In path to American's merger,
One CEO had to leave
Tom Horton and Doug Parker both wanted to run American Airlines; how 1 ultimately relented
By Scott Mayerowitz, AP Airlines Writer | Associated Press – 1 hour 0 minutes ago.. .
It wasn’t an easy fight, but by the end of this year the 51-year-old Parker will be at the helm of a combined American and US Airways, the world’s largest airline. Horton, also 51, will step aside, getting $19.9 million in cash and stock as well as a lifetime of free first class flights, excluding taxes, on American for himself and his wife. Horton will serve as chairman for about a year before stepping down. (AP Photo/LM Otero, File)
NEW YORK (AP) -- The 14-month battle for control of American Airlines came down to two men who got their start there.
When the airline filed for bankruptcy in November 2011, Tom Horton was simultaneously elevated to CEO. But from the minute he reached the top, a number of forces started converging against him. The airline's unions didn't trust him. Those owed money by American questioned his plans.
The strongest opposition, however, soon came from his old friend Doug Parker. The two had worked side-by-side as financial analysts at American's Fort Worth, Texas, headquarters in the 1980s, until Parker moved on to other airlines, eventually becoming CEO of rival US Airways.
Parker had spent the last five years looking to merge with another airline. With American in bankruptcy, he sprang into action.
By the end of the year, the 51-year-old Parker will be at the helm of a combined American and US Airways — the world's largest airline. Horton, also 51, will serve as chairman for about a year and then depart the company he worked at for nearly a quarter century. For his efforts, he will receive $19.9 million in cash and stock as well as a lifetime of free first-class tickets on American for himself and his wife.
Parker and Horton have spent most of their lives in the airline business. But that's about where the similarities end.
Horton is a buttoned-up guy who loves long runs and starts each morning with a bowl of oatmeal and freshly cut Texas peaches. Parker, on the other hand, is easily the life of a party. He commands a room and fills his conversations with energy.
There was never going to be room for both at the top of American.
This is the story of how two old friends and former protégés of legendary American Airlines CEO Robert Crandall found themselves on opposite ends of what may be the last great airline merger in the U.S. Horton and Parker declined to comment but interviews with executives, union officials, lawyers and others connected to the deal — agreed to late Wednesday — outline how it was filled with tactical negotiations, clandestine meetings and gut-wrenching decisions. The prize: A chance to bring American back to its glory days.
Horton initially was safe in his job.
When American's parent, AMR Corp., filed for bankruptcy five days after Thanksgiving in 2011, it did so from a unique position. It had lost more than $12 billion during the past decade but still had $4.1 billion in cash. That meant it didn't need to borrow money to keep operating, and that gave Horton more autonomy and control over the company's fate.
His first task was to get the airline to stop bleeding money. Aircraft leases and vendor agreements were quickly changed. The airline reviewed every part of its revenue and moved to cut labor expenses.
This was not the time to work out a merger, although Wall Street analysts were already speculating.
The official line became: American was open to a merger, but only after it emerged from bankruptcy protection. Horton's preference was for American to remain an independent airline. The unspoken reason was that American wasn't worth as much as executives hoped it would be later.
And that's exactly why Parker wanted to move quickly, while he still had the upper hand and could pay significantly less. US Airways hadn't signed new contracts with its unions in years. That was benefiting shareholders. Eventually, Parker would need to pay out large raises which would weaken his position in any merger. Time was of the essence.
In January 2012, Parker decided to shop around his idea for a merger on Wall Street and in Washington.
He wasn't the only one floating the idea of a merger.
Horton was also feeling pressure from American's creditors, who were owed $29.6 billion. Bankruptcy law gives a company 18 months to exclusively present its own plan to return to profitability. The creditors and judge have to sign off on the plan but typically sit on the sidelines.
American's creditors took a much more active role.
It started with their choice of lawyers. After American filed for bankruptcy protection, the creditors interviewed several law firms in a basement ballroom of the Sheraton New York Times Square Hotel.
"You have to decide whether you are going to be proactive or reactive," Jack Butler, of Skadden Arps Slate Meagher & Flom, told the committee.
The creditors chose proactive, and Butler's team was hired.
It probably helped that Butler had represented US Airways in its 2002 bankruptcy and Skadden's head of restructuring, Jay M. Goffman, had worked closely with Parker after 9/11, when Parker ran America West. Skadden was also America West's counsel when it later merged with US Airways.
"We said: You should pick a firm that does a lot of deals," Goffman recalled.
The full press started in February 2012, when the committee's lawyers invited Horton and two of his top lieutenants to a dinner at the firm's Times Square office. There, 38 floors above the city, overlooking the Empire State Building, creditor representatives talked about the merits of a merger. They didn't like American's plan to stay independent, thinking they could get back more of the money they were owed through a merger.
Horton stood firm, preferring to consider a merger only after American emerged from bankruptcy.
Then came American's unions.
David Bates, who was head of American's pilots' union at the time, was worried that the airline's plan would fail and the company would shortly return to bankruptcy. He also wanted to stop Horton from gutting his members' pay and benefits. So he turned to US Airways for a better deal.
