posted on April 20, 2012 10:03
AA-US Airways: Our Best Alternative
(Please note: APA Phone Watch has been activated. If you have any questions about today's news, call 817-302-2399. In addition, click here to visit the AA-US Airways Merger page on alliedpilots.org.)
Your APA leadership recently made the unanimous decision to sign a Conditional Labor Agreement (CLA) with US Airways management pledging to support its business plan for a merger of AMR and US Airways. The Association of Professional Flight Attendants and the Transport Workers Union also signed “agreements of support.” Each of the three agreements incorporates a term sheet with US Airways management that would become the basis for a new working agreement with that labor group should the merger be approved.
This decision by your APA leadership did not come without extensive discussions and consideration of a merger’s potential benefit to individual pilot careers, as well as its potential to produce a more viable and profitable American Airlines for the long term.
After extensive review by our legal and financial advisers and subject-matter experts, your APA leadership is confident that a merger between American Airlines and US Airways would be the best possible course of action for both our profession and for the future of our airline. There are three main reasons for this conclusion:
The APA leadership and its professional advisers strongly believe that the merger plan represents the best available alternative to a Section 1113 abrogation of our collective bargaining agreement.
Our advisers and industry analysts agree — American Airlines management’s stand-alone, post-bankruptcy business plan is wholly inadequate and will not fix the carrier’s revenue problem.
A combined American Airlines and US Airways will eliminate the size gap compared to Delta and United, and the combined operation will also immediately create a comprehensive network that can compete with Delta and United. The combined carrier would provide more feed to trans-Atlantic business, it would become the No. 1 carrier (based on revenue share) on the East Coast and the Midwest, it would revitalize the Chicago cornerstone, it would increase its network and competitive presence in the western U.S. and it would strengthen the oneworld Alliance. The post-merger business plan is also more likely to be successful in directly addressing American Airlines’ serious revenue disparity relative to the competition.
We’ll examine each of these points in more detail below.
Management’s 1113(c) Proposal: The End of the Green Book As We Know It
It’s been clear since Feb. 1 when management presented APA with its term sheet that it would be a complete gutting of our contract. In fact, if management implemented their 1113 motion, the APA leadership and its advisers believe that APA pilots would have the worst labor contract in the U.S. airline industry.
If AMR management has their way, by early June the bankruptcy court will rule in their favor and terminate our contract. In the past 33 restructuring cases where management has sought abrogation of labor contracts, the courts have ruled in favor of management’s request every single time. Those are not good odds.
What does a court-ordered termination really mean? In our case, it would mean nullifying more than 50 years of collective bargaining history—more than a half-century of cumulative effort to establish the rules and conditions necessary to run a safe operation and to provide an appropriate way of life for professional airline pilots.
Management could decide to tailor our terms of employment based on the airline’s financial performance. While management’s initial changes to our contract would likely be based on their term sheet, they could return to court to ask for whatever changes they want—just use your imagination. They could pursue 90-plus hour schedules and fly you to FARs with no duty rigs or deadhead pay. They could pursue unlimited domestic and international codesharing and buy ever-larger jets for American Eagle. They could furlough at will. Without a contract, they could eliminate sick benefits, impose airport standby and change layover rules, fatigue policies and discipline procedures. Lineholders could face assignment of open time without seniority.
If the new business plan were to prove ineffective at turning around the airline’s financial performance, management could unilaterally implement pay cuts and further reductions in medical and retirement benefits.
Without a contract, we would basically be venturing into the unknown—not a good approach to operating a highly complex, customer service-oriented business.
In exchange for supporting a merger with US Airways, APA will have a negotiated framework in place for a contract that will be based on our Green Book, as opposed to a terminated contract followed by an imposed 1113 scenario. Ultimately, our new contract will more closely resemble an industry competitive contract, as opposed to American Airlines management’s draconian term sheet.
Management’s Business Plan: “Underwhelming”
For the past several years, we have all watched our once great airline decline to a level that has made it unrecognizable when compared to the innovative industry leader it once was. Over the years, the airline industry has changed, and AMR management failed to develop innovative strategies to improve the product and strengthen AA’s network. In many ways, American Airlines essentially stood still while the competition passed us by.
AMR management has pursued a strategy of “shrinking to profitability,” and is now focused on “outsourcing to profitability.” As a consequence, American Airlines is now a distant third in terms of domestic network and global reach when compared with Delta and United. Through increased marketplace presence, these two network-carrier competitors enjoy a revenue premium relative to American Airlines obtained by “poaching” high-yield business travelers with a superior product and network. This in turn has rendered the oneworld Alliance less competitive when compared with Sky Team and the Star Alliance. No amount of concessions by labor can solve this revenue and network disparity. Trying to remedy those problems solely through the labor cost reductions and organic growth that AMR management has proposed would be difficult at best.
Our consultants have reached the same conclusion as many Wall Street analysts—management’s business plan won’t fix American Airlines’ revenue and network problem. The business plan is essentially the same “Cornerstone” strategy that landed the airline in bankruptcy restructuring. It relies primarily on deep labor cuts to improve the bottom line, “doubling down” on American Eagle by buying hundreds of new small narrowbody jets, and outsourcing more American Airlines flying through unrestricted additional domestic codeshare partnerships. The plan neglects the serious revenue shortfall that American Airlines now suffers from relative to our network carrier competition.
Management’s stand-alone plan is premised on hopeful projections and assumptions, and does not account for volatile fuel prices and the ability of competitors with deep pockets and stronger networks to respond. Analysts universally agree that AA’s plans to grow in an uncertain economy in already saturated markets will erode the entire industry’s ability to rationally price its product, generate free cash flow and provide for a positive return on invested capital.
Simply put, the plan just doesn’t make good business sense, and carries with it a very high risk.
On the other hand, there has been no shortage of airline management, analysts and media comments regarding future airline consolidation involving American Airlines.
