The “Plane” Truth about Bankruptcies and Mergers

American Airlines, one of the United States’ proudest and most recognized brands, filed for Chapter 11 bankruptcy protection in November 2011.  Seeing an opportunity to consolidate the industry and expand its footprint, US Airways has targeted the ailing airline for acquisition.  Exploiting American’s compromised position, US Airways has already forged contract agreements with three of American’s main labor unions.  American’s unionized employees have eagerly accepted US Airways’ offers, as they include fewer concessions than those offered by their current employer.

For years, American’s management has offered its employees salary and benefits packages that have become the envy of the industry.  This finally caught up with American, as its labor cost currently represents an industry-leading 28 percent of its revenue.  US Airways, on the other hand, enjoys a labor cost of only 17 percent of revenue.  This severe cost disadvantage has contributed significantly to American’s financial difficulties. 

US Airways offered American’s employees arguably generous contracts because they believe a merged carrier will produce synergies and cost savings that will allow for this expense to be covered.  Whether these contract offerings and promises of synergies are realistic or pipe dreams is to be seen, but considering US Airways history, these developments should be met with at least some degree of skepticism.

Because US Airways has yet to carve out contracts agreements with its own labor force, it is surprising that it was able to briskly negotiate deals with American’s unions.  Some argue this move was made to pressure American into a merger before its bankruptcy process is complete.  If true, this apparently hasty act of desperation emphasizes short-term union gains at the expense of the financial health of both American and a potential merged carrier.  If cushy union contracts led American into bankruptcy, it is likely that a newly formed US Airways could suffer the same fate.  US Airways claims revenue gains and cost savings from a merged carrier will allow these contracts to be honored, but its history says otherwise.

US Airways made similar promises when it acquired America West Airlines in 2005.  Management contended the deal would produce significant revenue gains and savings, and that the integration process would be swift and smooth.  However, merging the two workforces proved to be a logistical nightmare, as seniority and contract disputes hampered the process.  To this day, US Airways and America West pilots only fly the aircraft of their pre-merger employer.  Does this sound like a cost-saving synergy to you?  With turmoil already brewing within and amongst unions representing the employees of both carriers, is there any reason to believe this merger will play out differently.  Furthermore, the two carriers already share many overlapping routes, and American is a much larger carrier.  These issues could make successful integration and synergies even more difficult to achieve, as well as raise anticompetitive risks.

Presently, American has until September 28th to restructure itself and iron out new labor deals with its unionized employees.  Considering, US Airways past, it is important for American to exhaustively examine all of its options before entering into any sort of agreement with US Airways.  Yes, it is possible that a merger could be in the best interest of both parties, but this should not be seriously discussed until American exits bankruptcy.  American’s sound business model and amicable relations with its unions have allowed it to remain independent and out of bankruptcy court since 1934.  It deserves a chance to devise its own restructuring plan in the absence of any undue influence and exit bankruptcy intact.  If it is unable to come up with a viable solution, then merger talks should be “plan B.”  Until then, let’s allow American to do what’s best for American.

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