What’s next at AA?

Now that the APA has thrown its temper tantrum, let’s take a guess at where things go for American Airlines for a while.   I think that the APFA will see their membership vote no to their contract because, at the end of the day, having a similar temper tantrum will feel more satisfying.  This won’t matter because I think the bankruptcy court is going to give AA exactly what it wants:  imposed terms on both the APA and APFA.

It’s possible the court will wait for the APFA vote and the judge has shown previous interest in seeing rational agreements happen but . . . the APA vote is a signal to the court and judges are able to be emotional as well.  I think AA gets terms imposed and I think Tom Horton gets to chuckle at the unions.  He provoked them and got what he wants.

(Update:  The court did delay its ruling on the APFA contract.  I expect the APFA will also turn down its last offer.)

US Airways and Doug Parker now have a much more difficult uphill battle to pursue a merger.  The pilots just damaged his credibility badly and markets will take notice.  He won’t have influence through the unions because they are giving up a voice at the table as creditors.  They’ve lost some credibility in the PR wars going on and Tom Horton wins this round.  It isn’t good.

A merger still is quite possible and still the most sensible thing to do.  In some ways, it’s even smarter to do it in bankruptcy as opposed to after AA’s exit.  There are decisions that can be made that are easier to execute in bankruptcy as opposed to out of bankruptcy.  Creditors (future shareholders) are more willing to accept those decisions in bankruptcy than outside of it.   A merged company before bankruptcy exit probably sees a little less shareholder value at the exit but probably sees much more value created for shareholders after 3 to 5 years.  If (potential) shareholders are willing to see the long term, this deal makes sense.

But Doug Parker & company now have to go to work hard on bondholders and influential members of the unsecured creditors committee.  They have to present a sterling and realistic business case.  All their ducks need to be lined up perfectly and even with that, one more thing has to happen:

The current AA executive team has to make a mistake.  It doesn’t have to be a very big one but it needs to be enough to cause some to question their ability to deliver on a stand-alone plan.   Another quarterly loss could do it.  Possibly declining revenues might as well.  Delta and United could do US Airways a favor and engage in predatory behavior against AA in its cornerstone markets and that would certainly do it.

A US Airways / AA merger makes huge sense when it comes to competing with UA and Delta.  Those two have proven that their scale is helping them in ways that AA can’t experience.  It is crystal clear that both airlines need each other in the future.

And if you don’t think this fight is about who runs the company, you are kidding yourself.  It really does boil down to that and, in a way, you want that kind of discussion to happen.  Doug Parker is seen as having “failed” at 3 attempts to merge with Delta, UA and Continental.  I would argue that he didn’t “fail” but that marriages with those airlines were a bit less optimal than they would have been with AA.  The real truth is that if anyone is the “ugly chick” in the airline world for the past 5 years, it’s been AA, not US Airways.

After all, it’s AA that has lost $10 Billion in 10 years, not US Airways.  It’s AA that has refused to address its costs and revenues, not US Airways.   It is AA who has an atrocious relationship with its unions, not US Airways.  US Airways’ union problems are a product of the unions, not management.  And the circumstances under which those problems occurred can’t happen again because of new federal laws.

I’ll point out that US Airways not only didn’t like AA for a merger partner for 6 years, it went to the very best prospects over and over again.  That wasn’t dumb, that was smart.  They didn’t lose because they were bad ideas, they lost those merger attempts because their counterparts wanted to remain in charge at those airlines.

You see, those executives didn’t fear US Airways.  They feared Doug Parker and the reason they fear Doug Parker and his team is that they are aggressive, smart and overperform.  There is firm, consistent evidence of that.  Parker & company can make quite a few other executive teams look stupid and no one wants to look stupid.

So, I think Parker will go radio silent for the next few weeks, await some outcomes in bankruptcy court and spend their time quietly working with bondholders and lenders to firm their business case for creditors and shareholders.  Tom Horton isn’t dumb but if I had to choose between him and Doug Parker to run a modern airline against the likes of Jeff Smisek and Richard Anderson, I’d choose Parker.  Parker is aggressive, hungry and willing to think outside the box when it comes to an airline.  Horton hasn’t shown any inclination at adopting new behaviors in light of a changed industry.

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