Dahlman Rose, Helane Becker: “American’s cornerstone strategy (focusing on New York JFK, Miami, Chicago, Dallas/Ft. Worth, and Los Angeles) has not worked for the past five years, and frankly, we do not see how it works going forward. In our view, American has a revenue problem that will probably best be solved through a merger.”
Rodman & Renshaw, Dan McKenzie: “From a network perspective, USAir/AA combined are much more powerful than either as a standalone airline. AMR is at risk of reporting weak profitability upon exiting Ch. 11. And it’s why we’re arguing AMR needs to merge sooner rather than later – in Ch. 11.”
JP Morgan, Jamie Baker and Mark Streeter: “We are underwhelmed with AMR’s standalone restructuring plan, insofar as it fails to adequately address the decade-long marginalization of its domestic network, in our view. For this reason, we now ascribe a higher probability that AMR ultimately engages in industry consolidation – and whether or not this happens in court or post exit is likely dependent on whether the creditors’ committee (notably labor and the PBGC) can be won over by potential suitors. As an update to our early January piece, we believe the merits and regulatory challenges of an USAir-AMR combination warrant further consideration.”
A Combined AA-US Airways Makes Good Business Sense
After US Airways management approached APA to explore the possibilities of a merger, the APA leadership worked with APA Legal and the union’s professional advisers to thoroughly analyze the possibility and research each airline’s business facts.
US Airways has become an efficient, profitable carrier that is near industry-leading in operational performance. In 2010, the airline ranked first among the big five network carriers in the annual Airline Quality Rating (AQR) report, which benchmarks airline reliability and service. In the recently released 2011 AQR report, US Airways ranked No. 2 when compared to network carrier competitors.
US Airways management is primarily comprised of the former America West team. They’re lean and entrepreneurial in nature. US Airways is a proven survivor that has found a way to adapt and thrive in a very difficult competitive environment, in marked contrast to what has transpired at American Airlines under the current management team.
US Airways has a reported cash balance of $2.3 billion and in 2011, the airline had record year-over-year passenger revenue per available seat mile (RASM) and yield improvements in every month.
US Airways has successfully used revenue strategies to overcome external economic pressures. For example, in 2008, US Airways lost $856 million — in part because of a fuel cost increase of $1.3 billion. In 2011, the carrier had the same year-over-year increased fuel cost, but it recorded a $111 million profit – a $967 million turnaround.
Although it lacks a deep international network, the US Airways network has a substantial presence in the lucrative East Coast, along with a notable presence in the Midwest and Western U.S.
American Airlines, meanwhile, is currently a distant No. 3 in New York, and has minimal presence in the Northeast-Southeast region. AA is currently NOT No. 1 in three of five its cornerstones — a critical shortcoming.
Just a few short years ago, American Airlines commanded a unit revenue premium relative to competitors — that AA unit revenue premium is gone and the carrier is now trailing competitors. AA’s share of the high-yielding corporate travelers has also sharply declined as increasing numbers of corporate clients choose our competitors’ superior networks and product. AA’s network has clearly become a distant third to post-merger Delta and United. AA has completely withdrawn from markets that it previously dominated or capitulated when competitors showed signs of intrusion.
AA ranks as one of the worst airlines in America. In 2008, American Airlines ranked dead last in the industry for on-time performance and in 2009 when compared to network competitors, AA maintained its last-place ranking. Even over the last 12 months, when compared to our network competitors, AA continued its last-place ranking for on-time arrivals. This is in stark contrast to the days when AA’s advertising slogan was “The On-Time Machine.” (In comparison, in 2008 and 2009, US Airways’ network carrier on-time performance ranking was first and second place, respectively.)
Furthermore, for the years 2010 and 2011, AMR has racked up $33 million in Federal Aviation Administration fines for safety violations — compared to no fines for US Airways.
So how would an American Airlines/US Airways merger make for a stronger network?
AA and US Airways networks are complementary — they are better together than they are apart. An American Airlines-US Airways merger would create a comprehensive network that could compete with both Delta and United.
The combined carrier would be the No. 1 carrier in the key East Coast and central regions of the United States.
The New York-Boston and New York-Washington, D.C. markets feature some of the country’s highest-yield traffic. US Airways has 50 percent of the shuttle seats in those two markets and captures 40 percent of the corporate business.
The combined carrier can be a leader in not only large cities but also in small cities that complement each other.
The combined carrier would close network gaps and create a competitive and comprehensive alternative to Delta and United.
The combined carrier’s strong network will attract corporate customer and other travelers.
The combined carrier would maintain existing hubs and reverse the marginalization of American that happened as a result of the Delta and United mergers.
The combined carrier will more likely reverse American Airlines’ relative revenue decline and provide a deeper, more comprehensive network than a stand-alone AA.
The synergies of the two combined carriers are estimated to exceed $1.5 billion annually.
Our Window of Opportunity is Closing
Your APA leadership strongly believes that when it comes to the possibility of American Airlines merging with another carrier, it was always simply a question of not “if” but “when.” However, we also realize that our window of opportunity to reach a deal that would benefit our members the most is only open for a short time – during bankruptcy.
Our concerns would be the same whether a merger was completed after bankruptcy or prior. However, the ability to provide the highest level of benefit to the pilots is dramatically different under those two scenarios.
Prior to American Airlines exiting bankruptcy, we have the opportunity to craft an alternative to management’s 1113 contract termination – an opportunity to raise the bar to an industry competitive pilot contract.
Mr. Horton has said that any merger would be better addressed after exiting bankruptcy. There is a logical explanation for his position. Post-bankruptcy, any merger would be done on AA management’s terms, in an environment where we may be little more than a speed bump in the process.
After bankruptcy, management would remain in the driver’s seat, with a significant share of ownership in a newly reorganized company and with their positions protected by change of control clauses in the event of a merger. This would allow them to both dictate the terms of a merger and to potentially enrich themselves handsomely in the event of either a consensual consolidation or a hostile takeover.
