(MoneyWatch) Is US Airways (LCC) swooping in to pick off the corporate carcass that is American Airlines (AAMRQ)? Rumors have been swirling for weeks that US Air plans to buy the bankrupt carrier.
Multiple sources tell CBS News that while there have been no direct talks between US Air and American regarding a possible merger, US Air has been actively courting the rival airline’s creditors, along with the leadership of the three labor unions that represent American Airlines employees. US Air also has lobbied key congressional delegations on Capitol Hill to build support for what would be a hostile takeover of American.
American Airlines parent AMR, which filed for Chapter 11 bankruptcy protection, on Nov. 29, 2011, is trying to slash its annual labor costs by $1.25 billion and emerge from court supervision. Next week, the struggling airline will try to convince a bankruptcy judge to let it void existing union contracts and impose new ones to secure those spending cuts.
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AMR CEO Tom Horton has been steadfast in declaring that American can go it alone. In a letter today to employees after the company released its earnings, he said:
“As you know, there continues to be much takeover speculation in the press fueled by those who seek to serve their own agendas, including the circulation of misleading information. I expect this to continue and to escalate. Naturally, there are many who do not want American to succeed. Surprisingly, our competitors have even been encouraged by a few within our own ranks. I believe the best way for us to achieve the best outcome for our company, our people and our stakeholders is to proceed quickly with our restructuring to create a successful, growing and profitable company.”
Senator Kay Bailey Hutchison, R.-Texas, seems to agree with Horton, at least during American’s reorganization phase. She advised that “any merger discussions can occur when the bankruptcy court has cleared the process by which American can emerge from court supervision.”
One reason US Air might want to acquire American is because of the rapid airline industry consolidation that has increasingly put a premium on size and economies of scale. US Air has told American’s creditors that the merged airline could generate an additional $1.5 billion in annual revenue and cost savings, according to The Wall Street Journal. Combining US Air, the country’s fifth-largest carrier, with No. 4 American also could help the enlarged company compete with industry leaders United Continental (UAL) and Delta Air Lines (DAL). For example, US Air could add domestic hubs like Dallas and Miami.
Still, a USAir-American merger is fraught with risk. Look no further than to the 2012 merger of United and Continental, which continues to cause headaches. United Continental CEO Jeff Smisek recently told Bloomberg Business Week that “Merging two airlines is unlike merging any other businesses because it’s such a complex business, and we are so heavily regulated. … There’s huge technology issues, fleet issues, facilities issues, people issues. It also takes several years, which I think is surprising to a lot of people.”
Similarly, Delta’s 2008 merger with Northwest also once sounded promising, but it took 14 months, until January 2012, for the airlines to fly as a single carrier. For Delta there was at least a financial payoff, as the company posted its highest profit in a decade in 2010. But in logging those profits, quality sagged. The airline had the worst record among large carriers for on-time arrivals in 2010, and it accounted for a third of all customer complaints, the worst of any airline, for categories like service and lost bags, according to the Transportation Department.
Despite the operational challenges, consolidation has been fierce in the past decade. In addition to mergers involving, UAL, Continental, Delta, and Northwest, deals have linked US Airways and America West; Southwest (LUV) and AirTran; and Air France (AF) and KLM.
Driving these marriages are the industry’s own problems. Since the airline sector was deregulated in 1978, there have been hopes that carriers could make money by wringing redundancies out of the system and by better managing their businesses. When that didn’t work, companies turned to mergers to improve their bottom lines.
The results have been mixed, even as consolidation has reduced the number of competitors. Unfortunately, the improved financial performance of the surviving airlines has come at the expense of consumers. Airlines have reduced capacity, shut down unprofitable routes, and increased prices and fees.