In clash of visions, US Airways had the winning idea
For years, executives at American Airlines fought to stave off bankruptcy because they worried about controlling their destiny. Who knew they would lose it all?
Later this week, American and US Airways are expected to finalize a merger agreement to create the world’s largest airline. Look for happy news conferences, party flights and a dose of revisionist history.
This combination is more a takeover than a marriage and more hostile than consensual. From the beginning, it’s been a clash of visions, cultures and personalities. And the feisty little upstart, dissed and dismissed repeatedly by American management, made all the right moves and ended up on top.
It’s a great business story and a future case study on how to use the bankruptcy court to pull off a long-shot deal. American is almost twice as big as US Air, and the disparity between the companies is reflected in the merger price: Stakeholders in American and parent AMR Corp. are expected to own more than 70 percent of the combination.
American has a superior network, a much stronger global brand and powerful joint ventures in Europe and Japan. American has about triple the number of international seats, the most valuable segment in air travel.
But US Air CEO Doug Parker and his team will set the course, oversee the execution and strive to remake a dysfunctional corporate culture. Barring an eleventh-hour reversal, the one deal point that trumps all, management control, will go to the underdog.
“This is one of the greatest corporate heists of all time,” said William Swelbar, research engineer at the MIT Airline Data Project.
Most believe that Parker could never have pulled off the coup if American were not in bankruptcy. US Air wasn’t strong enough to force the issue, and American execs didn’t respect US Air’s assets enough to pursue a hookup.
Even in Chapter 11, the process strongly favors the debtor because it has the exclusive right to submit a reorganization plan.
American’s exclusivity was extended several times, yet US Air managed to turn the system to its advantage.
Mistakes by American
American CEO Tom Horton and his team made some key mistakes. They never bridged the gap with labor and clung to a stand-alone plan way too long.
But American didn’t lose this contest as much as US Airways won it.
First, US Air needed it more. US Air is much smaller than industry leaders, especially in international business, and many believed that US Air would be marginalized if it failed to find a partner.
Indeed, Parker had tried to merge with Delta and United and failed at both attempts. He succeeded in combining America West and US Air on the heels of a bankruptcy. So he and his team had incentive and experience and were prepared to offer an alternative.
They went on the offensive with a simple idea: A merger would create a more valuable company, both immediately and in the future, and the gains would be shared with all stakeholders.
It was an enticing pitch, designed to resonate with everyone. And because Horton responded so defensively, American management painted itself into a corner.
From the start of Chapter 11, Horton rejected the idea of a merger.
He warned of “opportunists” and outsiders trying to knock American off its path. His team privately mocked US Air, comparing it to the ugliest girl at the dance.
Horton came to be viewed as an obstructionist, wedded to his stand-alone plan. Meanwhile, Parker went on road shows to persuade others that a merger would create more than $1 billion extra a year. If he was right, he had something Horton couldn’t match: more wampum.
The breakthrough came last April, when American’s union leaders and US Air agreed on a framework for new labor contracts. They had reached a deal in six weeks after years of futile clashing with American.
Parker suddenly had real credibility, and the merger had a fan base. Wall Street began to study the merits for both companies and the industry, and momentum began to build.
American was soon backtracking. It had quickly abandoned the idea of terminating its pensions, agreeing to the costlier option of freezing them. It eventually agreed to smaller cuts in labor, saving thousands of jobs. By last summer, Horton had pivoted and was insisting that he never opposed a merger, just the timing of it.
More recently, unions from both American and US Air have agreed to a framework to integrate work groups and resolve disputes. All the progress and optimism stems from the fact that a merger creates more value — and Parker was willing to spread it around.
For months, Horton argued that American should emerge from bankruptcy and then consider a merger, maybe with Jet Blue or US Air. But doing the deal in Chapter 11 could save more money and ensure that it actually happened.
It would also put Parker in charge, a deal-maker for union leaders and many Wall Street analysts.
Once again, Parker had the better answer. For almost a year, he and the US Air team have been winning over key stakeholders, steadily building an irresistible force. Now they’re down to the AMR board and its chairman, Tom Horton.