors believe is superior.
Nothing less.

 

[eolesen]

It also doesn't change that AA was not able to defend its local market in STL and they didn't in BNA, RDU or SJC - all former hubs.

I'm sure that the fact all four examples listed above had little of a local market to begin with. They were all geographic or wayport hubs, not cities that grew into hubs on the back of local demand.

That's why the YX hubs in MCI and MKE ultimately failed, as well as the CMH hub for HP, and both PIT & DAY for legacy US.

Not going to waste any more arguing that point regarding failed hubs -- I've made it plenty of times before. Search the archives if you need more fodder to try and split hairs on.

Where a hypothetical US-AA merger stands away from other tie-ups is that the only hub that really appears to have a tiny local market is CLT. Arguably, it's the only one I'd expect to be reduced in size out of a consolidated network.

In the US-DL failed merger, I'd have expected both CLT and SLC to die in favor of strengthening ATL and PHX. The latter have the local market necessary, while the former don't.

 

[WorldTraveler]

YX' hubs were poorly developed as hubs - and they also happened to be large WN cities as well, whether WN calls it a hub or not.

And the RDU, BNA, STL, and SJC metros are all decent sized local markets. While it is true that network carrier hubs are being concentrated in a fewer and fewer number of cities as fuel prices increase, several of those former AA hubs were pulled down far before that was an issue.

But it still remains that AA and US have given up huge amounts of revenue in their former hubs to other carriers because they pulled down the hub but didn't maintain the local market share. Other carriers have pulled down connecting flows in other former hubs w/o reducing their presence in the local market, esp. to other network carriers - the ones with whom they should be most capable of competing.

You do realize that your position on reducing the size of CLT based on it being overhubbed is contrary to the fundamentals that are being pushed as the basis for that merger?
I'm not saying I disagree with you but considering that US has an enormous amount of its capacity on small regional jets, they are far more vulnerable to increasing fuel prices and the inevitable realization that 50 seat jets have to be pulled from airline fleets. As you well know, getting small RJs out of AA's network - or reducing the size of the fleet - is a major challenge that so far has not been publicly addressed in AA's BK case - and also just one more issue that, if AA solves the problem, will only be compounded if AA and US merge.

 

[WorldTraveler]

YX' hubs were poorly developed as hubs - and they also happened to be large WN cities as well, whether WN calls it a hub or not.

And the RDU, BNA, STL, and SJC metros are all decent sized local markets. While it is true that network carrier hubs are being concentrated in a fewer and fewer number of cities as fuel prices increase, several of those former AA hubs were pulled down far before that was an issue.

But it still remains that AA and US have given up huge amounts of revenue in their former hubs to other carriers because they pulled down the hub but didn't maintain the local market share. Other carriers have pulled down connecting flows in other former hubs w/o reducing their presence in the local market, esp. to other network carriers - the ones with whom they should be most capable of competing.

You do realize that your position on reducing the size of CLT based on it being overhubbed is contrary to the fundamentals that are being pushed as the basis for that merger?
I'm not saying I disagree with you but considering that US has an enormous amount of its capacity on small regional jets, they are far more vulnerable to increasing fuel prices and the inevitable realization that 50 seat jets have to be pulled from airline fleets. As you well know, getting small RJs out of AA's network - or reducing the size of the fleet - is a major challenge that so far has not been publicly addressed in AA's BK case - and also just one more issue that, if AA solves the problem, will only be compounded if AA and US merge.

 

[BoeingBoy]

AA made the decision to buy STL (or so they said) in order to have capacity to grow in the midwest as a result of the air traffic difficulties at ORD. They no longer needed that capacity post 9/11, true, but they still focused their pulldown disproportionately on STL.

So you're claiming that AA should have kept something that you admit they didn't need and give up something else??? Or should they have kept everything the same following 911 and just lost more money???

With "truth" like that I'm glad you never ran an airline that I worked for. Oh, wait, is that you Squeak?

