AMR’s goofy merger explorations – 7.23.12

AMR's goofy merger explorations – July 23, 2012

So AMR says it will explore merger opportunities as part of its bankruptcy process.

The choices of potential partners are odd, indeed. According to The Wall Street Journal, AMR's choices for a potential combination with American Airlines are US Airways, JetBlue, Alaska Air Group, Republic Airways Holdings's Frontier Airlines, and Virgin America.

The Wall Street Journal notes: Besides US Airways, none of the others has publicly expressed a desire to merge with American. JetBlue and Alaska Air have indicated they prefer to remain independent, and people familiar with closely held Virgin America also said the company isn't interested. Asked about that, Mr. Horton said: "If somebody's not interested, they're not interested."

The choices, aside from US Airways, are pretty goofy. None is a network carrier that would add a system to American. JetBlue and Alaska Airlines would certainly beef up the East and West coasts, respectively, where American is weak. JetBlue would add strength to American's JFK international hub. But neither brings a network to the airline.

Frontier Airlines and Virgin America wouldn't bring even the attributes offered by JetBlue and Alaska. Frontier's Denver hub competes with United Airlines and Southwest Airlines. Does American really want to get into this fight? We think not.

Virgin America, which regularly posts huge losses, isn't strong in San Francisco where it is based and neither is American. We don't understand why this airline is even mentioned.

The only airline that makes sense for consideration among those mentioned is US Airways. US Airways has a network, strong East Coast presence, and a sharp management, which wants to be in control and this seems to be the biggest obstacle for the AMR/American management.

And it only makes sense for the US Airways management to be the surviving one.

American has a dismal record of handling mergers and acquisitions. Consider:

AirCal: This airline was acquired to give AA major presence on the West Coast it lacked. AA then proceeded to dismantle to extensive AirCal system are redirect it around the then-new San Jose (CA) hub. This hub didn't work and was later dismantled. AirCal's route system disappeared long before San Jose did.

Reno Air: another attempt to bolster the Western operation. Another failure.

TWA: We never did understand this one. St. Louis is just down the road (so-to-speak) from Chicago. AA's second largest hub was in Chicago. TWA's only hub was in St. Louis. St. Louis wasn't much of an O&D market, a requirement for a viable hub for a legacy carrier. This was doomed from the start. 9/11 accelerated the process. AA eventually down-sized and dismantled St. Louis, returning it to a spoke-city status.

American's current management is largely the same one, and successors, to the management teams that screwed up AirCal, Reno Air and TWA. We shudder to think how badly it would screw up JetBlue and Alaska, both of which have proved to be competitive. In the case of Alaska Airlines, it has a special function with its service to and within the State of Alaska. A network carrier such as American would never maintain this service. (See Western Airlines and Pacific Northern Airways or Delta Air Lines and the remnants of Western's service to Alaska.) We shudder to think how badly this American management would screw up Alaska and the State of Alaska service.

Frontier and Virgin America simply don't bring anything substantial to AA and we view inclusion of these airlines as red herrings.

US Airways is the only combination that makes sense, but only if US Airways management is the surviving one. You can argue that the labor situation remains a deterrent, but we view this more of the intramural fighting between the two pilots unions than anything management has or has not done.

As for flight attendant contracts, we don't see anything here that is out of the ordinary in typical labor-management relations.

Service? Yep, US Airways service is awfully pedestrian but as a million-miler on American, we can tell you American's service is awfully pedestrian, too. In fact, no US airline can boast about its service any more; they've all been reduced to mass transit standards. Neither JetBlue nor Frontier offer the service levels they used to (we haven't flown Virgin America). Even Southwest is now going to reduce legroom to add another row of seats in its 737s and we never have liked its boarding system, old or current.

The best outcome for American is a merger with US Airways with Doug Parker and his team in charge. Parker makes a persuasive case that a combination is in the best interests of both airlines.

American's team proved it doesn't have what it takes anymore.