The Takeoff Episode 02: How Startups Can Adapt and Pivot Sponsored This content is created collaboratively with one of our sponsors.
It’s tempting to say that US Airways did everything right in the run up to the merger, because it certainly appears that its leadership did. Their mix of strength and lack of ego led the way for exactly the type of airline they wanted.
It started with a phone call on Nov. 29, 2011, the day that AMR Corp. filed for bankruptcy.
US Airways Chief Executive Doug Parker called his former cubicle mate at American Airlines, Tom Horton, to congratulate him on his promotion to CEO of the Fort Worth-based carrier.
Parker believed that a union with American Airlines was the next logical step in industry consolidation. But a merger was the furthest thing from Horton’s mind.
“He was upfront from the beginning: ‘Look, we’re always willing to talk, but you need to understand that our objective here is to get in and get out as fast as we can and we’re laser-focused on that,'” Parker said in an interview last summer.
The two executives, both 51, had known each other since the 1980s, when they worked together in American’s finance department under then-CEO Bob Crandall. But now, some 25 years later, they had different views on what American’s future should be and what was best for the airline industry.
Parker thought it made perfect financial sense for American and US Airways, the nation’s No. 3 and No. 5 airlines, to join forces. Combined, they would create the world’s largest carrier, with a network that could rival industry leader United Continental and Delta Air Lines, which was a close second in terms of revenue.
Horton didn’t agree. He believed American could get its operating costs under control and emerge from bankruptcy as an independent carrier, with plans to increase its network by 20 percent and then contemplate a merger.
But as 2012 progressed and AMR terminated aging aircraft leases and signed new cost-cutting labor contracts, the pressure on Horton to consider strategic alternatives increased, particularly after an ad hoc group of bondholders entered the confidential discussions among American, US Airways and the unsecured creditors committee in December.
Horton says he was never opposed to the idea of a merger but thought it was premature to consider before the carrier restructured its finances. He wanted American to negotiate from a position of strength.
“I’m not really sure my mind changed,” said Horton, AMR’s former chief financial officer, who became chief executive when Gerard Arpey resigned on the day of the bankruptcy filing. “It was all about getting the most value for our owners and the best outcome for our customers and our people.”
But in interviews with the Star-Telegram, several people involved in the discussions say that American’s leaders continued to advance a stand-alone strategy well into December and that even after deciding that a merger was the best course, they believed that their executive team should lead the combined carrier.
After about two months of intense negotiations, when a deal was struck and the $11 billion merger of American and US Airways was announced Thursday, Parker’s vision had won out.
Bringing in the unions
In early 2012, US Airways started quietly making the rounds on Wall Street to talk up a possible merger. A PowerPoint presentation was put together showing all the benefits of a combination, from route maps to fleet optimization to labor costs. Parker named the effort Tetris, after the popular puzzle video game.
David Bates, then president of the Allied Pilots Association at American, heard about the presentation from the union’s advisers and decided to reach out to the Tempe, Ariz.-based carrier.
On March 12, the day before US Airways President Scott Kirby was scheduled to speak to analysts at a conference in New York, Bates and Kirby met at the Oceana restaurant in a private room for dinner.
“He told me what he could do in terms of a pilot contract,” Bates said, recalling that the presentation, made over oysters, was impressive. “It was vastly more attractive than what AMR was willing to give the pilots.”
Parker, the longest-serving chief executive in the airline industry, had merged US Airways and America West in 2005. And while Parker still hadn’t reached new agreements with pilots unions from that merger, he and his executive team had improved operations, reporting record revenue of $13.8 billion in 2012 with $637 million in profit.
Having learned their lesson from a failed bid for Delta, when they didn’t move fast enough to get unions on their side, Kirby reached out to American’s two other major unions, the Association of Professional Flight Attendants and the Transport Workers Union.
APFA President Laura Glading met Kirby at Oceana a week later to confidentially talk about a merger.
“Everyone was a little bit nervous about one of us getting recognized,” Glading said.
She said that when she flew to Arizona a few days later to meet with Parker, she was recognized at the Phoenix airport and some asked on Facebook why she was there.
Of the initial meeting with Kirby, Glading said: “I feel like I just about made up my mind that night. I was very interested in what he had to say.”
On April 19, all three unions announced that they had signed conditional labor agreements with US Airways that would take effect in a merger.
Meetings and more meetings
With pressure building as the summer began, AMR announced that it would examine strategic alternatives with its creditors committee. Besides US Airways, Wall Street speculated that American was interested in JetBlue or possibly Virgin America as a merger partner or that it might consider an investment from its Oneworld alliance partner, British Airways.
