By Mitchell Schnurman
mschnurman@star-telegram.com
This was supposed to be a pivotal week in American Airlines' bankruptcy, as the company tries to end its high-priced labor contracts. But the showdown in a New York courtroom now looks like a prelude to the main event.
The bigger question hanging over the proceedings is whether US Airways has a better vision for the future -- and the wherewithal to pull off a merger.
Answer in the affirmative, and the current contract battle seems almost beside the point. Huge changes would be coming to American headquarters in Fort Worth, starting with a new management team assembling the country's largest airline.
If US Airways is ultimately rebuffed, and that has happened more than once in the recent era of airline consolidation, American rebuilds from the ground up. It may not be No. 1 in size, but going solo could be a more valuable option.
That debate must play out eventually, as stakeholders decide where to cast their lot. It's just not going to happen for a while.
In a voluntary bankruptcy, the debtor usually has the exclusive right to develop a reorganization plan, without interference from outsiders. A vital part of American's plan calls for cutting labor costs by $1.25 billion a year, and that's the court's focus this week.
American employees may face the fallout -- deep layoffs, cuts in benefits and changes in work rules -- as soon as June, if the judge rules as scheduled.
To avoid that, the unions want US Airways to be part of the discussion, because they've thrown their support behind a US Airways merger and agreed to a framework on new contracts. Sounds like a relevant development, but so far, U.S. Bankruptcy Judge Sean Lane won't hear of it.
He said Tuesday that he even avoids some news reports, adding, "I have to decide what's in front of me" -- and not the big part of the iceberg he does not see.
There's good reason to stick to the process, because US Airways' proposal is not a slam-dunk. Key details, such as financing the merger and integrating the workforce, haven't been spelled out. Even if an offer materializes and is proposed to creditors, it's still possible that American could offer a better plan.
American management has been working on a reorganization for five months, with input from outside experts, and most of the team has been with the company for years. Whether or not you view that as an advantage, CEO Tom Horton and his group may be able to create the most valuable enterprise for creditors, employees and the community.
American could emerge as a stand-alone carrier, as initially proposed, or later pull in JetBlue, Alaska Air or even US Airways. A big bankruptcy often has big surprises, but Horton cannot advance to the next stage until the labor piece is resolved.
The unsecured creditors committee, which has great influence over the outcome, acknowledged that starting point. A lawyer told the court that the committee supports ending the labor contracts and management's goal of a stand-alone business plan, according to news reports.
But the support goes only so far. The lawyer said creditors also want to vet strategic alternatives against the American plan. That sounds like the right balance: Let American's management take its best shot and then see whether outsiders can top it.
A bid from US Airways and other suitors would face serious scrutiny, too. US Airways has been mired in union problems since the middle of the last decade, and low labor costs have been a key factor in its profitability.
A merger would require the company to pay more to current workers, along with the premium offered to American's unions. Would that cost structure hinder growth?
US Airways officials said the gains from the merger are big enough to both reward employees and compete effectively with United and Delta, the largest carriers.
American is likely to attack those assumptions and argue that it could do better without being tethered to US Airways. But it's easy to challenge American's assumptions, because its cornerstone market strategy hasn't delivered. While the latest numbers look better, it may have a more compelling argument after labor costs go down.
"Bankruptcies tend to operate in the nature of an auction," said Jeffrey Morris, a University of Dayton law professor and member of the National Bankruptcy Conference. "Management has to respond."
American's exclusivity period extends until late September, but a majority of the unsecured creditors committee can petition the court to hear another proposal sooner.
Many analysts are projecting that the merger will happen, because the economics are simply so strong. It just may take a year or longer to work through the process.
Either way, a crucial decision is looming. Through May, they'll argue about labor contracts. Next up: Which management team to back.
Mitchell Schnurman's column appears Sundays and Thursdays. 817-390-7821Twitter: @mitchschnurman
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