What Happened to the 'Snap' Merger USAirways and American Airlines?

September 7th, 2013
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The folks at USAirways and at American Airlines thought their proposed merger would be an  easy case. After all, there had been four recent mergers which had  sailed right through with hardly a ripple. However, this time  proved to be different.


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Merger #1. USAirways merged with America West Airlines in 2005, to  form USAirways Group (NYSE: LCC). The two now do business under a  single FAA Operating Certificate and under a single trade name  ("USAirways"), although their operations are still not fully  integrated. It was a USAirways flight that Captain Chesley  Sullenberger was forced to ditch into the Hudson River when his  airplane's engines were disabled by a flock of Canada geese. His  skill, and that of his crew and of waterborne rescue crews that  fortunately were nearby, saved the lives of everyone aboard. The Governor of New York called it "The Miracle on the Hudson."

Merger #2. Delta Air Lines (NYSE: DAL) and Northwest Airlines  merged in 2008. It has been a successful merger. There's a "back  story:" Richard Anderson had worked at Northwest for 14 years, and  had risen to the office of Chief Executive Officer. He was  instrumental in the initiation and facilitation of the merger, and  now serves as Chief Executive Officer of Delta, which is the  surviving airline. One can reasonably speculate that his intimate  knowledge ("institutional memory") of Northwest's history and  operations has been and continues to be of significant benefit to  the merged company. It was a "good fit" from the start. There was  little overlapping of shared routes, and the Federal authorities  found that the merger would not adversely affect competition.

Merger #3. United Air Lines (NYSE: UAL) and Continental Airlines  merged in 2010. The route patterns of the two companies largely  complemented each other, but with some overlaps; and the merger was  allowed to proceed on the basis that competition would not be  significantly reduced. The merger resulted in the formation of the  largest airline in the world, in terms of the number of passengers  carried. The merger itself has not been as easy to implement as  that between Delta and Northwest. After the merger, there were  only four "legacy" air carriers left standing: USAirways, Delta,  United, and American. Southwest (NYSE: LUV), not counted as a  "legacy" carrier, was nevertheless a dark shadow in the corner of  the room. It had started as a "low price" carrier, operating only  within Texas, but had grown into a large "point-to-point" (as  distinguished from "hub-and-spoke") nationwide airline which  carried more passengers within the United States than anyone else.   It had grown by focusing on smaller cities which nevertheless  offered significant underserved populations, and by tapping into  peripheral locations which could be utilized as "reliever" airports  for large metropolitan areas - such as Providence and Manchester  (serving suburban and exurban populations of Boston), Islip  (serving dense suburban populations of New York), and smaller  cities within Metropolitan Los Angeles. It had taken a big jump by  starting service at the new Denver International Airport. However,  Southwest had no presence at all in Atlanta, the busiest airport in  the world.

Merger #4. Southwest acquired AirTran in 2011. AirTran was based  in Atlanta. It had started out as "ValuJet," but had suffered a  disastrous crash following an in-flight fire, and had re-invented  itself as "AirTran," a "low price" airline. It had grown by  reaching out from Atlanta to cities in the East and Midwest. Its  main competition, of course, was Delta, which was (and is) based in  Atlanta, and may fairly be said to enjoy a dominating presence  there. AirTran was a tempting target for Southwest, which had  never before made such a large acquisition: There was little route  overlap, so the established routes of the two companies would  largely complement each other; it would give Southwest instant  access to Atlanta without the costs of starting from scratch; and  at one stroke it would establish Southwest as a major competitor of  Delta - right on Delta's own home ground. The merger was approved.

Proposed Merger #5: USAirways and American Airlines (OTCMKTS: AAMRQ). American had struggled with high relative costs for years,  but had always insisted that it would not resort to the bankruptcy  court and that it would continue to "go it alone."  However, the  mergers of Delta and Northwest and of United and Continental had  presented American with stiffer competition than ever. It was  losing the race. Its potential candidates for a merger, if it  wanted or needed one, had almost all disappeared - and so had those  of US Airways, by the way. Reality finally set in at American, and it filed. USAirways, ever hungry, broached the possibility of a  merger, and now found a receptive ear. Discussions ensued, and a  merger agreement was announced. It was odd, in that a smaller  company would effectively be acquiring a larger one. USAirways'  management (former America West management!) would run the new  company, to be called "American Airlines," which would be operated  from American's offices in Fort Worth. Phoenix-based USAirways  people began to look for houses in Fort Worth.

They Thought it Would be a Snap

The folks at USAirways and at American thought this would be an  easy case. After all, there had been four recent mergers which had  sailed right through with hardly a ripple. However, this time  proved to be different. Perhaps some of the objection from  Government could be attributed to "Approver's Remorse."  There is  more to it, though; this time, there is significant route overlap;  and on some routes there would be no competition remaining.  Then  there is the question of oversized control of the number of landing  and takeoff "slots" and of airport boarding gates at certain  airports. One more major carrier would disappear.  Yes, there is  the recent history of four approved mergers; but the fact situation  attending each one was different from the others, and this one is  different from any of those.

What's the likely outcome? My guess is that a merger will  ultimately be approved, but that there will be substantial  "give-ups" required with respect to routes, landing and takeoff  slots, and gate control. I think that the result will be nothing  like the result that USAir and American had intended. I think that  USAirways will "swallow hard," but in the end will take the  medicine, because it badly wants the prize which is American  Airlines. I also think that this will be an opportunity for  Southwest, in particular, to pick up valuable tidbits that may be  required to be spun out as conditions of a merger.

Whatever happens, it will be fascinating to watch it evolve.

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