Merging Competitors: U.S. Airways and American Airlines

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In February 2013,   Airways announced that it would merge with American Airlines to create the  . During the acquisition, then-CEO Doug Parker and his board had transformative decisions to make. How should two large corporations merge their operations? Which members of the C-suite should stay? And how fast should they move on these changes? Parker knew that these strategic decisions would send important signals to employees, customers, and competitors.

Today, we bring you a conversation that breaks down the strategy for US Airways’ merger with American Airlines with Harvard Business School senior lecturer David Fubini. 

In this episode, you’ll learn how Parker approached each of these strategic decisions – especially in areas like culture and operations, where American and US Airways had huge differences.

This episode originally aired on Cold Call in September 2021. Here it is.

BRIAN KENNY: Hollywood has never been kind in its portrayal of business-people, and that’s doubly true when it comes to the deal-makers, those heartless, wing-tipped, pinstriped brokers who see finance as blood sport and workers as pawns. Think Gordon Gekko in Wall Street, or Richard Gere in Pretty Woman. In American Psycho, Christian Bale took the stereotype to new lows, playing a high-flying banker who specialized in mergers and acquisitions during the day and morphed into a murdering sociopath in the evening. Fortunately, there are no such villains to be found in real-life mergers, but there can be a lot of drama, and depending on the firms involved, a lot of headlines. Leading firms through a merger is a complex, daunting, and emotionally charged undertaking. The stakes are sky-high, and careers and livelihoods often hang in the balance. But done well, the results can lead to a happy ending for all involved. Today on Cold Call, we welcome Professor David Fubini to discuss the case entitled, Merging American Airlines and US Airways. I’m your host, Brian Kenny, and you’re listening to Cold Call on the HBR Presents network.

BRIAN KENNY: David Fubini teaches in the MBA and Executive Education programs at Harvard Business School. Before teaching, he had a long career at McKinsey Consulting, where he helped clients with major transformation programs stemming from acquisitions and mergers, which is perfect for today’s conversation. And he is the author of Hidden Truths: What Leaders Need to Hear but Are Rarely Told. David, maybe you’ll tell them some of that stuff today during our conversation. Great to have you back.

DAVID FUBINI: Great to be back, and thank you for having me back. I very much appreciate the opportunity.

BRIAN KENNY: The last time we met, we were talking about the Big Apple Circus and creepy clowns and stuff. So, I thought I would start out with just a nod to American Psycho in the beginning of this one.

DAVID FUBINI: Indeed, you did, and thankfully, I’m none of those things, either by vocation or by looks, in terms of being any of those movie stars, but nonetheless, great setting.

BRIAN KENNY: Yeah. It sells movies, but it’s not really true to life, I think, which is great.

DAVID FUBINI: Not true to life. no.

BRIAN KENNY: Maybe you can start just by telling us what would your cold call be to start this case in the classroom?

DAVID FUBINI: Well, the cold call would be: Is this a merger of equals, or is this a takeover? Because it is a little bit of both, and therein lies the debate. Takeover, because this was an acquisition of American Airlines by US Airways out of bankruptcy. So, you don’t get any more hostile than that one because, of course, American had hoped to emerge from bankruptcy following its own plan. US Airways thought otherwise. So, for that context, it’s clearly a takeover. On the other hand, no way you can actually take over such a big airline being such a small airline, as US Airways was. So, in many ways it has to be a merger, and it has to be a merger in every dimension because there’s so many pieces that have to be put together. So, students should have to ask, “Well, which is it?”

BRIAN KENNY: Why was it important to you to write this case? And more importantly, how does it relate to the ideas in your book?

DAVID FUBINI: This case came about because David Garvin, who of course we’ve lost, but was just a pillar of this place, and it was a great opportunity to be able to write a case with David. And he wanted to talk about the process of putting together a merger and acquisition properly. There are many, many books, and for that matter, cases written about mergers, but David thought and I thought it would be a great thing to help him, actually illustrate, in a much more definitive way, the trade-offs that go into a merger process. So, that was really the genesis of the case. Why it’s important to my book is because while Doug Parker is certainly not a new CEO to the US Airways folks, he is certainly a very new CEO to the American Airlines folks, and therefore has to apply many of the lessons learned that come in this book about the hidden truths because, for many CEOs taking over a new organization, they’re like a brand new CEO, and they do face all those hidden truths that I try to illustrate in the book.

BRIAN KENNY: And you saw how many of these when you were working at McKinsey? You probably don’t have the exact number, but a lot, I’m going to guess.

DAVID FUBINI: A lot. I probably was involved in as many as 50 major transactions of some note, also involved in a fair number of divestitures as well – how you actually roll out something from an organization as opposed to rolling in something to an organization.

BRIAN KENNY: So why don’t you just set the stage for us? What led up to the discussions about the merger?

DAVID FUBINI: First of all, we should note that in the American airlines industry, every major airline had been through a bankruptcy. American Airlines had held off, had been the last remaining airline to not slip into bankruptcy, but it couldn’t eventually avoid the fate that had fallen to others. US Airways has always wanted to acquire and become a bigger airline, and they saw in the bankruptcy of American an opportunity to really pounce, and did so. So, that was the foundational element of the deal itself. The reason for a lot of this consolidation is because, as we’ve observed in the airline industry, there’s real value in having scale, and scale was really important – and also because US Airways wanted to apply its approach to managing an airline to a broader airline. And so, they saw this as a real opportunity as well. That’s the institutional view. The individual view here is also important. Doug Parker started his career at American, had worked in the finance operation, actually worked alongside of the chairman of American Airlines. So, they were colleagues. So, he’d always eyed American Airlines as a possible airline he would love to own because he had begun there.