Jim

 

[WorldTraveler]

You fail to grasp the concept that there are airlines that have managed to close hubs yet maintain the local market -and didn't throw their employees under the bus either.

 

[BoeingBoy]

What does that have to do with the price of tea in China...or the effects of 911?

Jim

 

[eolesen]

You fail to grasp the concept that there are airlines that have managed to close hubs yet maintain the local market -and didn't throw their employees under the bus either.

I suspect there are a couple thousand pm-NW employees who would disagree with you on being thrown under the bus.

As far as hub share... You're right. DL kept their 15-20% market share at DFW and MCO when they closed the hubs.

Oh, wait. They didn't keep their local share. That shifted over in large part to AA and FL/B6 respectively.

I can almost predict the argument against those two examples -- they're pre-bankruptcy and pre-merger. But that doesn't apply when engaging in endless reminders of SJC (closed almost 20 years ago), BNA (closed almost 15 years ago) and RDU (closed almost 13 years ago).

You can make a valid argument that DL has kept their market share in CVG, though. The question you probably can't (or won't) answer is whether that's because DL is such a tough competitor, or because the local market is so weak that there's just not much interest from other airlines in serving CVG beyond what they're currently offering. I suspect the latter.

 

[WorldTraveler]

Except that there have not been a couple thousand PMNW employees who were thrown under the bus - talk about whipping up a frenzy. More importantly, the reason why the TW people are so ticked off (still are) is that they were stapled to the bottom of a list and then when the company had to shrink - they were the first to go and their existence at AA was riddled with footnotes that prevented them from becoming full-fledged AA employees. That hasn't happened with any DL merger, and all of those limitations that might have existed ended the day after the representation votes were finally decided. There is nothing today that distinguishes a PMDL from a PMNW employee, targets them for cuts, or says that the assets they brought to the merger are worth any less. And the fact is that CVG has been cut MORE than MEM was - the process just started earlier.

I'm so glad you brought up DFW and Florida because they are key parts of the most dramatic network restructuring that has occurred at a US network/legacy airline.
DL took its 250 or so flight operation at DFW along with its heavy use of int'l capable widebodies - largely focused on FL closed DFW as a hub, sent the widebodies overseas to new markets in Europe, the Middle East, and Africa, and later Asia, and backfilled that domestic widebody capacity with narrowbodies that came from the DFW hub PLUS built JFK into a hub, where more than 2 years ago, DL surpassed AA as the largest carrier.
In the process, and this is absolutely critical, DL has remained the largest network carrier in every FL city except for MIA AND gave up about 8% of its local market share at DFW (worth less than $100M per year) to redeploy those assets in markets that generate BILLIONS of revenue.
What DL did with closing the DFW hub made all the financial sense in the world - and DL still remains the #2 airline at DFW - a position that is growing even today as DL now serves DFW-LGA - one of AA's top revenue markets - while FL has had to pull out of the DFW market and DL was already the largest carrier on ATL-DFW and is growing its share between AA and DL proportionately larger.

DL still has a network gap with no southwest/Texas hub, something they tried to backfill for a time w/ the CO codeshare. But the revenue produced from the NYC and increased in'tl operations are worth far more than what DL gave up at DFW.
Since no US network carrier has a fully complete network, then the key is to build as much revenue from the network that each carrier has.

More importantly, DL's RELATIVE revenue position at DFW and in every one of its former hubs remains unchanged.

It matters not whether STL, RDU, SJC, or BNA were pulled down as hubs this year or 20 years ago. AA has done a very poor job of maintaining its revenue in key markets after it has pulled down hubs.

I'm not saying that AA's reasons for closing those hubs didn't make sense. We all know that the resources from BNA and RDU were used to build MIA which is a powerful hub. But in the process of pulling down those and other hubs, AA is left w/ big holes in its network and with other carriers now being the dominant carrier in markets where AA is still dominant.

AA is making good progress on rebuilding its revenue - but it it is also important to recognize that AA has enormous challenges to rebuild a network that is capable of competing with DL and UA - and the AA/US merger simply doesn't deliver it.