American appears ripe for acquisition

— -- As American Airlines seeks to slash jobs and pensions to help steer its way through bankruptcy reorganization, rival carriers are eyeing it, looking at whether they should buy the struggling airline.

US Airways, spurned in its quest for a major partner at least three times in the last dozen years, has said it's interested in exploring its options with American, which became the last of the nation's major carriers to file for bankruptcy protection when it did so in November.

Delta Air Lines, already the world's second-biggest carrier, has retained Blackstone Group, an investment and advisory firm, to watch American as it reorganizes under bankruptcy court protection.

But any proposal to buy American, invest in it or scoop up its assets is probably months away, industry and bankruptcy experts say, as American is given time to hammer out its own restructuring plan. A marriage of the U.S.' third-largest carrier with another airline could have a series of hurdles to overcome, from labor problems to antitrust concerns about what could be the last megamerger in an increasingly consolidated U.S. airline industry.

In the last four years, Delta took over Northwest, United and Continental have merged, and Southwest bought AirTran.

"You have to look at these mergers on a variety of levels," says Henry Harteveldt, airline and travel analyst with the Atmosphere Research Group, from the effect on ticket prices and shareholders to "the reduced competition, and impact on employees and communities."

The disappearance of another stand-alone airline could mean higher fares, reduced service to some markets, and a steeper climb for smaller carriers trying to compete with their jumbo-size peers, says George Hobica, of Airfarewatchdog.com.

"In any age of megamergers, where does that leave niche airlines such as …Virgin America, Frontier, Alaska and Hawaiian?" Hobica asks. "Can they survive as agile mice running around in a jungle full of 800-pound gorillas?"

American says it's not looking for a buyer or a partner, but aiming to emerge from the bankruptcy process independent and intact.

"You have likely read or heard reports that there are those who wish to shrink our airline, close hubs or acquire our company or assets," Tom Horton, American's CEO, said in a letter to employees on Feb. 1. "Still others may favor a break-up of American. I do not believe any of these outcomes are in the best interests of American, our people or our stakeholders.

"The best way for us to assure that we are in control of our own future is to make the necessary changes, complete our restructuring quickly and continue working hard to position American as a world-class competitor," Horton said.

Strategies to survive

The airline, which has presented its restructuring plan to employees, seeks to cut roughly 13,000 jobs, end the company's pension plans and outsource some aircraft maintenance to help achieve $3 billion in annual savings and improved revenue.

Proposed cuts drew sharp responses from airline unions, with whom American has had contentious relationships, as well as the Pension Benefit Guaranty Corporation (PBGC), the federal agency that would take over administration and payment of pension benefits if American terminates its plans.

Tuesday, some flight attendants and ground employees picketed at Dallas/Fort Worth International in protest. Wednesday, their unions submitted proposals to allow voluntary departures instead of layoffs.

"It represents a major change in almost every respect to our careers at American," says Tom Hoban, a pilot for the airline and spokesman for the Allied Pilots Association. "It's pretty extreme, but we expect to bargain off of this … and hopefully meet somewhere in the middle."

Michael Rae, acting chief insurance programs officer for the PBGC, said other carriers that have gone through bankruptcy, such as Delta and Continental, emerged with some or all of their pension plans intact, and American must prove that it has no alternative before taking such action.

"We're working towards an outcome where we don't have to take over those plans," says Rae, adding that if the PBGC has to step in, American employees will lose an estimated $1 billion in benefits. Higher-paid workers such as pilots would probably be particularly hard hit due to legal caps on how much the PBGC insures, he says.

"While it's PBGC's role to step in as a safety net when a company cannot afford to continue its plans," Rae says, that "doesn't mean that's a good thing for the participants, or the insurance program, or even the other creditors of American airlines."

After American paid only $6.5 million of a $97 million pension contribution due in January, the PBGC filed liens of more than $91 million on assets belonging to parent company AMR.

But American says pension cuts, as well as plans to update its fleet, shrink debt and boost the number of international flights, are necessary to be profitable. "If we were not able to terminate our plans, then we'd have to potentially seek deeper cuts elsewhere by either affecting more employees or asking for pay reductions or increases in benefit costs," says Will Ris, the airline's senior vice president, government affairs.

Industry analysts say potential suitors are unlikely to come calling until the labor issues are ironed out.

