Swelbar: Stuffing The Turkey

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

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.

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