The Deal: Stormy Skies Ahead for American, US Airways
Labor relations at American Airlines had been spiraling downhill for nearly a decade, and were so bad by November 2011 when the company filed for bankruptcy that pilots and other labor groups took the unusual step of endorsing a deal with US Airways over going it alone with the airline's current management team.
AMR chief executive Tom Horton was scheduled to step aside in favor of US Airways' Parker post-deal, and AMR's board would have to move quickly if the deal was abandoned to decide whether to stay with Horton, who authored the airline's standalone plan, or seek a new leader who might reboot relations with workers.
"American pilots are very antagonistic towards American's management team and appear to be determined to remove them from the picture through the merger," Raymond James & Associates managing director James D. Parker said.
Beyond reaching deals with labor, American Airlines would likely have to invest aggressively to try to compete against United and Delta, with analysts estimating the company could look to grow by as much as 20% annually by 2017. Such growth could succeed in holding down prices as regulators hope, but could also put the financial stability of not only American Airlines but the entire industry at risk.Indeed, while Delta and United might benefit in the near term from turbulence at American, over time the DOJ decision is likely to reverberate throughout the airline sector. JP Morgan Chase analyst Jamie Baker said a scenario in which American and US Airways each remain independent "yet overshadowed by the superior networks" of Delta and United "poses longer-term risks for investors and passengers alike." The increased capacity could diminish margins and leave airlines less able to reinvest in their business. "In our view, a network duopoly (Delta and United) where US Airways and American increasingly need to fight for share is less desirable than a fair and oligopolized industry" with three large airlines of roughly equal size, Baker said. "We believe three is better than two, though clearly our views are at odds with the DOJ." Some have suggested that should the merger fail, American Airlines would be better off resisting the urge to grow, and instead focus on its brand and key business routes in hopes of becoming a specialty airline catering primarily to more lucrative corporate travel. Then again, Delta and United are also concentrating on those same travelers, so such a transformation would not be easy.
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