How AMR's 3 rumored suitors stack up

US Airways, TPG Group and Delta would each bring different possibilities to the table.

By InvestorPlace Jan 17, 2012 12:26PM
Image: Airline (© Christie & Cole/Corbis)By Susan J. Aluise

The week before American Airlines' parent AMR Corp. (AAMRQ) filed for bankruptcy in November, I offered four ways for the struggling legacy airline to pull out of its tailspin. Now that it's taken the first step -- gaining Chapter 11 protection -- let's consider step two: merging with another carrier.


The airline industry has been awash in rumors this week of at least three potential suitors for American -- Delta (DAL), US Airways (LCC) and David Bonderman's private equity firm TPG Capital.


Airline mergers make sense because the combined carriers can cut capacity, better control operating costs and gain economies of scale. Delta reportedly has turned to Blackstone Group, which helped it acquire Northwest Airlines in 2008. Although US Airways' last trip down the aisle was with America West in 2005, it was an ardent -- but unsuccessful -- suitor for Delta and United.


Many Wall Street observers were surprised that AMR filed for bankruptcy in November because it still had $4 billion in cash. But AMR's timing made perfect sense because just days earlier, American's pilot union board rejected the airline's new labor offer. That deal would have paid pilots of smaller jets 40% less than their peers, offered new pilots 401(k) plans instead of pensions and halted health benefit payments when a pilot turns 65.


The company's stock had been walloped just eight weeks earlier when news of a 10-fold increase in pilot retirements in August and September fueled bankruptcy rumors. In the end, the Chapter 11 filing is buying valuable time for American to identify and work through its options.


One thing is certain: Maintaining the status quo wasn't a viable option for AMR. Its biggest problems stem from high pension and health benefit costs. Delta, United Continental (UAL) and US Airways filed for bankruptcy protection in the mid-2000s and were able to pare back costs dramatically by dumping their pensions. American has more than $18 billion in pension liabilities to its 130,000 employees and retirees and only $8.3 billion in assets, according to the federal Pension Benefit Guaranty Corp.


In a letter to AMR employees on Jan. 12, CEO Tom Horton said the company would be making tough choices on pensions and benefits. "While difficult, all of these changes will be grounded in our overall objective to become efficient and fully competitive in all aspects of our business," he said. "Just as we are carefully examining our fleet and network plans, we are looking at . . . what compensation, benefit and retirement packages will be going forward."


While the prospects are sobering for AMR employees and retirees, leaner labor and benefits costs -- combined with last year's sweet financing deal for 460 new fuel-efficient Boeing (BA) and Airbus jets -- makes American an attractive bride for the right groom.


Here are how the three rumored suitors stack up:


TPG Capital. "If a farsighted capitalist had been present at Kitty Hawk," Warren Buffett once wrote, "he would have done his successors a huge favor by shooting Orville down." TPG's founding partner David Bonderman is the antithesis of Buffett in that regard.


Bonderman's most notable airline play came with his stunning success turning around the then-bankrupt Continental Airlines in the 1990s. The airline, which after the $450 million investment went from worst to first in every performance measurement category, saw its stock price soar from $2 to $50 in just four years. It merged with United to become United Continental in 2010. It doesn't hurt TPC's chances that AMR's Horton was Continental's CFO during the turnaround and respects his expertise.


US Airways. Doug Parker, US Airways chairman and CEO, said last year that there's one more big deal in the airline industry and vowed US Air would be part of it. Parker, who was CEO of America West before taking over the merged US Air-America West in 2005, worked with Horton in finance positions at AMR during the late '80s and early '90s.


While the size, scale and network power of this pairing would give Parker the grand wedding he's pining for, it makes sense for LCC only if it can dump the high benefit costs and liabilities, which is by no means certain.


Delta. A marriage with DAL seems least likely. Although the airline's mega-merger with Northwest closed in April 2008, the airlines didn't fly as a combined carrier until January 2010. To some degree, DAL is still tinkering with the fine points of that tie-up. A marriage between the nation's second- and third-largest airlines also would come under regulatory scrutiny on the order of AT&T's (T) ill-fated attempt to buy T-Mobile.


Still, one of the characteristics Delta CEO Richard Anderson values most is situational awareness -- being very alert to everything going on around you at all times. So if there's a value play with AMR -- more likely an a la carte selection than the entire smorgasbord -- Anderson is adept enough to recognize it.


Bottom Line: AMR does represent a potentially attractive opportunity for the proper suitor -- if the price is right. The airline has a far better chance of rising out of bankruptcy and into profitability through merger than as a stand-alone carrier. But at best, mergers take time and patience. Despite the recent flurry of interest, don't expect any of these companies to update their Facebook status anytime soon.


Susan J. Aluise writes about the aviation, auto and transportation industries. As of this writing, she did not hold a position in any of the stocks named here.


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