US Air CEO Defies Buffett Adage Seeing American on Top
Doug Parker, returning to the carrier where he began his career, has a vision: He sees American Airlines (AAMRQ) vaulting to the top of the industry’s major financial benchmarks just three years after the merger he orchestrated with US Airways Group Inc.
Don’t take his visions lightly. Parker was chief executive officer of the eighth-largest U.S. carrier and the youngest airline CEO in America when he began calling for consolidation in the U.S. Twelve years later, the industry is about to shrink to three airlines with international reach, and the 51-year-old US Airways CEO was central to making that happen.
The man poised to run the new American as it becomes the world’s biggest airline is propelled by a mix of relentless determination, pragmatism, patience, risk, energy and a kind of Reaganesque confidence that tends to rub off on a room.
Asked at an interview at Bloomberg’s headquarters in New York whether he has sometimes felt like actor-director Ben Affleck, who said at the Oscars that being knocked down is less important than getting up, Parker looked quizzical for a moment and responded, “I’ve never felt knocked down.”
That’s quite a statement for someone who became CEO of already struggling America West Holdings Corp. 10 days before the 9/11 attacks; was caught up in airlines’ deepest cutbacks in flying since World War II; had his company dissed as “the ugly girl” amid three rebuffs by potential merger partners; and was elbowed away when he first suggested that US Airways take over bankrupt AMR Corp.’s much-bigger American.
“From the time I started in this business, people would say, ‘It’s the airline business; it’s romantic and we don’t make money,’” Parker said. “But none of that ever made sense to me. It’s not romantic. It’s bad business.”
Speaking quickly, in full sentences with few pauses, Parker gives the impression of someone who knows where a paragraph ends before he even starts, much as he says he always knew airlines would have to consolidate to survive.
The son of a Kroger Co. meat cutter who rose to vice president, Parker received an MBA at Vanderbilt University and said he’s not an “airline geek” who “breathes jet fuel.” Instead, asked why he likes the job, he talked about the complexities, from finance to marketing to operations to maintenance.
“I love the business,” he said. “The business we do is hard. I like the challenge of the business, the logistics. I like how everything is important in it.”
The odds against Parker can’t be overstated. Warren Buffett likes to say that the airline industry, as a whole, hasn’t made a penny since the Wright Brothers flew at Kitty Hawk. The Berkshire Hathaway Inc. (BRK/A) chairman has sworn off airline investments since a 1989 investment in US Airways that he once dubbed a “mistake.”
Parker will need to blend two airlines with almost 94,000 employees, more than 900 mainline jets, eight hubs and 99 million loyalty plan members. He also must build a common identity for employees, woo back corporate fliers lost to the wider networks of United Continental Holdings Inc. (UAL) and Delta Air Lines Inc. (DAL), and repair operations that left American last among seven major U.S. carriers in on-time arrivals in 2012.
“The execution of this has got to be close to perfect,” said George Hamlin, president of Hamlin Transportation Consulting in Fairfax, Virginia. “You have companies with different cultures, a lot of different systems. There’s an awful lot of moving parts. And one of the parties in this marriage has come somewhat unwillingly.”
Some believe Parker can pull it off. Fourteen of 15 analysts surveyed by Bloomberg recommend buying Tempe, Arizona-based US Airways, which has more than tripled since AMR’s bankruptcy filing on Nov. 29, 2011; one has a hold rating.
Parker has led US Airways to annual profits since 2010 and will extend the streak this year and next on a stand-alone basis, according to estimates compiled by Bloomberg. By passenger traffic, the airline he runs now is only half as big as the one he is about to lead, and ranks fifth in the U.S. to American’s No. 3.
“He’s clearly not afraid of risk or to take chances,” said Hunter Keay, an analyst with Wolfe Trahan & Co. in New York. “I don’t think Doug ever wants to look back and say, ‘I wish I had done that.’ He’s willing to embrace commercial risk so he can effect change, given his small size in the industry.”
“I was there from ’86 to ’91,” said Parker, who started a year after Bob Crandall became American’s CEO and ushered in more than a decade of growth marked by new routes, planes and alliances.
American employees believed then that they worked for “the best airline in the world,” Parker said. “They lost some of that.”