There is an enormous financial incentive for senior management to resist merging while in bankruptcy, as their control over the corporation would be jeopardized by an agreement with US Airways, threatening their ability to “cash in” following American Airlines’ emergence from Chapter 11.
We can expect significant opposition to what your APA leadership believes to be the best course of action for our collective futures.
Click here to visit the AA-US Airways Merger page on alliedpilots.org, which features supporting analysis.
American Airlines-US Airways Merger: Questions and Answers
1. Why has APA chosen to pursue a merger with US Airways?
Your APA leadership has repeatedly emphasized our commitment to pursuing the best available alternatives for the pilots we represent throughout the restructuring process. After extensive review by our legal and financial advisers and subject-matter experts, we’re confident that a merger between American Airlines and US Airways would be the best possible course of action for both our profession and for the future of our airline. This post-merger business plan directly addresses American Airlines’ two most significant shortcomings: 1) a diminishing network and 2) a serious revenue disparity relative to the competition.
Management’s “Cornerstone” stand-alone plan fails to address a potentially fatal flaw — a billion dollar-plus revenue gap combined with a shrinking network. Management’s restructuring strategy is mainly predicated on driving labor costs below the lowest common denominator. In a rare show of unanimity, the airline analyst community has universally dismissed management’s plan to add capacity in the current economic environment. Almost without exception, analysts agree that a US Airways merger would be the best way to repair American Airlines’ network and revenue disparities.
In exchange for supporting this presently contemplated merger with US Airways, APA has a negotiated framework in place for a contract that would be based on our Green Book, as opposed to a terminated contract followed by an imposed 1113.
2. What are the advantages of a merger between American Airlines and US Airways?
During the past decade, AMR management has pursued a strategy of “shrinking to profitability.” As a consequence, American Airlines is now a distant third in terms of domestic network and global reach when compared with Delta and United. Through increased marketplace presence, these two network-carrier competitors enjoy a revenue premium relative to American Airlines obtained by “poaching” high-yield business travelers with a superior product and network. This in turn has rendered the oneworld Alliance less competitive when compared with Sky Team and the Star Alliance. No amount of concessions by labor can solve this revenue and network disparity. Trying to remedy those problems solely through the labor cost reductions and organic growth that AMR management has proposed would be difficult at best.
Among other specific challenges, American Airlines is disadvantaged by a diminished East Coast domestic presence, with no hubs there that have the same scale and dominance as MIA or DFW. In addition, AA lacks small and medium-size market presence in the region to feed smaller bases such as BOS, DCA and LGA/JFK. In this slot-restricted, congested environment, we have few options available to us aside from partnering with US Airways, which has a formidable East Coast network.
3. Why not a tie-up with Delta, JetBlue or someone else?
There would be significant regulatory and antitrust obstacles to a merger with Delta, which currently overlaps American Airlines in 69 markets. Of those 69 markets, 28 would be reduced to a single carrier in the event of an American-Delta merger, with 38 anchored to New York. Consequently, an American-Delta tie-up would require significant carve-outs to pass muster with the Department of Transportation and Department of Justice. There would also be significant European Union concerns regarding an American Airlines defection from oneworld or a Delta departure from Skyteam. Assuming those regulatory hurdles were successfully addressed, there is no guarantee that the smaller American Airlines bases that overlap with Delta’s network would remain in operation. Delta management has made it clear that they covet Miami and whatever South American routes and JFK slots they can obtain in an acquisition. The end result would potentially be thousands of American Airlines pilots on the street with no recall rights.
A merger with JetBlue would not address American Airlines’ core problem in East Coast markets outside of JFK. JetBlue is primarily focused on the leisure market in the Caribbean and Florida, rather than on business travelers. Its two non-contiguous JFK terminals make connections to American Airlines extremely difficult, while JFK is not the favored airport for NYC customers. In many respects, JFK is considered to be “geographically challenged’ in the local New York market, especially when compared to LaGuardia and Newark, which offer far more connectivity.
4. Just what does US Airways bring to the table that would help American Airlines?
An American Airlines-US Airways merger would create a comprehensive network that could compete with both Delta and United.
US Airways and American Airlines currently overlap in 13 domestic markets, primarily hub to hub—no international overlap. Both carriers’ networks are generally complementary and together are a force multiplier on the East Coast. American Airlines currently serves 33 cities in that region, compared with 65 for Delta, 54 for United and 68 for US Airways. According to our industry experts, American Airlines would vault from the region’s fourth-largest carrier to first by merging with US Airways, with the US Airways Shuttle making up a valuable component. The New York-Boston and New York-Washington, D.C. markets feature some of the country’s highest-yield traffic. US Airways has 50 percent of the shuttle seats in those two markets and captures 40 percent of the corporate business. The synergies of the two combined carriers are estimated to exceed $1.5 billion annually.
A merger would also likely catapult American Airlines into the No. 1 position in the Central-Midwest region, and would likewise improve American Airlines’ position in the West by flowing more traffic into a strengthened LAX hub.
By serving significantly more domestic markets, American Airlines would be better able to attract more corporate clients and elite travelers, who provide the bulk of airline revenue. Also, current oneworld Alliance members would likely welcome the ability to tap into the bigger domestic network that an American Airlines-US Airways merger would create. That same expanded network could also serve to attract new members to the oneworld Alliance.
5. Why can’t American Airlines go it alone in accordance with AMR management’s plan?
That plan suggests organic growth, but without exception, industry analysts are skeptical. What the plan doesn’t adequately address is American Airlines’ underlying revenue weakness, loss of corporate market share, and a diminished presence on both coasts. During the past decade, American Airlines remained on the sidelines operationally while the world passed us by. The comprehensive networks that have been created by a combined UAL-CAL and DAL-NWA have put our airline at a structural disadvantage that cannot be remedied with the “Cornerstone” stand-alone plan. A variety of analysts have described management’s plan as “more of the same.” Please keep in mind that in three of those five “Cornerstone” markets, American Airlines is not the dominant carrier.
