The sharks have started to circle American Airlines, but don't expect anything to come of it -- at least in the near term. A tie up involving American with either Delta Air Lines or US Airways makes little strategic sense at this point and would end up creating major headaches for all the parties involved. Meanwhile, a cash infusion from either TPG or another private equity firm isn't needed for the airline to work its way through bankruptcy.
It was just a matter of time before rumors would start about American Airlines being in play following its trip to the bankruptcy court in November. Delta has reportedly hired the Blackstone Group (BX) to look into a possible deal while US Airways (LCC) has hired Barclays (BCS) to do the same. Dallas-based private equity firm TPG is also apparently looking into the possibility of taking the airline private or splitting it up.
Tom Horton, AMR's new chief executive, warned employees in December that there would be "opportunists" who would threaten to destabilize the airline's attempt at reorganization. Such harsh language was meant to send a clear message to the markets: we are going to do this alone. Nothing has changed so far to alter Horton's thinking and it would probably take a lot to do so.
The rationale behind the deal talk is itself questionable. The biggest one touted in the media was that American somehow "missed out" on the airline merger mania over the last decade or so and that they need to be bigger if they ever want to be profitable. This, of course, is a total fallacy. American actually set off the consolidation craze by acquiring rival TWA in 2001. This merger created what was the largest airline in the world until Delta merged with Northwest Airlines in 2008 and United Airlines merged with Continental Airlines in 2010.
American chose to stay out of the other mergers because it was already big enough. In fact, it has spent much of the last decade paring down its capacity in order to boost its fledgling profit margins.
In fact, American has suffered because it was the first mover in the airline consolidation game. It did not attain the cost savings its rivals received when pairing up, especially when it came to labor and lease agreements. Unlike rivals Delta (DAL) and United (UAL), American acquired TWA before it was able to reorganize its cost structure in bankruptcy. That meant that American's expensive labor contracts remained intact and were then extended to all TWA employees. The airline wasn't able to renegotiate other high-priced contracts like its expensive airline leases. It was stuck paying off planes that were older and less fuel efficient.
Analysts and the media paint a picture of merger bliss if American would just pair up with larger rival Delta or smaller rival US Airways. But they seem to have it backwards. The bliss will come when American slashes its costs in bankruptcy, not if it merges. There is no evidence that airline mergers actually enhance revenue. In fact, airline travel is actually 20% less expensive than it was in 2001, after adjusting for inflation. That means that airlines have failed in their attempt to achieve any meaningful top-line growth by combining operations.
