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10(-K) REASONS TO HATE THE MERGER
By Joe Brancatelli
February 28, 2013 -- Didja know that the US Airways-American Airlines merger is doomed and that both carriers have already told the feds exactly where and how it will fail?
No joke. Read the Form 10-K filings that the two carriers dropped on the Securities and Exchange Commission in the last two weeks. The warnings are dire. Awful. Downright apocalyptic.
"The surviving company may be unable to integrate businesses successfully and realize the anticipated benefits of the merger," American warned in bold-faced type in its 10-K filing. It then went on to offer nearly a page of bullet points why the merger could tank. American even warned that the simple act of doing the merger will divert management time and may "materially and adversely affect the surviving company's ability to maintain relationships with customers."
US Airways was at least as pessimistic. Despite what chief executive and Skygod-in-waiting Doug Parker says publicly, "the integration of separate airlines has often proven to be more time consuming and require more resources than initially estimated," US Airways says in its Form 10-K filing. "The contemplated benefits may not be realized fully, or at all."
Okay. Joke. Sorta. American and US Airways did say those things and did warn that the soon-to-be-merged sky is falling. But it's all boilerplate, legalistic babble, throw-the-kitchen-sink at shareholders so executive asses are covered should something go wrong. It's all sound and fury signifying nothing other than make-work for lawyers, lobbyists and SEC specialists.
But here's the thing about Form 10-K merger boilerplate: It's all true. The mindless words that lawyers for American and US Airways throw out there to cover corporate asses are drawn from the reality of past airline mergers. In the through-the-looking-glass world of airlines, phony-baloney boilerplate is sound commercial aviation history. What can go wrong, and then gets boiled down to Form 10-K boilerplate, is what almost always does go wrong.
Besides unintentionally worthy boilerplate, however, the American and US Airways 10-K filings are chock full of red flags, interesting tidbits and useful stuff that the carriers would prefer you not know. Here's just some of what I found as I plowed through them.
LABOR LUNACY AHEAD
As you surely know, US Airways got the upper hand in negotiations when Parker cut a "memorandum of understanding" with the unhappy American labor unions. The deal to make a contract deal was the AA unions' way of sticking it to American chief executive Tom Horton and all of his predecessors. But you have to wonder why American's unions think they'll do better with Parker at the helm. According to the US Airways 10-K, just 200 of the more than 26,000 unionized employees at the mainline airline even have current contracts. In the seven years that Parker has been at the helm of US Airways, he's been unable to reach a deal with his labor groups. Almost all work on separate contracts that were cut when the old US Airways and America West ran independently. The pilots, for example, have deals that became "amendable" (airline contracts never technically expire) in 2006 (America West) or 2009 (pre-merger US Airways). The flight attendants, now voting on their third post-merger deal (rank-and-filers rejected two previous offers), have contracts that became amendable in 2004 (America West) or 2011 (US Airways).
DON'T KICK OUR TIRES
As with most mergers, the American-US Airways deal has "no-shop" clauses to stop the parties from looking around for better offers. I could argue that a no-shop clause violates what American is tasked to do while working through a Chapter 11 filing. American management is supposed to be maximizing value for its stakeholders and any deal that limits its ability to shop assets to the highest bidder corrupts a bankruptcy reorganization. That aside, however, it's worth noting that American will have to pay US Airways $135 million should it walk away from the merger. US Airways would have to pay American $55 million if it terminates.
ABOUT THOSE NEW AMERICAN AIRCRAFT
A big part of American's revival rests on a 2011 announcement of "the largest aircraft order in aviation history." The plan: Purchase 460 narrowbody planes to replace American's aging fleet of B737s, MD-80s and B757s. The problem? According to American's 10-K, "we have not yet secured financing for all of our scheduled aircraft deliveries," including "deliveries scheduled for 2013." Worse, a separate deal for American to replace most of its international widebodies with dozens of Boeing 777-300ERs is also unfinanced. Those planes are due to arrive beginning this year.
THE HUB MOST LIKELY TO GET DOWNSIZED
For all the talking-head babble about the complementary nature of the American/US Airways route maps, the merged carrier will have lots of excess capacity. For example, why keep Phoenix as a hub when you have a gigantic connecting complex at Dallas/Fort Worth? But it's US Airways' Philadelphia hub that seems most likely to lose. More than half of US Airways' international service runs through Philadelphia, according to the US Airways 10-K. But with American and Oneworld's New York/JFK operation just 90 miles up the turnpike, you can logically assume that much of Philadelphia's overseas service will move south to the Charlotte hub, shift north to JFK or be dropped. Besides, US Air and Philadelphia don't get on. "Our inability to operate profitably out of Philadelphia International Airport could harm our business, financial condition and results," says the US Airways filing. The airport "plans to embark on a multi-billion dollar runway and terminal expansion project that will, if undertaken as planned, result in huge cost increases. If we are unable to operate profitably from PHL, we may need to significantly reduce our business at Philadelphia."
AMERICAN AADVANTAGE IS GIGANTIC
American's 10-K has a wealth of information about the AAdvantage frequent flyer program: It now has 72 million members, 609 billion miles outstanding and 1,000 partners. It provided 6 million one-way award flights on American and American Eagle in 2012, 8.6 percent of American's total capacity. And get your mind around this: 66 percent of the 209 billion miles that American AAdvantage issued last year were sold to partners. In other words, our flying on American and its partners accounted for only a third of the 2012 mileage accrual in AAdvantage.
THE AADVANTAGE GRAVY TRAIN IS PROBABLY OVER
In contrast to American's comparative munificence, US Airways Dividend Miles is a piker. According to the US Airways 10-K filing, just 4 percent of the carrier's inventory was used for award travel. In fairness to US Airways, a substantial (if undisclosed) number of Dividend Miles awards were surely used for travel on United, Lufthansa and other Star Alliance carriers. But that's bad news, too. If the new AAdvantage program adopts the push-'em-to-the-partners approach, we'll get dinged financially. Many AAdvantage partner carriers (most notably, British Airways) tack rapacious fuel surcharges on award tickets. One example: On a New York-London premium-class freebie using AAdvantage miles on British Airways, out-of-pocket costs for fuel surcharges and taxes approach $1,000 roundtrip.
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ABOUT JOE BRANCATELLI Joe Brancatelli is a publication consultant, which means that he helps media companies start, fix and reposition newspapers, magazines and Web sites. He's also the former executive editor of Frequent Flyer and has been a consultant to or columnist for more business-travel and leisure-travel publishing operations than he can remember. He started his career as a business journalist and created JoeSentMe in the dark days after 9/11 while he was stranded in a hotel room in San Francisco. He lives on the Hudson River in the tourist town of Cold Spring.
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