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Did American Airlines Thrust Itself Into US Airways’ Arms?

When American Airlines parent AMR (PINK:AAMRQ) asked a federal bankruptcy court in New York to throw out its union contracts Tuesday, it might inadvertently have made it easier for another carrier — like US Airways (NYSE:LCC) — to swoop in and snap it up for a song.

US Airways CEO Doug Parker has often said that there is one major airline merger left and that he plans to be a part of it. Last spring, I pointed out that a marriage between US Airways and American made more sense than any other major combination.

Last week, Parker confirmed to reporters in Phoenix that his airline has hired advisers to “investigate the American situation.” US Air executives have discussed plans to acquire AMR before it emerges from bankruptcy with some members of American’s unsecured creditors committee, according to Bloomberg. The unsecured creditors committee includes representatives from AMR’s three largest unions — pilots, flight attendants and ground workers.

Under federal bankruptcy law, that creditors’ panel must approve AMR management’s plan to reorganize under Chapter 11. Reuters reported last month that the panel members are growing frustrated with American’s reorganization plans and believe it should consider merging with another carrier.

Parker has been here before. He was at the helm of America West back in 2005 when his airline acquired US Airways Group, which then was in bankruptcy. The combined entity — which assumed the US Airways name — rebounded financially and now is the fifth-largest airline in the U.S.

Living together after the marriage, however, has been challenging. Seven years later, US Airways still is struggling with some aspects of integrating its two groups of employees. For example, the airline’s pilots still are not under a joint contract, and it does not yet have a single seniority list. That’s likely to be the biggest sticking point for unions if merger talks progress.

In an interview with The Wall Street Journal on Tuesday, Parker said he had learned an important lesson from US Air’s failed attempt at a hostile takeover of Delta (NYSE:DAL) in 2006.

“You need to have allies, particularly the employees,” he said. “You need labor to be excited about the transactions.”

Ironically, a hostile takeover is exactly what American CEO Tom Horton said he was trying to prevent when the carrier asked a federal bankruptcy judge to void nine collective bargaining agreements with its unions and force employees to accept additional cost-cutting measures. The airline also asked the court’s permission to eliminate company-paid medical benefits for employees who retired before the carrier filed for bankruptcy last year.

“I have also heard great concern that American could be the target of those who wish to acquire our company or break it up,” Horton said in a letter to employees on Tuesday. “The best way for us to assure the best possible outcome — and prevent a bad outcome — for our company, our people and our stakeholders is to proceed quickly on our restructuring to create a successful, profitable and growing American.”

American made a case for substantial cuts in Tuesday’s massive court filing, arguing that it can no longer compete because its major rivals have used Chapter 11 to “secure large labor cost reductions and operating flexibility.” That has left American with “the highest unit labor costs among the major network carriers,” according to the filing.

Union leaders weren’t buying Horton’s appeal. While they reiterated their commitment to continue talks with the company, representatives of the pilots, flight attendants and ground workers’ unions decried the bid to void their contracts as a failure to negotiate in good faith.

“APA leadership has been engaging in ongoing contingency planning if the court decides to grant management’s motion to reject our contract,” Allied Pilots Association President Dave Bates said in a letter to American’s pilots. “APA is prepared for a variety of scenarios and will respond aggressively as events warrant.”

The Association of Professional Flight Attendants vowed to “fight the effort in court and will do all we can to preserve Flight Attendants health care, wages and benefits.” The Transport Workers Union, which represents mechanics and baggage handlers, said if it could not forge an acceptable agreement with AMR, “We are fully prepared to vigorously represent our members in court and explore all options.”

The unions and other creditors have until April 3 to submit objections to AMR’s filing. The court will hold a hearing on the matter on April 10.

For his part, AMR’s Horton is committed to work through the Chapter 11 process — and would prefer to do so without the distraction of any marriage proposals. “I want to go as quickly as we can,” he told the Associated Press earlier this week, noting that he’d like to finish the bankruptcy process by the end of this year.

While Horton grants that consolidation has been “healthy and constructive for the U.S. airline industry,” he contends that now is not the time for American to explore a merger. “We are in the midst of a very complex restructuring and so our focus is singularly on returning the company to growth,” he said. “The idea of doing the two together strikes me as a bridge too far.”

Bottom Line

Horton wants to preserve AMR as an independent entity — that’s why he’s trying to blaze through reorganization before prospective acquirers can get their ducks in a row. He has a little help: IAG, the parent of British Airways and Iberia, is mulling the prospect of buying into AMR to fend off unwelcome advances from US Airways and others.

Besides US Airways, potential suitors include Delta and David Bonderman’s private equity firm TPG Capital. LCC still is the most likely partner, though, because it would raise fewer antitrust concerns.

But Horton also must weigh the potential perils of pushing his unions too far too fast because it might make them more motivated to throw in with a potential suitor. Union opposition skunked up US Air’s plans to acquire Delta, and Doug Parker has learned from those mistakes and won’t likely repeat them.

Expect Parker to embark on a charm offensive with American’s unions and other creditors — including Boeing (NYSE:BA), several banks and the Pension Benefit Guaranty Corp., the federal agency that guarantees the airline’s pensions.

AAMRQ shares were down more than 3% on Wednesday and the stock is unlikely to experience any rebound until at least after the court rules on the union contract issue. One thing is certain: Horton is on the clock, and he has precious little time left to craft his airline’s destiny.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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