“If we’re going to look at mergers, we ought to look expansively and make sure we’re reviewing the whole playing field here,” Horton said Thursday, reflecting on the due diligence done by American executives last summer.
He said American talked to various airlines, but he declined to name them because the discussions were confidential.
Horton was also still working to secure new labor contracts with the pilots, flight attendants and mechanics unions over the summer. While relations with labor were not as strained as they were under Arpey, the unions felt that Horton had overreached with a restructuring plan, announced in February, that asked for $1.25 billion in annual labor cost savings.
In July, Horton said AMR would send nondisclosure agreements to interested parties so they could share sensitive financial information. But Parker didn’t jump at signing the agreement.
US Airways waited to see the results of contract ratification votes by American’s unions: The mechanics and flight attendants approved new agreements while the pilots voted their offer down.
By the end of August, Parker signed the nondisclosure agreement.
Around the same time, Horton told AMR’s board of directors that a US Airways deal might be the best course of action.
“Horton reported to the board that he believed there could be substantial value from the combination with US Airways and that it could be a better deal for creditors and stakeholders than any other plan available, including the stand-alone plan,” said Thomas Roberts, a corporate partner with Weil, Gotshal & Manges, AMR’s lead counsel.
“So when the CEO comes into the boardroom and says that, it opens up possibilities and it starts you down the path.”
But in Horton’s mind, it had to be the right deal.
An earlier offer from US Airways that suggested a 50-50 equity split in the new company was rebuffed. And Horton insisted that labor issues needed to be settled as part of the deal.
“There was a lot of poker playing,” Horton said.
With confidentiality agreements signed, Jack Butler, the lead counsel for the creditors committee, scheduled several meetings to hear merger proposals from US Airways and to consider the financials of a stand-alone plan as all the unions, except for the pilots, had signed new contracts.
In November, US Airways presented the creditors committee a merger proposal that included a 70-30 equity split in favor of AMR. American countered with an 80-20 split.
Union leaders involved in the meetings viewed Horton’s merger negotiations as halfhearted because American executives continued to move forward with a stand-alone restructuring plan.
“They were taking the single-carrier approach all along. They were not interested in a merger in bankruptcy. They felt they were being pressured,” said Robert Gless, deputy director of the Transport Workers Union. “They even used the words ‘being pushed by US Airways’ into something they didn’t want.”
The final weeks
In December, the pilots approved a new labor contract. Then an ad hoc group of bondholders got involved in the confidential discussions, signing a nondisclosure agreement that prevented them from trading AMR or US Airways debt until it expired.
That increased the pressure on all the parties, since the investors did not want to sit on the market sidelines for too long.
Unions at both carriers were also invited to meetings by Butler. Since AMR wanted labor deals in place, Butler negotiated memorandums of understanding between the unions and the carriers that would govern labor contracts and lay out a seniority integration process if a merger occurred.
In the final weeks, there were two outstanding issues to resolve: the equity split and who would run the new carrier.
“It’s a complicated situation because we have to negotiate with USAir and then you have to negotiate with the creditors committee and then you have to negotiate with the ad hoc creditors. It’s just a lot of negotiations,” Roberts said. “Within the last week, the offer on the table from US Airways was still 70-30.”
Wall Street analysts assumed all along that Parker would run the merged airline, but Horton had to consider whether he wanted a chairman role or an executive position in the new company.
“I would say that they were very reluctant up until the very end,” Glading said. “But I’d also have to say that I think in their heart of hearts they believed they were the team to do this. I think they thought they knew how to do it better.”
Horton doesn’t think he was an obstacle to a merger and doesn’t believe he threw up any roadblocks as the agreement was negotiated.
“I think I was enhancing the maximum value creation for the American owners,” Horton said. “And I think the American owners would tell you that, if you speak with the bondholders and the board of directors, the record is pretty clear on how we moved the ownership percentage up to the range of where it is today.”
The final equity split was 72 percent for AMR and 28 percent for US Airways.
Horton was named chairman and Parker will be the chief executive of the new American Airlines Group when the merger closes, most likely in the third quarter.
For navigating AMR through bankruptcy, Horton will receive a cash and stock severance package worth close to $20 million.
On Wednesday, the AMR board considered the merger agreement and voted unanimously for a deal that puts Parker at the helm of the new carrier.
“We had a plan that called for bringing the two companies together, and it created one stronger than either of us could be independently,” Parker said as he and Horton stood in the Admirals Club at Dallas/Fort Worth Airport on Thursday and announced the merger.
(c)2013 the Fort Worth Star-Telegram. Distributed by MCT Information Services