Management’s stand-alone plan is premised on hopeful projections and assumptions, and does not account for volatile fuel prices and the ability of competitors with deep pockets and stronger networks to respond. Analysts universally agree that AA’s plans to grow in an uncertain economy in already saturated markets will erode the entire industry’s ability to rationally price its product, make a profit, generate free cash flow and provide for a positive return on invested capital.
We should also keep in mind that the primary tenets of management’s plan include below-market labor costs, “doubling down” on American Eagle by buying hundreds of new small narrowbody jets, and outsourcing more American Airlines flying through unrestricted additional domestic codeshare partnerships.
6. Hasn’t US Airways been the “poster child” of industry dysfunction since merging with America West?
Like most other mergers, the US Airways-America West tie-up has experienced significant integration issues. The biggest obstacle still remaining is a single pilot seniority list, which would enable US Airways to enjoy the full benefit of the synergies that mergers produce. Dissatisfied with the arbitrator’s decision on integration of the two seniority lists, the US Airways pilots decided to litigate the issue and are now awaiting a decision from the U.S. District Court in Phoenix. For now, the two pilot groups work under separate contracts.
The pilot seniority issue aside, US Airways has become an efficient, profitable carrier that is near industry-leading in operational performance. In 2010, the airline ranked first among the big five network carriers in the annual Airline Quality Rating (AQR) report, which benchmarks airline reliability and service. In the just released 2011 AQR report, US Airways ranked No. 2 when compared to network carrier competitors. US Airways management is primarily comprised of the former America West team. They’re lean and entrepreneurial in nature. US Airways is a proven survivor that has found a way to adapt and thrive in a very difficult competitive environment, in marked contrast to what has transpired at American Airlines under the current management team.
7. How would my seniority be affected by a combination of American Airlines and US Airways?
Airline industry seniority integrations are now governed by the McCaskill-Bond Amendment, which became law in 2007. McCaskill-Bond requires a “fair and equitable” integration of seniority lists and includes a provision for a negotiated settlement between the parties. If the integration cannot be settled within 20 days, either party may refer the dispute to a neutral arbitrator, who must render a decision within 90 days. (In practice, the parties generally agree to extend the time limits as necessary.)
8. Would we be forced to work under the US Airways pilot contract?
No. APA has negotiated a Conditional Labor Agreement (CLA) that is outlined in the new term sheet with US Airways management.
9. Would a merger result in pilot furloughs?
Under the terms of APA’s CLA with US Airways management, there would be 100 percent furlough protection for our pilots.
10. In the event of an American Airlines-US Airways merger, what would the new airline be called and where would it be headquartered?
US Airways’ senior management has indicated that they plan for the combined entity to do business under American Airlines’ operating certificate and to be branded American Airlines, with the headquarters in Fort Worth, Texas.
11. How would American Airlines’ aircraft order be affected by a merger with US Airways?
US Airways management has committed to maintain all aircraft deliveries that were negotiated between American Airlines and both Boeing and Airbus.
12. Where do the TWU and APFA stand on the subject of a merger with US Airways?
Both TWU and APFA have negotiated and signed new term sheets with US Airways management that would also become the basis for new collective bargaining agreements in the event of a merger.
13. Would AMR management be replaced by US Airways management?
There would likely be significant changes in the ranks of middle and upper management at American Airlines, but exactly what those changes would consist of is impossible to predict.
14. How will this proposed merger affect the 1113 process and the upcoming court hearing?
We can expect the 1113 process to continue unless both the Unsecured Creditors’ Committee (UCC) and the bankruptcy court choose to end AMR management’s exclusivity period. Currently, AMR management has the exclusive right to present a plan of reorganization. If a majority of the nine members of the UCC petition the court for that exclusivity period to be waived, then AMR management would need to make their case to the court concerning why they should retain exclusivity. Ultimately, the judge will decide whether to terminate AMR management’s exclusivity period.
15. Would it be better to wait until American Airlines emerges from restructuring before even considering a merger with another carrier?
In the view of your APA leadership, the question of a merger with US Airways is not “if,” but “when.” We’re clearly better off proceeding with a merger while in restructuring as opposed to after the bankruptcy process is complete. Our concerns would be the same whether a merger was completed after bankruptcy or prior. However, the ability to provide the highest level of benefit to the pilots is dramatically different under those two scenarios. A merger with US Airways that followed our exit from bankruptcy (or any other carrier for that matter) would be entirely on AMR management’s terms and would not require APA’s consent. We would barely constitute a speed bump in that post-bankruptcy scenario. However, a merger consummated in bankruptcy provides us with the opportunity to craft a collective bargaining agreement that is industry competitive rather than the product of a unilaterally imposed Section 1113(c) term sheet that takes APA to the bottom of the industry.
In short, we have more control over our destiny if a merger is conducted while the airline is in restructuring. Conversely, just the opposite would be true in a merger scenario after bankruptcy. We would basically be along for the ride with AMR management in the driver’s seat—not an appealing scenario.
As you may have seen, AMR Chairman Tom Horton has publicly stated that he would consider a merger after American Airlines exits bankruptcy. There is a logical explanation for his position. If history is any guide, management would own a large share of the company upon exit from bankruptcy. By way of example, Glen Tilton and his management group emerged from bankruptcy with a 15 percent ownership of United Airlines. We can therefore expect that AMR management would reward themselves handsomely when the company has completed restructuring. There is an enormous financial incentive for senior management to resist merging while in bankruptcy, as their control over the corporation would be jeopardized by an agreement with US Airways, threatening their ability to “cash in” following American Airlines’ emergence from Chapter 11. Clearly we can expect significant opposition to what your APA leadership believes to be the best course of action for our collective futures.