"If we had hope of a better outcome, I needed to move very quickly," Bates said.
Through a mutual friend, he set up a dinner on March 12, 2012, with Scott Kirby, president of US Airways and Parker's right-hand man. They were both in New York for an investor conference and met at Oceana, an upscale seafood restaurant in the heart of Manhattan.
Kirby had reserved a private table. It turned out to be in the kitchen.
"It was private," Bates said. "Just noisy."
Bates and another union leader — Dennis Tajer — ordered a mix of East Coast and West Coast oysters. A joke was made because US Airways has two separate unions, referred to as east and west.
Kirby passed on the appetizer.
"I found out he's not a fan of oysters," Bates said.
The meeting otherwise went well. Bates and union vice president Tony Chapman flew to Phoenix 10 days later for dinner with Kirby and Parker. A steakhouse dinner quickly followed with the union's entire leadership team and most of US Airways management.
Steps were taken to ensure the meetings remained a secret.
Too many American pilots recognize Bates and the other union officials. So they flew US Airways.
Pilots will often fly other airlines in uniform and chat with the crew. That couldn't happen on these flights.
"Everybody was told to be invisible, not to talk to anyone," Bates said.
When Parker and Kirby flew to Texas to make their case to the union, there was even a higher level of secrecy. They used a private jet and Bates personally made the 12-mile drive to the meeting site in the union's red Chevrolet Suburban.
Union security guards were stationed around the Hilton Arlington, but when Bates pulled up at the back entrance, he recognized a reporter lurking nearby. He quickly made a U-turn and the meeting was moved to the union's headquarters.
Similar meetings were being held with the flight attendant union and one that represents ground service employees and maintenance workers.
Around this time, Parker sent a letter to American formally proposing a merger. US Airways would own 51 percent of the new airline. The offer wasn't taken seriously.
On April 20, Parker publically announced that American's three unions were backing a merger.
It was an audacious move.
American was still in control of its bankruptcy but suddenly there was another option on the table. The unions told the court that jobs and wages didn't need to be cut.
Wall Street analysts supported a merger, preferring Parker as the new CEO.
Horton publically told employees "nothing changes as a result of these announcements." But privately he and other top American executives were rethinking a deal.
American had originally planned to emerge from bankruptcy and talk to several airlines, including US Airways. Horton became convinced that if he waited too long, a deal might not be available to him.
"He's a great numbers guy," said Thomas Roberts, a partner with Weil, Gotshal & Manges, the law firm that represented American.
In summer, Horton alerted his board that it was time to investigate a merger.
He reached out to Parker and arranged a 6:15 a.m. breakfast on July 19 at the Jefferson Hotel in Washington. Both men had oatmeal. They spoke about sharing financial documents and Horton asked Parker to ratchet down the public push for a merger.
A deal and decision about who would run the new airline was still way off.
Three days later, Horton started to spin the idea of a merger as his own.
He told The Associated Press that the first conversation the two men had about a possible merger took place in September 2011, when Horton was just American's president. They were at an exclusive gathering of top airline executives in Wyoming known as "conquistadores del cielo," or the conquerors of the skies. During a barbeque lunch, Horton approached Parker, saying there could be value in a merger.
"I made that pitch. We nodded heads to one another," Horton had said in July 2012.
On Aug. 31, the airline announced that nondisclosure agreements had been signed and they were considering a merger.
"It does not mean we are merging — it simply means we have agreed to work together to discuss and analyze a potential merger," Parker told employees.
For the next three months, teams of lawyers, accountants and consultants started reviewing each airline's books. There were so many people that eight separate conference rooms in Weil's Dallas office were required.
US Airways executives came to Dallas to hammer out details between sips of Dr. Pepper and iced tea.
"We wowed them with Mexican food and BBQ," said Glenn West, a partner with Weil who oversaw American's negotiations.
By this point, American had secured new contracts from its unions, cut other costs and improved its revenue.
After months of negotiations, US Airways presented the merger to the creditors on Jan. 10. It proposed giving 70 percent of the new airline to them and American's employees and the remaining 30 percent to US Airways shareholders. The creditors were sold. But Horton wasn't.
His team eventually was able to shift another 2 percent ownership away from US Airways shareholders, ensuring that American's pre-bankruptcy shareholders would see some money. The new airline would be valued at $11 billion.
The only sticking point was who would lead it.
Parker badly wanted to be the one in charge. Horton, who had spent a year fixing a broken American, believed he should be able to finish what he started.
A small group of advisors met with Horton and appealed to his principles. It was time to do what was right for American. The airline needed a fresh start. Horton agreed and prepared to hand over the reins to Parker, his friend and rival for three decades.
"He's put his heart and soul into this for most of his career," says Beverly Goulet, American's treasurer and chief restructuring officer. "All things being equal, he might prefer to be the guy sitting in the CEO chair."
Scott Mayerowitz can be reached at http://twitter.com/GlobeTrotScott.