{"id":4828,"date":"2012-08-07T09:37:38","date_gmt":"2012-08-06T23:37:38","guid":{"rendered":"http:\/\/blogs.unsw.edu.au\/knowledgetoday\/?p=4828"},"modified":"2012-08-07T09:37:38","modified_gmt":"2012-08-06T23:37:38","slug":"us-airways","status":"publish","type":"post","link":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/blog\/2012\/08\/us-airways\/","title":{"rendered":"US Airways and American Airlines: On Board for a Merger?"},"content":{"rendered":"

From the Knowledge@Wharton today\u00a0blog<\/a>.<\/strong><\/p>\n

US Airways in recent weeks has set an aggressive flight path for its plan to merge with bankrupt American Airlines. Indeed, US Airways CEO Doug Parker has stated that the merger is the only way to effectively compete against United and Delta, its two bigger rivals.<\/p>\n

US Airways has taken a number of steps to help push American \u2013 which would just as soon emerge from bankruptcy as a standalone company \u2013 into a merger. For example, it has already secured tentative contract agreements with American\u2019s three biggest unions \u2014 The Transport Workers\u2019 Union, The Allied Pilots Association and The Association of Professional Flight Attendants. In addition, US Airways bought a sliver of American\u2019s debt, which means it will be treated as a creditor in American\u2019s bankruptcy hearings and be able to gain valuable information about the company\u2019s operations.<\/p>\n

We asked two Wharton professors \u2013 one an expert on strategy and the other on unions \u2013 for their analysis of this possible merger.<\/p>\n

Emeritus management professor Lawrence G. Hrebiniak<\/a> notes that \u201cUS Airways desperately wants the merger with American Airlines. A merger of numbers 3 and 4 would add size, scale economies and an ability to compete better with United and Delta.\u201d<\/p>\n

He points out that Philadelphia, a US Airways hub, is the largest metropolitan city in the country that does not operate flights to Asian markets, including China and Japan. \u201cAmerican has the flights and planes, so the merger would immediately add to US Airways\u2019 presence in Asia,\u201d he says, noting that US Airways has ordered airplanes that would allow flights to Asia, but \u201cdelivery is years away.\u201d<\/p>\n

The merger looks good for both airlines, suggests Hrebiniak, but not for consumers. Reduced capacity or fewer flights with the same or increased demand \u201cwill result in higher prices, fewer seats, longer lines and more disgruntled customers, the airline\u2019s statements to the contrary notwithstanding\u2026. Also, consumers should use their frequent flyer miles soon; I have a feeling they will disappear quickly after a merger.\u201d<\/p>\n

So, why is American\u2019s management team hesitating to jump on US Airways\u2019 offer? \u201cCould it be due to the big bonuses they will receive if American successfully emerges from bankruptcy?\u201d he asks.<\/p>\n

According to Janice Bellace<\/a>, professor of legal studies and business ethics, \u201ca big problem that crops up in airline mergers is the difficulty realizing the expected gains from integrating the two airlines. The main reason for that is that the main occupational groupings \u2014 the pilots, the flight attendants, the mechanics, in other words, the people who can stop an airline from flying \u2014 are unionized. In this industry, seniority is extremely important because it affects the individual\u2019s ability to have some control over route selection and scheduling. When there\u2019s a merger of two airlines, the new airline has to integrate two lists of employees \u2013 pilots, for example \u2014 with different seniority rules.\u201d There are other differences in the contracts for the two sets of employees, she notes, \u201cbut how seniority will be treated is often the huge stumbling block.\u201d<\/p>\n

Aware of how hard it is in an airline industry merger to reap cost savings, \u201canalysts reacted very positively to US Airways\u2019 April 20 announcement that it had reached an agreement with American Airlines\u2019 three largest unions to support a AA-US Air merger,\u201d she says, adding that unionized employees often resist a merger, but in this case, 55,000 of American\u2019s 80,000 employees were supporting one. \u00a0<\/p>\n

