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American CFO Mulls Consolidation

Ted Reed

The chief financial officer of American Airlines(AMR) says airline mergers are "fraught with difficulty," but they may nevertheless reshape the airline industry.

Although American is focused on cost control, "We've got to play the ground game and the air game," said CFO Tom Horton, in an interview Wednesday. "You can't ignore what's going on in the industry and how it may be reshaped by consolidation. So we look at that and give it a lot of thought."

Horton returned to American in 2006, after spending four years at AT&T(T). There, he oversaw an evaluation of strategic alternatives that resulted in a merger with SBC, which retained the AT&T name. The merger "worked out pretty well," he said.

"As I think about other industries, consolidation is a natural part of the landscape, part of an evolution of the market," Horton said. "In the airline business, mergers are really complex [and] fraught with difficulty in terms of labor issues and other issues. There's a mixed record with respect to mergers in this industry."

Horton declined to comment specifically on American's intent. In the past, Northwest Airlines(NWACQ) has been mentioned as a potential merger partner for American because of its strength in Asia.

At an investment conference in March, American Treasurer Beverly Goulet said: "Northwest has a very extensive Pacific network, and that's obviously something people presume that AMR might have an interest in."

Since Goulet spoke, however, American has added a Chicago-Shanghai route to its portfolio, which already included a Chicago-Delhi route and service to Japan from several cities. As Asian markets open to nonstop service by U.S. carriers, the value of Northwest's Tokyo hub may seem to have diminished, especially in view of potentially difficult labor integration with Northwest. Major work groups at the two carriers are represented by different unions.

Consolidation issues aside, American will be reviewing the need to upgrade its fleet in the coming year, Horton said. The carrier operates about 300 aging MD-80 aircraft. Horton noted that replacing them with Boeing (BA) 737s would cost more than $10 billion. "Sometime in the next year or so, we will have to make a decision on the first installment of whether to replace those airplanes," he said.

In general, Horton appeared to agree with Scott Carson, CEO of Boeing Commercial Airplanes, who said earlier this week that during the next two years, aircraft orders could be placed by American, Delta(DALRQ) and United (UAUA).

"All three are in the process of trying to understand what their options are," Carson said. "My guess is that in late 2007 or 2008, we're going to see campaigns mature there."