Parker left American in 1991 to be Northwest Airlines Corp.’s vice president and assistant treasurer, and was hired as chief financial officer at America West in 1995, the year after the airline emerged from bankruptcy. In 2001, at age 39, Parker was named CEO of the carrier dubbed “America Worst” for its poor operations and service.
Parker was among early proponents of consolidation as a way to bring much-needed stability to the industry, letting carriers focus on so-called fortress hubs instead of battling for market share everywhere. That could help produce profits, damp troughs in the business and allow airlines to stay profitable when fuel prices surge, he said.
He was barely into his tenure when he went before Congress seeking federal aid following the Sept. 11 attacks. Without help, he said, America West would be forced into bankruptcy within days. The airline and US Airways were the only two major carriers to receive loans backed by the U.S. government.
From 2001 through 2004, Parker’s first four years as CEO at America West, operating losses bled $22.5 billion from U.S. airlines, U.S. statistics show.
In Parker’s view, the 9/11 attacks didn’t cause industry consolidation -- the post-Sept. 11 travel slump only accelerated an inevitable shake-out for U.S. airlines saddled with unsustainable expenses and overseas networks inferior to foreign competitors.
“Their costs were too high and they didn’t provide what business customers really wanted, which was to take them anywhere they wanted to go globally,” Parker said. “Those airlines had to get their costs down.”
In 2005, Parker secured about $1.57 billion from planemaker Airbus SAS, former Air Canada parent ACE Aviation Holdings Inc. and hedge funds Par Capital Management Inc. and Peninsula Investment Partners LP to acquire bankrupt US Airways, which was 60 percent larger than America West. It was an unprecedented group of investors for an airline takeover.
“There’s real value in consolidation,” he said. “We took two airlines that probably wouldn’t have made it, and put them together to create an airline that’s making record profits.”
Parker said he learned a critical lesson from that first merger: America West kept its processes and computer systems for the combined airline even though US Airways was larger, because he and his team felt those were better and certainly more familiar.
That decision led to delays and long lines at some airports in 2007 when the carriers’ reservation systems were combined and some passengers couldn’t check in. Parker later realized that the bigger airline’s systems must subsume the smaller, an approach he says he will bring to the new deal.
“Management teams get wedded to their systems and processes,” he said. “We’ve stolen this from Delta: to ‘adopt and go.’ Just get yourself running by adopting the larger airline’s processes and just go. We need to get the integration done.”
That includes labor unions. Under Parker, pilots from the old US Airways and America West failed to move to one labor contract, forcing them to operate with separate work rules and pay scales for more than seven years. Negotiations stopped when leaders for each union became embroiled in a legal battle over how to combine seniority lists.
Parker maintained that he was ready to negotiate a combined accord once the two unions settled their dispute. Pilot unions at American and US Airways already have agreed on a transitional contract and a system to handle seniority integration. US Airways flight attendants didn’t approve their first joint contract since the America West merger until Feb. 28, after rejecting two prior accords.
The US Airways deal didn’t sate Parker’s appetite for combinations. In late 2006, he made a hostile bid for Delta, an effort that collapsed two months later amid opposition from the Atlanta-based airline’s bankruptcy creditors and employees.
Hours after US Airways admitted defeat and withdrew its Delta offer, Parker was arrested for drunken driving in the Phoenix suburb of Scottsdale. He had spent the evening at a party tent at a golf tournament, where he said he had consumed three beers.
Parker later apologized for making such a mistake and for the “embarrassment” the incident caused US Airways. He pleaded guilty, paid a fine and was sentenced to one day in jail.
The Delta failure taught another vital lesson, Parker said: move early on a takeover in bankruptcy and build support from workers and other groups first, because hostile moves rarely succeed. A little more than a year later, Delta acquired Northwest, which also had gone through bankruptcy.
“We were disappointed we didn’t end up with that transaction, but we were elated to see the results -- that the creditors put in place a board that was directed to go look at mergers and acquisitions, put in place a CEO who was directed to go look at mergers and consolidation,” he said. “Of all the things we’ve done to add value to our shareholders, the Delta hostile is certainly No. 2 or 3.”
The Delta-Northwest deal stirred a flurry of merger talks around the industry in early 2008. Former United parent UAL Corp. considered a tie-up with US Airways, then walked away.
