American Resists Pressure to Merge With US Airways

American Airlines may be bankrupt, but CEO Tom Horton talks as if he's in the catbird seat.

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American Airlines

He says he's not going to be pressured by US Airways CEO Doug Parker into a merger. If anything, Horton says, American will be doing the acquiring — not the other way around. There are other airlines out there for American to buy if it makes sense, he says.

And if not, Horton maintains, American will emerge from federal bankruptcy protection strong enough to compete against United and Delta .

"This company is going to be very successful," Horton, 51, told USA Today's editorial board Thursday. "I think that we have a very powerful company coming out of restructuring. And I want to be sure that anything that we do only makes it better and stronger — not weaker — and more valuable, of course."

Although he had breakfast with his old friend Parker in Washington on Thursday, he was dismissive of Parker's pressure and steps to force a merger.

He said that US Airways has half the value of American and does little more than run connecting flights out of its major East Coast hub in Charlotte.

"I can clearly see the urgency to make a deal on their side," he said.

But some industry analysts see a union with US Airways as the best alternative because of their complementary routes and corporate cultures.

Other potential partners — JetBlue , Alaska , Virgin America and Frontier — don't offer American much value, says Daniel Friedenzohn, associate professor of aeronautical science at Embry-Riddle Aeronautical University.

"They're not going to be very meaningful in terms of affecting the landscape," he says.

Horton insists other airlines could make better partners, though he wouldn't name them.

He plans to be picky. In reviewing potential acquisitions, Horton said, American would consider the partner's network, its debt, and how the companies would integrate their planes and workers.

If he doesn't get everything on his wish list, he said, he can go it alone. He pointed to the progress American has made in its reorganization, as reflected in its second-quarter earnings that he said showed the best financial improvement in the industry.

American's parent company, AMR, said Wednesday that it had record quarterly revenue of $6.46 billion from April through June, with a record portion of seats filled. It lost $241 million in the quarter, but said if bankruptcy costs such as legal fees were excluded, it would have earned $95 million.

An Aggressive Campaign

American, which in November became the last major legacy airline to file for bankruptcy protection, has also agreed to buy hundreds of new planes and has strong international partners such as British Airways, Horton said.

"Our company is only going to get more valuable," he said.

US Airways' Parker, 50, has waged an aggressive and very public campaign for American.

He went so far as to pay $600,000 for American bonds so he could become an American creditor — a move American calls a "publicity stunt." He's also managed to get support from American's labor unions by promising better pay and job security.

Parker has highlighted American's lack of routes for business travel along the East Coast, a gap he said US Airways could fill. But Horton said American does well with its hubs in New York and Miami.

"Those are the most important population centers, and we are very strong in them," Horton said. "What that airline (US Airways) does is carry a lot of connecting traffic over Charlotte and does so in a way that I would suggest is somewhat unrewarding."

Horton also said that he didn't think US Airways' route map would give American a strategic advantage. "There might be others where integration might be easier and smoother," he said.

In a separate interview on Thursday, US Airways President Scott Kirby said that with hubs in Charlotte, Philadelphia and Washington, his airline could give American better links between 60 cities on the East Coast. Charlotte is the fourth-most-lucrative hub in the country, he said.

"We absolutely complement American and the holes they have," Kirby said. "American has become largely irrelevant on the East Coast outside of New York and Miami. The reality is that a large percentage of the traveling public doesn't live in New York or Miami."

He dismissed Horton's suggestion that US Airways is not as valuable as American.

"We have a business model that works, that is profitable, and generates margins that are far superior to American's," he said. "Our results prove that."

'No Substantial Progress'

Over breakfast Thursday, the day after Parker once again pressed his case for American at a speech at the National Press Club, he and Horton began discussions about a possible combination.

But "no substantial progress was made," said US Airways spokesman Todd Lehmacher.

In a statement Thursday afternoon, American said Horton described to Parker the process of reviewing potential partners, what the criteria will be and the next steps.

Horton said that process will be fair and transparent. Parker has said more than once that he is skeptical of that.

The two CEOs have a history, having both worked at American years ago. Each has called the other a close friend and insists there is nothing personal at stake in the corporate fight.

But they have very different opinions about whether — and how — the airlines should join forces to rival the larger United/Continental and Delta, which are the nation's biggest network airlines, respectively.

Parker said at the National Press Club that he wanted a merger to happen before American emerges from bankruptcy. American has until the end of the year to come up with a restructuring plan as a stand-alone company. The company already has ended leases on some aircraft and reached tentative contract resolutions with workers.

Horton said he's going to dictate the timing of American's next move.

"I don't think our company should be driven to an outcome because another company has an urgent need to do something," he said.

Some analysts agree that Parker should be more patient.

"American should be allowed to get through its restructuring, understand what it might be as a stand-alone company and examine multiple strategic alternatives," said William Swelbar, a research engineer at MIT's International Center for Air Transportation who has worked as a consultant with American in the past but is not advising on the bankruptcy.

Labor Gets Involved

American's executives stress that their company is the larger, better-situated airline.

Parker doesn't buy that. But he says that if the two were to combine, the airline would be called American and would keep its headquarters in Fort Worth.

Parker, who was the head of America West when it merged with US Airways in 2005, has been trying to merge with another airline for years. He's failed to court partners such as Delta.

"It has been firmly established that US Airways is for sale," Horton said.

But he pointed out that Parker's last merger didn't go very smoothly. US Airways has had a difficult time merging the seniority lists of its two pilot unions.

Friedenzohn, of Embry-Riddle Aeronautical University, said any American-US Airways union wouldn't be easy.

"US Airways is in some ways still operating as two separate carriers," he says. "Adding a third pilots unions to the mix would add some complications."

But somehow Parker has managed to score with American's unions. The labor leaders joined him at the head table at his National Press Club appearance.

Horton acknowledged "it's a difficult process" and that American's unions for pilots, flight attendants and mechanics support a merger with US Airways. But he said American's tentative contracts are firmer for workers than the promise of a merger.

"He made a deal to make a deal," Horton said. "What we made are actual tentative agreements, with all the language written down."

Horton also dismissed suggestions that it's in his financial interest to drag his feet on a merger with US Airways because he could receive as much as $60 million if American emerges from bankruptcy independently.

"My focus is 100 percent on what creates the most value for our owners. That's my job," Horton said. "It's not about me … I don't think for a minute about such things."

Although he complains that American is foot-dragging on his merger bid, Parker doesn't accuse Horton of doing it out of personal financial motives.

However, Parker said at the press club, "I find it noteworthy that the only opposition that seems to exist to this merger is the senior management at American."

"I don't want to guess as to why it is that they don't support it," Parker said. "But we are hopeful that we will find that we can get their support at some point in the future."