American Airlines: 4th merger the charm?
By The Dallas Morning News
Published: Saturday, Feb. 2, 2013, 9:00 p.m.
If American Airlines Inc. merges with US Airways this year, American can only hope that the fourth time is the charm.
Three times since 1986, American has merged with another airline. All three times, American had little left to show for the deals within a few years of closing the transactions — except for more debt, unneeded aircraft and facilities, and abandoned strategies.
American is expected to decide soon whether to accept a merger with US Airways Group Inc., which has been pushing for the partnership since American and its parent, AMR Corp., filed for bankruptcy in November 2011. Whatever it decides, the Fort Worth-based airline can learn from the lessons taught by the first three mergers.
The big one, in terms of people, money and airplanes, was American's 2001 purchase of Trans World Airlines Inc., structured as an acquisition of assets in TWA's bankruptcy case.
But American also made two purchases of West Coast airlines, AirCal and Reno Air Inc. — both acquired to bolster American's presence up and down the West Coast and particularly in California. In both cases, American eventually surrendered the positions it had acquired.
The roots of the deals go back to American's ambitious growth plan launched in 1983, as American went from 244 aircraft that year to 672 by 1992. Strong in the nation's midsection, it lacked a network along the West Coast.
On Nov. 17, 1986, it announced it would pay $225 million to acquire a low-cost carrier, AirCal and its parent ACI Holdings Inc., to give American the routes, airplanes and California base it needed.
“The AirCal acquisition will allow American to fulfill its plans to develop its new hubs at Nashville, Raleigh-Durham and San Juan while simultaneously developing a substantial West Coast operation,” Robert L. Crandall, American's chairman and CEO at the time, said as he announced the deal.
He cited the “special importance of the West Coast and the timing imperatives created by the rapidly changing airline industry.”
Based in Newport Beach, Calif., AirCal was folded into American's operations in July 1987. In 1988, American realigned AirCal's routes to focus on San Jose, Calif., where American created its newest connecting hub. The airport there began building a terminal to accommodate the rapidly expanding American.
Aviation consultant Bill Swelbar said American made its move on AirCal as airlines were battling for market share in the California corridor. American coveted AirCal's young hub in San Jose at the center of the Silicon Valley, he said.
At that time, American officials “were investing in a hub in Raleigh-Durham, which was the Research Triangle, and they had a meaningful position in Boston, on Route 28, the biotech center,” Swelbar said. “They were really building what they believed were strategic hubs in areas where the economies could flourish.”
As it happened, US Airways had a similar idea and bought Pacific Southwest Airlines in 1987 to gain its own West Coast foothold.
But American and US Airways made their big move into the West Coast at the same time that low-fare, low-cost competitor Southwest Airlines Co. was doing the same.
When American and US Airways bought the two California carriers, Southwest served only four California airports — San Francisco, San Diego, Los Angeles and Ontario. But between 1989 and 1994, it added service to five others, including San Jose. Those nine cities comprise Southwest's California network today.
Southwest quickly became the leading intrastate carrier in California. The timing was simply bad for American, which was learning that Southwest was hard to beat when the Dallas-based airline entered a market.
“American and US Airways simply didn't have the cost structure to compete with Southwest in the California corridor,” Swelbar said. United Airlines, with a hub at San Francisco, survived primarily because its domestic routes were weighted to the West and it was a “very large California player.”
“Southwest had the economic strength to withstand predation, whereas other guys didn't,” aviation consultant Darryl Jenkins said.
In the face of the low-fare competition, American spooled down the San Jose hub almost as quickly as it had built it up. In 1993, it announced that its San Jose operations were no longer a hub.
As the Silicon Valley bloomed in the late 1990s with soaring stock values and millionaire-making initial public offerings, the demand for airplane seats by high-dollar business travelers also soared. And American again expanded its foothold with an acquisition.
American approached Reno Air, a low-cost carrier that began flying in 1992 and flew mostly MD-80 jets — the workhorse of American's fleet. In November 1998, the two companies announced a merger and, again, the impetus was American's need to build up its system in the Western United States.
“Reno's West Coast route system will enhance both the AA network and the networks of our Oneworld partners,” said Don Carty, who replaced Crandall as chairman and CEO in 1998.
But in February 1999, just weeks after American wrapped up the year-end purchase, some American pilots began a sickout as the pilots union and American argued over how to fold the Reno pilots into the workforce.
The sickout wound up costing American more than $200 million in lost revenue — more than it paid to buy Reno.
A year later, there was TWA.
To many American executives, the failure of the TWA merger was simply a matter of timing.
On Jan. 10, 2001, the two carriers announced a $2.8 billion deal in which TWA would file for bankruptcy and American would buy its assets in bankruptcy court for $742 million, assume just over $2 billion in obligations and hire its employees.
The deal started out as a defensive move, as United —which had passed American to become the world's largest carrier — had announced a merger with US Airways Group Inc.
The TWA announcement was coupled with a more complex proposal aimed at resolving antitrust issues raised in the US Airways-United deal. American would share the East Coast shuttle with United, and American would invest in a new entity, DC Air, which would begin operating out of Ronald Reagan Washington National Airport using US Airways slots.
The United-US Airways deal collapsed in the face of Justice Department opposition. But the American-TWA merger went ahead, without the shuttle and DC Air portions.
Even as American took over TWA on April 9, 2001, the dot-com boom was slowing and the demand for high-price premium airline tickets began slowing.
Five months later, on Sept. 11, the terrorist hijackings and crashes of two American and two United airplanes tanked the airline industry and the economy.
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