AA-US Airways: Our Best Alternative
(Please note: APA Phone Watch has been activated. If you have any questions about today's news, call 817-302-2399. In addition, click here to visit the AA-US Airways Merger page on alliedpilots.org.)
Your APA leadership recently made the unanimous decision to sign a Conditional Labor Agreement (CLA) with US Airways management pledging to support its business plan for a merger of AMR and US Airways. The Association of Professional Flight Attendants and the Transport Workers Union also signed “agreements of support.” Each of the three agreements incorporates a term sheet with US Airways management that would become the basis for a new working agreement with that labor group should the merger be approved.
This decision by your APA leadership did not come without extensive discussions and consideration of a merger’s potential benefit to individual pilot careers, as well as its potential to produce a more viable and profitable American Airlines for the long term.
After extensive review by our legal and financial advisers and subject-matter experts, your APA leadership is confident that a merger between American Airlines and US Airways would be the best possible course of action for both our profession and for the future of our airline. There are three main reasons for this conclusion:
The APA leadership and its professional advisers strongly believe that the merger plan represents the best available alternative to a Section 1113 abrogation of our collective bargaining agreement.
Our advisers and industry analysts agree — American Airlines management’s stand-alone, post-bankruptcy business plan is wholly inadequate and will not fix the carrier’s revenue problem.
A combined American Airlines and US Airways will eliminate the size gap compared to Delta and United, and the combined operation will also immediately create a comprehensive network that can compete with Delta and United. The combined carrier would provide more feed to trans-Atlantic business, it would become the No. 1 carrier (based on revenue share) on the East Coast and the Midwest, it would revitalize the Chicago cornerstone, it would increase its network and competitive presence in the western U.S. and it would strengthen the oneworld Alliance. The post-merger business plan is also more likely to be successful in directly addressing American Airlines’ serious revenue disparity relative to the competition.
We’ll examine each of these points in more detail below.
Management’s 1113(c) Proposal: The End of the Green Book As We Know It
It’s been clear since Feb. 1 when management presented APA with its term sheet that it would be a complete gutting of our contract. In fact, if management implemented their 1113 motion, the APA leadership and its advisers believe that APA pilots would have the worst labor contract in the U.S. airline industry.
If AMR management has their way, by early June the bankruptcy court will rule in their favor and terminate our contract. In the past 33 restructuring cases where management has sought abrogation of labor contracts, the courts have ruled in favor of management’s request every single time. Those are not good odds.
What does a court-ordered termination really mean? In our case, it would mean nullifying more than 50 years of collective bargaining history—more than a half-century of cumulative effort to establish the rules and conditions necessary to run a safe operation and to provide an appropriate way of life for professional airline pilots.
Management could decide to tailor our terms of employment based on the airline’s financial performance. While management’s initial changes to our contract would likely be based on their term sheet, they could return to court to ask for whatever changes they want—just use your imagination. They could pursue 90-plus hour schedules and fly you to FARs with no duty rigs or deadhead pay. They could pursue unlimited domestic and international codesharing and buy ever-larger jets for American Eagle. They could furlough at will. Without a contract, they could eliminate sick benefits, impose airport standby and change layover rules, fatigue policies and discipline procedures. Lineholders could face assignment of open time without seniority.
If the new business plan were to prove ineffective at turning around the airline’s financial performance, management could unilaterally implement pay cuts and further reductions in medical and retirement benefits.
Without a contract, we would basically be venturing into the unknown—not a good approach to operating a highly complex, customer service-oriented business.
In exchange for supporting a merger with US Airways, APA will have a negotiated framework in place for a contract that will be based on our Green Book, as opposed to a terminated contract followed by an imposed 1113 scenario. Ultimately, our new contract will more closely resemble an industry competitive contract, as opposed to American Airlines management’s draconian term sheet.
Management’s Business Plan: “Underwhelming”
For the past several years, we have all watched our once great airline decline to a level that has made it unrecognizable when compared to the innovative industry leader it once was. Over the years, the airline industry has changed, and AMR management failed to develop innovative strategies to improve the product and strengthen AA’s network. In many ways, American Airlines essentially stood still while the competition passed us by.
AMR management has pursued a strategy of “shrinking to profitability,” and is now focused on “outsourcing to profitability.” As a consequence, American Airlines is now a distant third in terms of domestic network and global reach when compared with Delta and United. Through increased marketplace presence, these two network-carrier competitors enjoy a revenue premium relative to American Airlines obtained by “poaching” high-yield business travelers with a superior product and network. This in turn has rendered the oneworld Alliance less competitive when compared with Sky Team and the Star Alliance. No amount of concessions by labor can solve this revenue and network disparity. Trying to remedy those problems solely through the labor cost reductions and organic growth that AMR management has proposed would be difficult at best.
Our consultants have reached the same conclusion as many Wall Street analysts—management’s business plan won’t fix American Airlines’ revenue and network problem. The business plan is essentially the same “Cornerstone” strategy that landed the airline in bankruptcy restructuring. It relies primarily on deep labor cuts to improve the bottom line, “doubling down” on American Eagle by buying hundreds of new small narrowbody jets, and outsourcing more American Airlines flying through unrestricted additional domestic codeshare partnerships. The plan neglects the serious revenue shortfall that American Airlines now suffers from relative to our network carrier competition.
Management’s stand-alone plan is premised on hopeful projections and assumptions, and does not account for volatile fuel prices and the ability of competitors with deep pockets and stronger networks to respond. Analysts universally agree that AA’s plans to grow in an uncertain economy in already saturated markets will erode the entire industry’s ability to rationally price its product, generate free cash flow and provide for a positive return on invested capital.
Simply put, the plan just doesn’t make good business sense, and carries with it a very high risk.
On the other hand, there has been no shortage of airline management, analysts and media comments regarding future airline consolidation involving American Airlines.
