Airline smackdown: American CEO bashes US Airways

(CBS/AP) BOSTON - American Airlines CEO Thomas Horton wants to set the record straight: It was he who approached US Airways CEO Doug Parker about the possibility of combining the two airlines, not the other way around.

Horton has never made that fact public before, but he's doing so now to send a message. If American is going to combine with US Airways (LCC) or any other airline, the decision will be Horton's.

Since American's parent AMR Corp. (AMR) filed for bankruptcy last November, Parker has been aggressively promoting a combination of the two airlines as the only way to save American. Parker has championed the idea on Wall Street, in the media and lined up support from the three labor unions at American. Investors have treated the possibility as a near inevitability, pushing up shares of US Airways Group Inc. 150 percent over the past seven months.

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But in an interview with The Associated Press Horton was emphatic that there's more financial pressure on US Airways than American to find a partner. And he cited Parker's repeated overtures as a sign of desperation.

Perhaps the biggest problem on the horizon for US Airways is that its labor costs are going to rise, Horton said. Unions there haven't had a new contract in more than seven years. Horton said Parker is in "a race against the clock" to somehow increase revenue before he has to pay higher salaries in a new contract. A combination with American would help do that because American flies many more international routes, which bring in higher fares per passenger.

"It would be tremendously unwise for us to pursue a combination with a company because they are seeking to solve their own problems," Horton said.

Elise Eberwein, US Airways executive vice president for communications, said in response: "Nothing could be further from the truth. We've got a very sustainable model."

On Wednesday, the Tempe, Ariz. airline reported that revenue rose 7.2 percent in the second quarter and it made $306 million in profit, its best quarter ever.

Horton and Parker started their airline careers together in the 1980s, sitting practically side-by-side in cubicles at American Airlines' headquarters in Fort Worth, Texas. And they've remained friends.

The first conversation the two had about a possible merger took place in September, when Horton was still just American's president. Horton wouldn't say where they met but two people familiar with the situation said it was at the A Bar A Ranch, a 100,000-acre retreat in southern Wyoming during an exclusive gathering of top airline executives informally known as "conquistadores del cielo," or the conquerors of the skies. The people spoke on the condition of anonymity because the executive meeting is supposed to be a secret. The discussion between Horton and Parker occurred during a barbeque lunch along the banks of the North Platte River.

"I said to Doug, standing by the river, I think there could be the potential for value creation in a combination," Horton recalled. "I made that pitch. We nodded heads to one another."

Two months later, on Nov. 29, American's parent company, AMR Corp., filed for Chapter 11 bankruptcy protection. On the same day, former CEO Gerard Arpey stepped down and American named Horton as its new CEO.

Within weeks, Parker started to publicly call for a merger. But Horton remained steadfast: his airline would emerge from bankruptcy independent.

Now Horton is stepping up his rhetoric. He is making his case about American's own strength with investors and Wall Street analysts, most recently at a breakfast and a lunch on Friday in New York.

Ray Neidl, a Maxim Group airline analyst who met with Horton at the breakfast, said he was swayed by Horton's determination to keep American independent. "I reduce (the) odds of a merger happening from 90 (percent) to less than 50," he said.

Another analyst, Helane Becker from Dahlman Rose, noted that "it's more important for US Airways to do the deal than it is for American."

US Airways stock hit a 52-week high on July 13 as merger speculation peaked. It has since fallen more than 20 percent as investors have questioned the certainty of a deal. The stock closed Wednesday at $11.15, down 3.75 percent.

There's an unspoken incentive for Horton to bash US Airways and quash merger speculation - drive down his rival's stock price and make a merger less expensive.

One reason a combination may be less likely is that American has been getting stronger as part of its bankruptcy restructuring. Revenue is growing and costs are down. The airline is shedding money-losing routes and has ambitious orders for new planes with some of the most advanced interiors available.

Combining with another airline is not out of the question for American, Horton said during the interview, which took place after an industry conference in Boston. But he said the best time to merge is when you are at "a position of greatest strength." That could mean a combination during or after the bankruptcy process.

American has exclusive rights until the end of December to present its own plan for restructuring to the bankruptcy court. Ultimately, it will be the bankruptcy judge and the airline's creditors that decide its fate. American's three unions hold a third of the creditors' votes. Horton noted that the union leadership's feelings are "not reflective of how the 80,000 people of American feel. So stay tuned."

There would be some advantages to a merger for American. US Airways has a strong domestic presence that would feed well into American's European and Latin American routes. Combined, they would be nearly equal in size to rivals Delta Air Lines and United Continental Holdings Inc. That size would help to steal away large corporate contracts.

But Horton notes that US Airways is "not the only option." There has been talk about a merger with JetBlue Airways Corp. or Alaska Air Group, Inc., but the leaders of both airlines said publicly that they want to remain independent.