New planes are expensive, but many of AA's new planes aren't all that expensive. With current fuel prices ($3.20/gal in 2012 for AMR), the new 738s save enough fuel so that the fuel savings makes the lease payments. Add in maintenance savings for the first several years (they won't need a heavy check until they're 5-6 years old) and they're actually profitable out of the gate. Richard Anderson, CEO of Delta, told investors last year that DL's order for 100 739ERs is expected to add to profits in their first year.
Right now, the cost of fuel is high yet the cost of money is very cheap. It's impossible to hedge fuel prices for 20 years, but with advantageous lease rates, AA is currently achieving what results in a long-term fuel hedge (low lease rates on new fuel efficient planes). Of course, if fuel prices decline over that long-term, then the planes don't pay for themselves via fuel savings and the strategy doesn't look so great. But if fuel prices climb over the next 20 years, the strategy looks brilliant. In effect, the new airplanes are "free."
I don't think that sounds crazy at all. I see it as a very real possibility. The Parker promises to AA labor and his own labor are saddling the combined airline with several hundred million dollars of additional labor costs just as AA fought to hard to cut its costs, and IMO, those higher costs could easily soak up the cost-savings and synergies that the merger is promised to deliver. The employees of both airlines will be understandably livid, but the Wall St deal-makers will be long-gone with their enormous profits made on the marriage in 2013.
Yes, AA needs to grow, but I discount the worries about "price wars" as a result of growth by AA. Delta is currently adding a lot of capacity from LGA with its new slots acquired from US, and in some of the key markets, DL is getting average fares far below those of AA. DL has managed to take away some market share from AA, but at very low average fares compared to AA. Last year, Delta admitted to investors that it captures average fares in NYC that are far below those of AA or UA, and that it hopes to fix that deficiency. So far, it does not look like DL has succeeded.
I suspect that we'll find out within a few weeks what the UCC thinks when we learn whether AA will emerge on its own (ala Delta) or merge as a part of its Ch 11 exit. Parker's plan is certainly ambitious.
Actually, we already have some data on this one. As part of Horton's ambitious plan to turn AA around, he set goals of $3 billion of improvements by 2017, including $2 billion in cost reductions and $1 billion in revenue growth.
http://aa.mediaroom.com/index.php?s=43&item=3449
Presumably, the bankruptcy cost reductions to wages and equipment (leases and debt) achieved in 2012 accomplished much of the $2 billion (wage cuts alone were in excess of $900 million annually).
What about revenue? In 2012, AMR reported total revenue of $900 million more than in 2011, achieving 90% of the 2017 target in year one.
Recall that nearly every vaunted Wall St analyst predicted in late 2011 that AMR would likely shrink by 10% to 15% (with some clueless dimwits predicting as much as 20% contraction). One such well-respected analyst was Jamie Baker of JP Morgan:
http://articles.marketwatch.com/2011...st-jamie-baker
Didn't happen. AMR didn't shrink by anywhere near 10%. Of course, Baker also didn't correctly predict the AMR bankruptcy on the horizon in late 2011:
http://blogs.wsj.com/deals/2011/11/2...out-liquidity/
Whoops. Baker also predicted in early December, 2012 that AA would not achieve the labor cost savings that Horton had targeted:
http://www.washingtonpost.com/busine...7vO_story.html (sorry, link is dead - may exist somehwere in Wash Post archives)
$500 million a year? Nope, Horton got more than $900 million a year. And again with the incorrect 10% shrinkage prediction.
So in year one, the year in Ch 11, Horton cut more than $900 million in labor costs and increased revenue by $900 million. If left to implement the five-year plan outlined on Feb 1, 2012, would AMR hit the $3 billion in cost cuts and revenue improvements by 2017? Hard to say, but 2012 saw AMR achieve a large portion of the targets in one year.
Can he deliver on the promises? Don't know, but he's already delivered quite a bit of what he promised, and 2017 is still a long ways off.
I haven't read any reports that those CEOs have said anything along the lines of "We think the merger simply most happen because the standalone plan is clearly inferior to Parker's merger plan." They have both indicated support for whatever AA and the creditors choose, whether that includes emerging as an independent airline or a merger with US as part of AA's emergence from Ch 11 or a merger with US at some later date. What I've read appears to be the typical "we support our valuable partner AA in whatever path it selects" type of carefully crafted corporate-speak.
Having said all that, I think the merger will happen as part of the exit from Ch 11.