Why would AA unions want to vote for contracts now?

A number of people have found a disconnect in the idea that American Airlines unions would encourage their membership to vote for the recently negotiated terms as a result of bankruptcy court mediation.  Particularly so after signing agreements with US Airways in support of a merger.

The answer is that it is a calculated bet on the part of the unions.  The terms are better than the term sheets offered by AA to the court for imposing upon the unions.  They increase AA’s costs although the terms are less than what is being offered by US Airways.  This boxes in AA when it comes to making its case for a stand-alone exit strategy.  Once those costs are fixed by a vote, US Airways can better those terms and advance its own business case.

This is why AA and Tom Horton are working so furiously to push away US Airways.  It is putting pressure on them to make a better and better business case and that means they have to find an argument for the revenue side of their business.  Unfortunately, that argument is increasingly not a very compelling one.

Bondholders have formed an ad hoc committee to try to gain more leverage in the bankruptcy process and US Airways CEO is reportedly directly negotiating with bondholders and offering a better deal.

The walls are closing in on AA management.  To succeed in a stand-alone strategy, they must:

  • Make a cost savings argument that supports a viable business plan going forward.  Their costs are now being forced upon them by unions and US Airways which doesn’t make creditors feel like the management has control of the situation.
  • Make a revenue argument based on the Corners Strategy.  This argument is becoming more and more difficult to make since American Airlines still cannot point to revenue improvements that impress anyone.  No financial analyst feels confident about AA’s revenue strategy and many are expressing that lack of confidence very publicly.  US Airways, on the other hand, is able to point to its own revenue strategies and their unequivocal success:   US Airways is earning signficant profits and growing its revenue very successfully despite the inherent weaknesses of its own network.  This shows that US Airways management knows how to run an airline today and puts pressure on AA executives again.
  • AA must convince its creditors that their fortunes are better in a stand-alone strategy than a merger.  The argument here is that an exit from bankruptcy will result in those creditors owning shares of a company that is thought to be worth about $6 Billion upon exit.  Unfortunately, US Airways is forcing cuts into that pie for creditors outside the company by maneuvering AA into offering pilots a very, very significant portion of that pie.

And that’s why the fight is on.  We’ve seem a significant ramp up in PR activities by both airlines and already AA appears to be lashing out wildly in hopes of gaining maneuvering room.  Doug Parker and US Airways is applying pressure both externally and internally and has maneuvering room as a function of their financial results.

I expect this fight to get increasingly dirty.  AA’s disadvantage in this fight is that AA unions aren’t particularly fond of their executive management and just aren’t interested in supporting them.  The DFW area has not, so far, really put forth any strong movement to keep American Airlines a stand-alone company.  Why should they?  US Airways made the guarantee that the merged airlines would retain both the name and headquarters location in the DFW area.

American has lost public support in its Corners Strategy markets of Chicago where it has to contend with the fact that both United and Southwest Airlines are competing with it.  The New York market is being dominated by Delta and United Airlines.  There is no groundswell of public support for American’s current management.

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