Dahlman Rose, Helane Becker: “American’s cornerstone strategy (focusing on New York JFK, Miami, Chicago, Dallas/Ft. Worth, and Los Angeles) has not worked for the past five years, and frankly, we do not see how it works going forward. In our view, American has a revenue problem that will probably best be solved through a merger.”
Rodman & Renshaw, Dan McKenzie: “From a network perspective, USAir/AA combined are much more powerful than either as a standalone airline. AMR is at risk of reporting weak profitability upon exiting Ch. 11. And it’s why we’re arguing AMR needs to merge sooner rather than later – in Ch. 11.”
JP Morgan, Jamie Baker and Mark Streeter: “We are underwhelmed with AMR’s standalone restructuring plan, insofar as it fails to adequately address the decade-long marginalization of its domestic network, in our view. For this reason, we now ascribe a higher probability that AMR ultimately engages in industry consolidation – and whether or not this happens in court or post exit is likely dependent on whether the creditors’ committee (notably labor and the PBGC) can be won over by potential suitors. As an update to our early January piece, we believe the merits and regulatory challenges of an USAir-AMR combination warrant further consideration.”
A Combined AA-US Airways Makes Good Business Sense
After US Airways management approached APA to explore the possibilities of a merger, the APA leadership worked with APA Legal and the union’s professional advisers to thoroughly analyze the possibility and research each airline’s business facts.
US Airways has become an efficient, profitable carrier that is near industry-leading in operational performance. In 2010, the airline ranked first among the big five network carriers in the annual Airline Quality Rating (AQR) report, which benchmarks airline reliability and service. In the recently released 2011 AQR report, US Airways ranked No. 2 when compared to network carrier competitors.
US Airways management is primarily comprised of the former America West team. They’re lean and entrepreneurial in nature. US Airways is a proven survivor that has found a way to adapt and thrive in a very difficult competitive environment, in marked contrast to what has transpired at American Airlines under the current management team.
US Airways has a reported cash balance of $2.3 billion and in 2011, the airline had record year-over-year passenger revenue per available seat mile (RASM) and yield improvements in every month.
US Airways has successfully used revenue strategies to overcome external economic pressures. For example, in 2008, US Airways lost $856 million — in part because of a fuel cost increase of $1.3 billion. In 2011, the carrier had the same year-over-year increased fuel cost, but it recorded a $111 million profit – a $967 million turnaround.
Although it lacks a deep international network, the US Airways network has a substantial presence in the lucrative East Coast, along with a notable presence in the Midwest and Western U.S.
American Airlines, meanwhile, is currently a distant No. 3 in New York, and has minimal presence in the Northeast-Southeast region. AA is currently NOT No. 1 in three of five its cornerstones — a critical shortcoming.
Just a few short years ago, American Airlines commanded a unit revenue premium relative to competitors — that AA unit revenue premium is gone and the carrier is now trailing competitors. AA’s share of the high-yielding corporate travelers has also sharply declined as increasing numbers of corporate clients choose our competitors’ superior networks and product. AA’s network has clearly become a distant third to post-merger Delta and United. AA has completely withdrawn from markets that it previously dominated or capitulated when competitors showed signs of intrusion.
AA ranks as one of the worst airlines in America. In 2008, American Airlines ranked dead last in the industry for on-time performance and in 2009 when compared to network competitors, AA maintained its last-place ranking. Even over the last 12 months, when compared to our network competitors, AA continued its last-place ranking for on-time arrivals. This is in stark contrast to the days when AA’s advertising slogan was “The On-Time Machine.” (In comparison, in 2008 and 2009, US Airways’ network carrier on-time performance ranking was first and second place, respectively.)
Furthermore, for the years 2010 and 2011, AMR has racked up $33 million in Federal Aviation Administration fines for safety violations — compared to no fines for US Airways.
So how would an American Airlines/US Airways merger make for a stronger network?
AA and US Airways networks are complementary — they are better together than they are apart. An American Airlines-US Airways merger would create a comprehensive network that could compete with both Delta and United.
The combined carrier would be the No. 1 carrier in the key East Coast and central regions of the United States.
The New York-Boston and New York-Washington, D.C. markets feature some of the country’s highest-yield traffic. US Airways has 50 percent of the shuttle seats in those two markets and captures 40 percent of the corporate business.
The combined carrier can be a leader in not only large cities but also in small cities that complement each other.
The combined carrier would close network gaps and create a competitive and comprehensive alternative to Delta and United.
The combined carrier’s strong network will attract corporate customer and other travelers.
The combined carrier would maintain existing hubs and reverse the marginalization of American that happened as a result of the Delta and United mergers.
The combined carrier will more likely reverse American Airlines’ relative revenue decline and provide a deeper, more comprehensive network than a stand-alone AA.
The synergies of the two combined carriers are estimated to exceed $1.5 billion annually.
Our Window of Opportunity is Closing
Your APA leadership strongly believes that when it comes to the possibility of American Airlines merging with another carrier, it was always simply a question of not “if” but “when.” However, we also realize that our window of opportunity to reach a deal that would benefit our members the most is only open for a short time – during bankruptcy.
Our concerns would be the same whether a merger was completed after bankruptcy or prior. However, the ability to provide the highest level of benefit to the pilots is dramatically different under those two scenarios.
Prior to American Airlines exiting bankruptcy, we have the opportunity to craft an alternative to management’s 1113 contract termination – an opportunity to raise the bar to an industry competitive pilot contract.
Mr. Horton has said that any merger would be better addressed after exiting bankruptcy. There is a logical explanation for his position. Post-bankruptcy, any merger would be done on AA management’s terms, in an environment where we may be little more than a speed bump in the process.
After bankruptcy, management would remain in the driver’s seat, with a significant share of ownership in a newly reorganized company and with their positions protected by change of control clauses in the event of a merger. This would allow them to both dictate the terms of a merger and to potentially enrich themselves handsomely in the event of either a consensual consolidation or a hostile takeover.