It\u2019s also important to note, Bellace states, that the nine-member unsecured creditors\u2019 committee of AMR (American\u2019s parent company) \u201cmust approve the company\u2019s restructuring plan and that American\u2019s three largest unions each have a seat on that committee.\u201d Why three unions agreed to support US Airways is \u201ca more complex question. It could be to gain leverage in their negotiations with American, or to throw support to their preferred merger partner at a critical time.\u201d\u00a0<\/p>\n

In February, American announced it was seeking a 20% reduction in employee costs and 13,000 job cuts. As expected, Bellace says, \u201cthe specific proposals made by American to each of the three unions received a stony reception.\u201d American on March 27 then asked the bankruptcy judge to let it void its existing collective agreements, which \u201cput immense pressure on the three unions to engage in serious concession bargaining and to reach a new agreement that they could tolerate and that their membership would vote to approve.\u201d The judge said he would issue a ruling June 27.<\/p>\n

In such tough negotiations, Bellace adds, \u201cit would not be surprising if the unions sought some leverage \u2013 and making an agreement to support a merger with US Airways certainly gave them that leverage. They were demonstrating to American Airlines that they had an alternative to caving in to American\u2019s demands.\u201d American then modified its bargaining demands, and negotiations on new collective agreements took place. \u201cRight at the June 27 deadline, the bargaining committees of the three unions agreed to take American\u2019s last, best offer to a vote. The [bankruptcy judge] has agreed to postpone his ruling until August 8, at which time the results of the balloting will be known.\u201d<\/p>\n

Each of the three unions had different issues, Bellace notes. \u201cThe contract with the 10,000 member Allied Pilots Association (APA) has received the most attention, in part because this is the most expensive employee group and also the one most critical to the future of American Airlines. The proposed agreement with the APA contains some major concessions, but it freezes the pilots\u2019 pension plan instead of terminating it, gives a 14.8% pay increase over the six years of the agreement and has a no-furlough pledge.\u201d Finally, if the agreement is approved, the pilots will get an equity stake of 13.5% in the company that emerges from bankruptcy.<\/p>\n

Assuming the three unions vote to accept the new agreements, and assuming that the bankruptcy judge approves these agreements, \u201cthe question remains whether US Airways\u2019 bid to merge with American will continue to merit serious attention from the unsecured creditors\u2019 committee,\u201d Bellace says. \u201cThe position taken by the three members from unions on that committee will likely decide the question. US Airways has not hammered out any specific agreement with any one of the three unions, so it is not known how the terms and conditions of employment of these employees in a merged airline would compare with those they will have under the new agreements.\u201d<\/p>\n

Hrebiniak adds that \u201cUS Airways\u2019 longing for American is clearly suggested by its deals with American\u2019s unions, which are taking a \u2018less bad\u2019 offer over a \u2018much worse\u2019 offer. American will surely lay off a bunch of people if it remains independent after emerging from bankruptcy. US Airlines has promised to hurt the unions less, thus gaining their support.<\/p>\n

This blog was previously posted in Knowledge@Wharton today blog: US Airways and American Airlines: On Board for a Merger?<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

From the Knowledge@Wharton today\u00a0blog. US Airways in recent weeks has set an aggressive flight path for its plan to merge with bankrupt American Airlines. Indeed, US Airways CEO Doug Parker has stated that the merger is the only way to effectively compete against United and Delta, its two bigger rivals. US Airways has taken a […]<\/p>\n","protected":false},"author":336,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-4828","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/posts\/4828","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/users\/336"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/comments?post=4828"}],"version-history":[{"count":2,"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/posts\/4828\/revisions"}],"predecessor-version":[{"id":4830,"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/posts\/4828\/revisions\/4830"}],"wp:attachment":[{"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/media?parent=4828"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/categories?post=4828"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/tags?post=4828"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}