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 number of steps to help push American – which would just as soon emerge from bankruptcy as a standalone company – into a merger. For example, it has already secured tentative contract agreements with American’s three biggest unions — The Transport Workers’ Union, The Allied Pilots Association and The Association of Professional Flight Attendants. In addition, US Airways bought a sliver of American’s debt, which means it will be treated as a creditor in American’s bankruptcy hearings and be able to gain valuable information about the company’s operations.
We asked two Wharton professors – one an expert on strategy and the other on unions – for their analysis of this possible merger.
Emeritus management professor Lawrence G. Hrebiniak notes that “US 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.”
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. “American has the flights and planes, so the merger would immediately add to US Airways’ presence in Asia,” he says, noting that US Airways has ordered airplanes that would allow flights to Asia, but “delivery is years away.”
The merger looks good for both airlines, suggests Hrebiniak, but not for consumers. Reduced capacity or fewer flights with the same or increased demand “will result in higher prices, fewer seats, longer lines and more disgruntled customers, the airline’s statements to the contrary notwithstanding…. Also, consumers should use their frequent flyer miles soon; I have a feeling they will disappear quickly after a merger.”
So, why is American’s management team hesitating to jump on US Airways’ offer? “Could it be due to the big bonuses they will receive if American successfully emerges from bankruptcy?” he asks.
According to Janice Bellace, professor of legal studies and business ethics, “a 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 — the pilots, the flight attendants, the mechanics, in other words, the people who can stop an airline from flying — are unionized. In this industry, seniority is extremely important because it affects the individual’s ability to have some control over route selection and scheduling. When there’s a merger of two airlines, the new airline has to integrate two lists of employees – pilots, for example — with different seniority rules.” There are other differences in the contracts for the two sets of employees, she notes, “but how seniority will be treated is often the huge stumbling block.”
Aware of how hard it is in an airline industry merger to reap cost savings, “analysts reacted very positively to US Airways’ April 20 announcement that it had reached an agreement with American Airlines’ three largest unions to support a AA-US Air merger,” she says, adding that unionized employees often resist a merger, but in this case, 55,000 of American’s 80,000 employees were supporting one.
It’s also important to note, Bellace states, that the nine-member unsecured creditors’ committee of AMR (American’s parent company) “must approve the company’s restructuring plan and that American’s three largest unions each have a seat on that committee.” Why three unions agreed to support US Airways is “a 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.”
In February, American announced it was seeking a 20% reduction in employee costs and 13,000 job cuts. As expected, Bellace says, “the specific proposals made by American to each of the three unions received a stony reception.” American on March 27 then asked the bankruptcy judge to let it void its existing collective agreements, which “put 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.” The judge said he would issue a ruling June 27.
In such tough negotiations, Bellace adds, “it would not be surprising if the unions sought some leverage – 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’s demands.” American then modified its bargaining demands, and negotiations on new collective agreements took place. “Right at the June 27 deadline, the bargaining committees of the three unions agreed to take American’s 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.”
Each of the three unions had different issues, Bellace notes. “The 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’ 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.” Finally, if the agreement is approved, the pilots will get an equity stake of 13.5% in the company that emerges from bankruptcy.
Assuming the three unions vote to accept the new agreements, and assuming that the bankruptcy judge approves these agreements, “the question remains whether US Airways’ bid to merge with American will continue to merit serious attention from the unsecured creditors’ committee,” Bellace says. “The 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.”
Hrebiniak adds that “US Airways’ longing for American is clearly suggested by its deals with American’s unions, which are taking a ‘less bad’ offer over a ‘much worse’ 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.”