There is an enormous financial incentive for senior management to resist merging while in bankruptcy, as their control over the corporation would be jeopardized by an agreement with US Airways, threatening their ability to “cash in” following American Airlines’ emergence from Chapter 11.
We can expect significant opposition to what your APA leadership believes to be the best course of action for our collective futures.
Click here to visit the AA-US Airways Merger page on alliedpilots.org, which features supporting analysis.
American Airlines-US Airways Merger: Questions and Answers
1. Why has APA chosen to pursue a merger with US Airways?
Your APA leadership has repeatedly emphasized our commitment to pursuing the best available alternatives for the pilots we represent throughout the restructuring process. After extensive review by our legal and financial advisers and subject-matter experts, we’re confident that a merger between American Airlines and US Airways would be the best possible course of action for both our profession and for the future of our airline. This post-merger business plan directly addresses American Airlines’ two most significant shortcomings: 1) a diminishing network and 2) a serious revenue disparity relative to the competition.
Management’s “Cornerstone” stand-alone plan fails to address a potentially fatal flaw — a billion dollar-plus revenue gap combined with a shrinking network. Management’s restructuring strategy is mainly predicated on driving labor costs below the lowest common denominator. In a rare show of unanimity, the airline analyst community has universally dismissed management’s plan to add capacity in the current economic environment. Almost without exception, analysts agree that a US Airways merger would be the best way to repair American Airlines’ network and revenue disparities.
In exchange for supporting this presently contemplated merger with US Airways, APA has a negotiated framework in place for a contract that would be based on our Green Book, as opposed to a terminated contract followed by an imposed 1113.
2. What are the advantages of a merger between American Airlines and US Airways?
During the past decade, AMR management has pursued a strategy of “shrinking to profitability.” As a consequence, American Airlines is now a distant third in terms of domestic network and global reach when compared with Delta and United. Through increased marketplace presence, these two network-carrier competitors enjoy a revenue premium relative to American Airlines obtained by “poaching” high-yield business travelers with a superior product and network. This in turn has rendered the oneworld Alliance less competitive when compared with Sky Team and the Star Alliance. No amount of concessions by labor can solve this revenue and network disparity. Trying to remedy those problems solely through the labor cost reductions and organic growth that AMR management has proposed would be difficult at best.
Among other specific challenges, American Airlines is disadvantaged by a diminished East Coast domestic presence, with no hubs there that have the same scale and dominance as MIA or DFW. In addition, AA lacks small and medium-size market presence in the region to feed smaller bases such as BOS, DCA and LGA/JFK. In this slot-restricted, congested environment, we have few options available to us aside from partnering with US Airways, which has a formidable East Coast network.
3. Why not a tie-up with Delta, JetBlue or someone else?
There would be significant regulatory and antitrust obstacles to a merger with Delta, which currently overlaps American Airlines in 69 markets. Of those 69 markets, 28 would be reduced to a single carrier in the event of an American-Delta merger, with 38 anchored to New York. Consequently, an American-Delta tie-up would require significant carve-outs to pass muster with the Department of Transportation and Department of Justice. There would also be significant European Union concerns regarding an American Airlines defection from oneworld or a Delta departure from Skyteam. Assuming those regulatory hurdles were successfully addressed, there is no guarantee that the smaller American Airlines bases that overlap with Delta’s network would remain in operation. Delta management has made it clear that they covet Miami and whatever South American routes and JFK slots they can obtain in an acquisition. The end result would potentially be thousands of American Airlines pilots on the street with no recall rights.
A merger with JetBlue would not address American Airlines’ core problem in East Coast markets outside of JFK. JetBlue is primarily focused on the leisure market in the Caribbean and Florida, rather than on business travelers. Its two non-contiguous JFK terminals make connections to American Airlines extremely difficult, while JFK is not the favored airport for NYC customers. In many respects, JFK is considered to be “geographically challenged’ in the local New York market, especially when compared to LaGuardia and Newark, which offer far more connectivity.
4. Just what does US Airways bring to the table that would help American Airlines?
An American Airlines-US Airways merger would create a comprehensive network that could compete with both Delta and United.
US Airways and American Airlines currently overlap in 13 domestic markets, primarily hub to hub—no international overlap. Both carriers’ networks are generally complementary and together are a force multiplier on the East Coast. American Airlines currently serves 33 cities in that region, compared with 65 for Delta, 54 for United and 68 for US Airways. According to our industry experts, American Airlines would vault from the region’s fourth-largest carrier to first by merging with US Airways, with the US Airways Shuttle making up a valuable component. The New York-Boston and New York-Washington, D.C. markets feature some of the country’s highest-yield traffic. US Airways has 50 percent of the shuttle seats in those two markets and captures 40 percent of the corporate business. The synergies of the two combined carriers are estimated to exceed $1.5 billion annually.
A merger would also likely catapult American Airlines into the No. 1 position in the Central-Midwest region, and would likewise improve American Airlines’ position in the West by flowing more traffic into a strengthened LAX hub.
By serving significantly more domestic markets, American Airlines would be better able to attract more corporate clients and elite travelers, who provide the bulk of airline revenue. Also, current oneworld Alliance members would likely welcome the ability to tap into the bigger domestic network that an American Airlines-US Airways merger would create. That same expanded network could also serve to attract new members to the oneworld Alliance.
5. Why can’t American Airlines go it alone in accordance with AMR management’s plan?
That plan suggests organic growth, but without exception, industry analysts are skeptical. What the plan doesn’t adequately address is American Airlines’ underlying revenue weakness, loss of corporate market share, and a diminished presence on both coasts. During the past decade, American Airlines remained on the sidelines operationally while the world passed us by. The comprehensive networks that have been created by a combined UAL-CAL and DAL-NWA have put our airline at a structural disadvantage that cannot be remedied with the “Cornerstone” stand-alone plan. A variety of analysts have described management’s plan as “more of the same.” Please keep in mind that in three of those five “Cornerstone” markets, American Airlines is not the dominant carrier.
