AMR’s ‘Merger Review’: Playing Hard to Get

After months of ardent pursuit by US Airways (NYSE:LCC), American Airlines’ parent AMR (PINK:AAMRQ) finally appears ready to consider that much-anticipated walk down the aisle. But LCC isn’t celebrating an engagement yet: American CEO Tom Horton plans to play the field a bit before settling down.

Horton said in a letter to employees on Tuesday that his airline would conduct a merger review and will be “reaching out” to several “interested parties” in the coming weeks. Besides US Air, at least four airlines — JetBlue (NASDAQ:JBLU), Alaska Air Group (NYSE:ALK), Republic Airways’ (NASDAQ:RJET) Frontier Airlines subsidiary and Virgin America — are on AMR’s list of prospective partners, according to a Reuters report.

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But one very interested party who apparently isn’t on Horton’s speed dial is LCC Chairman and CEO Doug Parker. He told USA Today’s editorial board on Wednesday that he hasn’t heard from AMR yet and is “skeptical” of the airline’s “true intention.”

Parker has been seeking a merger deal with American for months and turned up the charm after the airline filed for bankruptcy in November. Since then, he has courted AMR’s major creditors — including its unions.

Although American is a true believer in the benefits of airline consolidation, it’s no secret that merging with another carrier while still in bankruptcy has never been its preference. Then again, neither was bankruptcy.

Ever since Horton took the controls from former CEO Gerard Arpey as American entered Chapter 11 last November, Horton has had a singular goal: to lead the storied airline through a successful restructuring and emerge from Chapter 11 as a viable, stand-alone carrier.

In addition to LCC, Delta Airlines (NYSE:DAL) and David Bonderman’s private equity firm TPG Capital were rumored to be interested in a possible tie-up with American. Back in January, I discussed how LCC and the other two potential suitors stack up.

Horton’s goal appeared to shift this week when he decided it was time to consider merger options as part of its restructuring strategy. Chalk up Horton’s change of heart to intense pressure from AMR’s nine-member unsecured creditors committee. That group, which must approve the company’s restructuring plan, includes the airline’s three largest unions: pilots, flight attendants and ground workers.

Horton incurred the unions’ wrath in March by asking a federal bankruptcy court in New York for permission to void their contracts. The unions vowed to fight the attempt.

In April, US Air’s Parker gained the support of the three unions on a potential merger. In May, the industry was awash in speculation that LCC could team up with TPG in a joint bid for American.

In his Tuesday letter to AMR employees, Horton positioned the merger review as a logical next step. “We have assessed many possible combinations in the past, including, of course, an acquisition of US Airways,” Horton wrote. “[A]s we embarked on the restructuring journey, I have held the view that it is best that we first put our own house in order before considering a complex and challenging airline acquisition. That is just common sense. But it is also prudent merger strategy, should we take that path, to assure that we begin from a position of greatest strength and stability.”

AMR has been working overtime to accomplish precisely that: It has penned tentative agreements with its pilots and ground workers, and per-seat passenger revenue rose 8.6% last month. But not all is going smoothly: American has had to cut flights by about 1% because pilots have been taking more sick days than usual.

On the bankruptcy front, Judge Sean Lane has postponed his decision on AMR’s bid to throw out the collective bargaining agreements three times. A decision is now expected sometime next month after union members vote on tentative labor deals now on the table.

From Day 1, Horton’s focus has been on getting American’s own house in order. Despite the merger review, I don’t think his priorities have changed. Horton believes in putting American’s interests first — and that’s not wrong. In fact, it’s what shareholders pay him to do.

Horton expects stakeholders to trust AMR’s board and executive leadership to determine whether or not it’s in American’s best interest to pursue a merger — and whether or not this is the right time to do so.

But trust is a scarce commodity: The airline’s unions warmed to US Air’s advances because they fear Horton and other executives are resisting a merger while in bankruptcy in order to gain a bigger payday — a charge AMR vehemently has denied.

In any case, the merger review is a savvy move by Horton because it buys American time and maneuverability.

Let’s break down the prospective merger partners. The four airlines in this week’s speculation — JetBlue, Alaska Air, Frontier and Virgin America — are too small and/or too regionally focused to deliver any measurable benefit to a post-bankruptcy American. While AMR would gain substantial economies of scale in a tie-up with Delta, antitrust regulators would likely balk at such a marriage.

That brings us back to Parker and US Air. That marriage, which would create a combined airline that rivals United Continental (NYSE:UAL), makes the most sense from a shareholder value perspective. If Bonderman were to throw TPG Capital’s resources behind US Air’s bid, that could further strengthen the merged airline’s competitive position.

Bottom Line: I’m not questioning Horton’s sincerity about the merger review. He has a long track record of excelling at due diligence and will leave no stone unturned when it comes to seeking shareholder value. But despite his insistence that he’s ready for marriage, this “bachelor” is nowhere near having found “The One.”

While Parker will make a public case for his courtship at a National Press Club luncheon in Washington, D.C.. next Wednesday, don’t expect an engagement announcement from AMR anytime soon.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.

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