In 2010, as US Airways and UAL prepared to announce a merger agreement -- a press release and a website for the combined company had already been prepared -- Continental Airlines Inc. CEO Jeff Smisek swooped in and engineered a deal with his counterpart at United, Glenn Tilton.
“I didn’t want him to marry the ugly girl,” Smisek said as he and Tilton announced the creation of United Continental Holdings.
Parker got another chance for consolidation when American sought court protection in 2011. On the day American announced the move, his colleague from the old days, Tom Horton, became CEO and they talked on the phone.
“It was a bit of an odd moment,” Parker recalled. “He filed and was named CEO the same day, so it was ‘Congratulations and I’m sorry you’re in bankruptcy.’”
Parker said he believes that even in that first call, he broached the idea of a merger. Horton turned down Parker’s suggestions to begin talks, saying he wanted American to exit Chapter 11 on a stand-alone basis and then consider possible combinations.
“In the early days of the restructuring, merger talk was premature,” Horton said. “It was essential to first complete the substance of the restructuring to create value for American. This allowed the merger to be negotiated from a position of much greater strength.”
Parker said he remembered his lessons from the aborted Delta merger: Work with investors and employees first and move fast.
“We knew we couldn’t wait,” he said. “We knew we had to get something done early, before the deal got baked.”
Parker and US Airways President Scott Kirby began detailing their plan and its benefits to AMR creditors and bondholders.
In April, after a series of secret talks, they secured the backing of unions representing American’s pilots, flight attendants, mechanics and baggage handlers and signed them to contracts conditioned upon a merger. The unions had negotiated as much as six years with American before the bankruptcy without reaching new labor agreements.
Parker knew the unions had expressed a lack of confidence in Horton and his management team and might be open to a deal. He also knew that pursuing a merger with labor’s blessing could be a game-changer.
“That was a brilliant strategic move,” said Jim Corridore, an analyst with S&P Capital IQ in New York. “He was able to make sure he got respect at the bargaining table from AMR and other stakeholders because of the way he got the unions on board.”
US Airways used the growing base of support to help win over members of American’s creditors committee, which has a voice in major decisions made during bankruptcy and helped persuade AMR and its board to accept the merger.
Still, considering the last-minute rejections of the past and American’s early resistance, Parker said he wasn’t sure the merger would occur until the day AMR’s board approved it, “or maybe the day before.”
That vote came Feb. 13, and he found himself in Fort Worth, alongside Horton, to announce the tie-up the next morning: Valentine’s Day.
Now Parker has to persuade regulators to approve the deal. Some consumer advocates are concerned that less competition will mean higher ticket prices, an issue already raised in congressional hearings. US Airways has said it expects the merger to close in the third quarter.
American Airlines Group Inc., as the new company will be called, will join United and Delta as the only U.S. carriers with full-service cabins and international networks, down from seven airlines in 2000. They’re joined at the top of the industry by one dominant discounter, Southwest Airlines Co. (LUV) -- a realization of Parker’s consolidation goal.
One of his sounding boards has been the man linked with the expansion of the old American: Crandall, 77, who retired as CEO and chairman in 1998.
“I think the world of Bob Crandall. I have turned to him for advice a number of times throughout my career and through this process,” said Parker, who declined to talk about what the two have discussed.
Crandall praised Parker and his team for doing a “superior job” in improving operations at US Airways.
“Doug’s been pursuing the notion of enlarging US Airways for a long time,” said Crandall, who also wouldn’t comment on any conversations with Parker. “For this deal, he is in the right place at the right time, and they put the story together in a very persuasive way.”
Success for the merger will be based on the new American’s profitability relative to its peers, profit margins as good as or better than others in the U.S. industry, a return on capital and a return on equity to shareholders, Parker said. He will be “disappointed” if the airline isn’t leading its largest competitors on those metrics within three years, he said.
“It’s a much more healthy industry structurally,” Parker said. “We now have an industry that’s positioned, at least, to be able to provide real returns to investors like they’ve never seen before.”
Has Parker always been such an optimist? He smiled at the question and responded, in one of those full paragraphs:
“I believe it, so it’s easy. This is a great business that has a really nice future ahead of it, and we have a very good airline that we’re going to build. I’m excited about it. None of this is surprising to me. It feels like this is where we’ve always been headed.”
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