"I don't think anybody is going to step up and buy them right now," says Vicki Bryan, senior high-yield analyst at corporate bond research service Gimme Credit, who has said that American has "limited appeal as a takeover candidate."

Besides American's labor issues, she says, a bigger problem is its loss of premium-paying business and international fliers to United and Delta. "Why do you want to jump up and start waving a checkbook now? Let the dust settle."

Tough competition

Just as many U.S. carriers sought bankruptcy protection in the last decade to gain leeway to cut labor costs and streamline operations, airlines have been pairing up to boost profits by shrinking competition, bolstering the number of cities served and increasing efficiency.

Delta and Northwest joined in 2008, Continental and United in 2010, and Southwest completed its purchase of AirTran last year.

Such steps have helped an industry, which struggles to make money in the best of times, reap a profit. But American, with no major merger partner or bankruptcy umbrella under which to make big changes, was the only large U.S. carrier to not post a profit last year or in 2010.

Now, US Airways has retained three firms "to help us explore our options as they relate to AMR's bankruptcy," US Airways CEO Doug Parker told investors in a Jan. 25 earnings call.

As recently as 2010, US Airways was in talks with United about a possible partnership before United teamed with Continental to become the world's biggest carrier.

Still, Parker noted in the January call, US Airways has been doing well on its own, posting a net profit of $21 million in the last three months of 2011. "US Airways does not need to participate in consolidation," he said. "We can now decide whether it's best for US Airways to operate as a stand-alone company or participate in further consolidation over time."

If US Airways and American were to join forces, some industry experts say, US Airways might get more out of the deal. It could gain a stronger presence in major markets such as Dallas, New York and Chicago, a gateway to Latin America through American's Miami hub and the ability to offer American's popular customer-loyalty program.

"American is certainly a very attractive target, but again, American doesn't need US Airways," Harteveldt says.

On the flip side, a union between the two would give American inroads to the shuttle market between Boston, New York and Washington, popular with coveted business travelers.

It would not necessarily be the most ideal of partnerships. US Airways has had labor problems stemming from its merger with America West in 2005. It was only last month that representatives of its two groups of flight attendants agreed to a joint contract that members must now ratify.

"When United and Continental merged, that was seen as this dream team of hubs, in terms of putting together a nearly perfect network … that had strengths in every part of the world," says Seth Kaplan, managing partner of Airline Weekly, an industry trade publication. If US Airways and American decide to link up, "it's not going to be because everybody thinks it's going to be clean and easy. It'll be because people think in the very long term it's worth facing all those challenges."

A union with Delta could be more mutually beneficial, vaulting Delta back into first place as the world's biggest airline. Delta could increase its already large stake in the highly sought-after New York market, and the two would strengthen each other's global reach across the Atlantic, Pacific and Caribbean.

"It would put Delta solidly ahead as the number one airline, and it would be very difficult for another airline to catch up with Delta on a domestic or international basis," Harteveldt says.

But most of Delta's employees aren't in unions, unlike American's. And the carriers would likely have to give up slots at some airports to quell antitrust concerns, analysts say.

Which path?

While American has time to work out its own plan, its creditors can argue in favor of a merger or purchase, says Max Newman, a bankruptcy attorney with the firm Butzel Long.

"It is only speculation, but I do think there's going to be some bidding, and there will be some form of an alliance or acquisition that occurs out of all of this," says Newman, who is not involved with American's bankruptcy proceedings.

American's most recent merger attempts with smaller airlines did not fare well, Harteveldt says. That included unions with AirCalifornia in 1986 and Reno Air in 1998. And American's purchase of TWA's assets, completed in April 2001, faltered in the wake of the Sept. 11 terrorist attacks, he says.

Harteveldt thinks American can still thrive solo. "American doesn't really need any other airline," he says. But, it will need to "work to repair everything from relations with its workers to making customers really care for the airline and seek it out."

Others say that in an industry increasingly dominated by giants, it might be difficult for American to continue going it alone.

"It becomes really tough to see how they can continue on competing against these massive" airlines such as United-Continental and Delta, says Andrew Thomas, assistant professor of international business at the University of Akron in Ohio and author of Soft Landing: Airline Industry Strategy, Service and Safety. "It becomes very difficult to see how they survive."