Management’s stand-alone plan is premised on hopeful projections and assumptions, and does not account for volatile fuel prices and the ability of competitors with deep pockets and stronger networks to respond. Analysts universally agree that AA’s plans to grow in an uncertain economy in already saturated markets will erode the entire industry’s ability to rationally price its product, make a profit, generate free cash flow and provide for a positive return on invested capital.
We should also keep in mind that the primary tenets of management’s plan include below-market labor costs, “doubling down” on American Eagle by buying hundreds of new small narrowbody jets, and outsourcing more American Airlines flying through unrestricted additional domestic codeshare partnerships.
6. Hasn’t US Airways been the “poster child” of industry dysfunction since merging with America West?
Like most other mergers, the US Airways-America West tie-up has experienced significant integration issues. The biggest obstacle still remaining is a single pilot seniority list, which would enable US Airways to enjoy the full benefit of the synergies that mergers produce. Dissatisfied with the arbitrator’s decision on integration of the two seniority lists, the US Airways pilots decided to litigate the issue and are now awaiting a decision from the U.S. District Court in Phoenix. For now, the two pilot groups work under separate contracts.
The pilot seniority issue aside, US Airways has become an efficient, profitable carrier that is near industry-leading in operational performance. In 2010, the airline ranked first among the big five network carriers in the annual Airline Quality Rating (AQR) report, which benchmarks airline reliability and service. In the just released 2011 AQR report, US Airways ranked No. 2 when compared to network carrier competitors. US Airways management is primarily comprised of the former America West team. They’re lean and entrepreneurial in nature. US Airways is a proven survivor that has found a way to adapt and thrive in a very difficult competitive environment, in marked contrast to what has transpired at American Airlines under the current management team.
7. How would my seniority be affected by a combination of American Airlines and US Airways?
Airline industry seniority integrations are now governed by the McCaskill-Bond Amendment, which became law in 2007. McCaskill-Bond requires a “fair and equitable” integration of seniority lists and includes a provision for a negotiated settlement between the parties. If the integration cannot be settled within 20 days, either party may refer the dispute to a neutral arbitrator, who must render a decision within 90 days. (In practice, the parties generally agree to extend the time limits as necessary.)
8. Would we be forced to work under the US Airways pilot contract?
No. APA has negotiated a Conditional Labor Agreement (CLA) that is outlined in the new term sheet with US Airways management.
9. Would a merger result in pilot furloughs?
Under the terms of APA’s CLA with US Airways management, there would be 100 percent furlough protection for our pilots.
10. In the event of an American Airlines-US Airways merger, what would the new airline be called and where would it be headquartered?
US Airways’ senior management has indicated that they plan for the combined entity to do business under American Airlines’ operating certificate and to be branded American Airlines, with the headquarters in Fort Worth, Texas.
11. How would American Airlines’ aircraft order be affected by a merger with US Airways?
US Airways management has committed to maintain all aircraft deliveries that were negotiated between American Airlines and both Boeing and Airbus.
12. Where do the TWU and APFA stand on the subject of a merger with US Airways?
Both TWU and APFA have negotiated and signed new term sheets with US Airways management that would also become the basis for new collective bargaining agreements in the event of a merger.
13. Would AMR management be replaced by US Airways management?
There would likely be significant changes in the ranks of middle and upper management at American Airlines, but exactly what those changes would consist of is impossible to predict.
14. How will this proposed merger affect the 1113 process and the upcoming court hearing?
We can expect the 1113 process to continue unless both the Unsecured Creditors’ Committee (UCC) and the bankruptcy court choose to end AMR management’s exclusivity period. Currently, AMR management has the exclusive right to present a plan of reorganization. If a majority of the nine members of the UCC petition the court for that exclusivity period to be waived, then AMR management would need to make their case to the court concerning why they should retain exclusivity. Ultimately, the judge will decide whether to terminate AMR management’s exclusivity period.
15. Would it be better to wait until American Airlines emerges from restructuring before even considering a merger with another carrier?
In the view of your APA leadership, the question of a merger with US Airways is not “if,” but “when.” We’re clearly better off proceeding with a merger while in restructuring as opposed to after the bankruptcy process is complete. Our concerns would be the same whether a merger was completed after bankruptcy or prior. However, the ability to provide the highest level of benefit to the pilots is dramatically different under those two scenarios. A merger with US Airways that followed our exit from bankruptcy (or any other carrier for that matter) would be entirely on AMR management’s terms and would not require APA’s consent. We would barely constitute a speed bump in that post-bankruptcy scenario. However, a merger consummated in bankruptcy provides us with the opportunity to craft a collective bargaining agreement that is industry competitive rather than the product of a unilaterally imposed Section 1113(c) term sheet that takes APA to the bottom of the industry.
In short, we have more control over our destiny if a merger is conducted while the airline is in restructuring. Conversely, just the opposite would be true in a merger scenario after bankruptcy. We would basically be along for the ride with AMR management in the driver’s seat—not an appealing scenario.
As you may have seen, AMR Chairman Tom Horton has publicly stated that he would consider a merger after American Airlines exits bankruptcy. There is a logical explanation for his position. If history is any guide, management would own a large share of the company upon exit from bankruptcy. By way of example, Glen Tilton and his management group emerged from bankruptcy with a 15 percent ownership of United Airlines. We can therefore expect that AMR management would reward themselves handsomely when the company has completed restructuring. There is an enormous financial incentive for senior management to resist merging while in bankruptcy, as their control over the corporation would be jeopardized by an agreement with US Airways, threatening their ability to “cash in” following American Airlines’ emergence from Chapter 11. Clearly we can expect significant opposition to what your APA leadership believes to be the best course of action for our collective futures.
