The drum beat is growing louder now that we may soon see the outcome of all those merger talks between American Airlines and US Airways. As Ray Neidl of the Maxim Group wrote in a November 20 research note this morning: “We believe a merger would definitely benefit the industry since it would promote further consolidation and enhanced pricing power for the carriers in general. However, we also believe that an AMR/US Airways merger, if it were to happen, would not be an easy endeavor to manage (as was Delta/Northwest merger, even with AMR union support). We believe that the benefits in market mass would not be as great as either the Delta/Northwest or UAL/Continental merger are proving to be.”
US Airways and others tout the benefits of synergy – relying mostly on the experience of recent mergers that may not apply in this case. Proponents are less likely, however, to spotlight dis-synergies. The fundamental question: What are the net synergies?
This question is particularly relevant in the case of a potential merger that creates an unstable labor situation. I tried to address this before in the most-read blog in swelblog history: US Airways and American and the Elephants in the Room.
The labor issues we’ve seen recently at several airlines offer a big window into the risks of brand and service degradation. But let’s focus just on pilots. What’s most important to a pilot’s career, flying opportunities and pay? Seniority. What is for pilots at most risk in a merger? Seniority.
We already know what can happen when pilots are unhappy . . . they uniquely have the means to affect the operation by something as minor as a slow taxi to the gate. Look no further than American’s on-time performance in September and October. .
Difficulty in merging seniority lists is likely the rule, not the exception. Even MaCaskill-Bond, legislation designed to make the process fair for each side, does nothing to ensure a smooth integration.
So imagine for a moment the seniority integration monster a merger between American and US Airways could create because there are not two but FOUR pilot groups involved: American’s pilots represented by the APA, US Airways pilots and former America West pilots both represented USAPA but working under separate contracts, and former TWA pilots who have never been very happy about their treatment when American acquired TWA’s assets in 2001.
By the time you involve management in that equation, it could be a 5-way or 6-way conversation.. We have seen enough cases of difficult outcomes with three parties at the table, let alone more.
Enter arbitration.
At US Airways, an arbitrated seniority award under ALPA merger policy resulted in the decertification of the union by a majority of US Airways pilots because some more junior America West pilots were placed ahead of them on the combined list. This happened in part because America West pilots had more certain career expectations than the original US Airways’ pilots whose carrier was in bankruptcy for a second time with little hope of surviving as a stand-alone carrier.
If an AA-US merger were to occur before American exits bankruptcy, the two pilot groups at US might successfully argue that AA is a failed carrier and that, as pilots for a successful carrier they deserve super-seniority consideration. This scenario, known in the industry as the Failed Carrier Doctrine, has long played a role in combining seniority lists in mergers involving a profitable carrier and a bankrupt carrier
Former TWA pilots at AA won a recent court case arguing that ALPA did not meet its “duty of fair representation” in the AA-TWA integration. The APA was originally part of this litigation but was dismissed because the court found that APA did not yet represent the TWA pilots at the time the lists were merged. Now, the TWA pilots working at AA may demand that wrong be undone as part of their support for a merger with US Airways.
Now consider this: If an integration list is created using a pilot’s date of hire (the most common method of determining seniority) then it is likely that many US Airways East pilots would be placed at the top of the new list. And you can be sure that would not be received well by the AA pilots or the former TWA pilots who could argue that the AA list should be adjusted to reflect their hire date at TWA.
Fences (an industry term for isolating respective operations from another) can fix some of the seniority concerns but also add complexity and unknown costs to the merged operation. At the end of the day, what usually makes pilots happy is a big check from the company.
Bottom line: A merger between American and US Airways would likely be the most difficult seniority integration in history. Some or all pilots will feel disenfranchised as a result because integration results in winners and losers - perceived or real. Could the pilot unions work together to negotiate integration? Maybe, but given the history of these pilot groups not without a lot of blood on ground.
Therefore the most likely path to integration is one in which every pilot at AA and US would put their future in the hands of an arbitrator with no guarantee of a positive outcome. There is plenty of precedent for the arbitrator to consider, but very little that indicates an outcome that would be acceptable to a majority of the combined pilot group.
Moreover, it could take years to work out the implementation of a new seniority list. During that time Delta and United would do everything possible to gain a competitive advantage. These carriers already have a first mover advantage over American and US Airways. So put me in the C-Suite in Atlanta and Chicago and I’m cheering this proposed merger on with a megaphone because there is nothing but opportunity for Delta and United, not only from improved domestic market fundamentals but also from any fallout that occurs should the new American fail to produce.
No valuation of the merger is complete without consideration of this factor during what will be a critical transition period that could make or break the value equation. And no shareholder should buy the optimistic prospectus from Doug Parker without taking into account this very real risk.