BRIAN KENNY: How often does it happen in the reverse order, I guess, with the little fish gobbling the big fish?

DAVID FUBINI: It’s rare because it’s very difficult. It’s very difficult, one, to convince shareholders that this is a good thing to do, because of the scale differences. Then there’s the capital formation questions, which are obviously always challenging when you’re talking about the scale differences. And finally, it’s really hard to actually outbid a larger company for an asset if you are the smaller company.

BRIAN KENNY: So, let’s talk a little bit about Doug. You mentioned that he worked at American Airlines early on. How did he come into his role at US Airways, and what’s his leadership style?

DAVID FUBINI: Well, he had been the CEO of US Airways for some time, actually, ever since they bought America West, if you’re old enough to remember that there was a former airline called America West.

BRIAN KENNY: Indeed I am.

DAVID FUBINI: Yes, indeed. Many of us are. And US Airways itself is a product of lots of other airlines being rolled up. So, both of these are all products of other consolidations. Doug had taken over as the head of US Airways, and one, he’s remarkably smart and obviously incredibly engaging. But he has a very low-key approach to being a CEO, not like the Hollywood version of the all-seeing, all-knowing, sitting on a pedestal type CEO. That’s not Doug. Doug is very down to earth, loves talking to everybody in the building, from the person who might be at the front desk greeting people to his most senior executives. So, he was very open, engaging, very informal in his approach and his style with people, which played very well in the airline industry, as you might imagine.

BRIAN KENNY: But that sets up an interesting dynamic because the case does a good job of talking about the differences and the personalities of the two companies, right? So American Airlines is the antithesis of what you just described.

DAVID FUBINI: It is indeed, in many ways. First of all, American Airlines viewed themselves, maybe rightfully so, as the airline of the Americas. I mean, it was America’s airline. It was the representative of business travelers everywhere, and it was viewed itself as such. It was quite proud, and internally ran itself in a very, very hierarchical way, committee on top of committee on top of committee, and then eventually to the senior executives. Things moved quite slowly, really driven by marketing and branding more so than operations. I would say that US Airways was just the opposite of all of that. So, you have two radically different cultures and then you have the scale difference as well when you’re doing the acquisition, and you can see that this would be a big challenge.

BRIAN KENNY: And we’ll get into some of those differences a little bit further on in our conversation, but let’s start at least if you can describe the issues that Parker found himself contending with as he’s starting to move down this path to the merger.

DAVID FUBINI: The very first and largest challenge is one of scale. I mean, it is truly, and we discussed it as being the minnow trying to eat the whale. So, the scale differences were quite significant. If you think about the number of anything between city pair routings to number of planes and the different planes that American had in their fleet than that of US Airways, you’d understand just how radically different and challenging this would be when you look at the scale differences between the two. Second, the culture of running the airlines were quite different, as we were just already indicating. American Airlines was very focused on customer service and its service to business travelers in particular. For example, it was quite famous for the fact that it allowed its captains to hold the plane, if indeed it felt it was appropriate to accommodate a business traveler or a set of travelers who might be coming in on an airline that had been delayed, and so therefore they would hold the plane. US Airways was, “No, we fly when it said we’re going to fly and not a minute later,” because their theory was that they ran such a tight network that a 10-minute delay at the beginning of the day would turn out to be a two-and-a-half-hour delay by the end of the day, and they were probably right. Nonetheless, you have this incredible difference in operational philosophy between the two. So that’s the second major challenge. And the third is dealing with the sheer volume of transactional decisions that have to be made when you think about putting together airlines. Just think about it for a moment and we understand just how complicated they can be from what we observed. Then you have to think about all the things you can’t observe that are also very complicated, not the least of which was the questions around things that you don’t often think about, like cargo, for example. Cargo is a huge part of the airline, and yet you really don’t ever think about it, but merging the cargo parts of it on top of the passenger part is really quite difficult. The sheer preponderance of issues here on an airline are pretty dramatic, even more so than a make-and-sell business.

BRIAN KENNY: So, in your experience, how complicated is it to sustain a business while you’re going through a merger like this? How do you continue to operate as if things are normal? We always use that expression of fixing the plane while it’s in flight. I guess it’s apropos here.

DAVID FUBINI: It is apropos here. It’s incredibly apropos here and incredibly tough. It’s probably the number one challenge in the work that I used to do advising companies on their mergers is how to actually make sure that during the time post the announcement, pre the regulatory approval process, which can be as long as six months, how do you actually maintain your base business and not have it suffer? And the truth is it’s ridiculously difficult because the norm for most organizations as they’re going through a transaction for them to lose focus on their base business and have, frankly, their revenue drop. One, there’s something called the “shiny object phenomenon”, which is everybody wants to be involved in that which is going on, which is the new thing, which is the merger, and so that takes time and attention away from the base business. So, the first thing you have to tell everybody is, “Do your job, and don’t worry about the merger. Some of us will worry about that on your behalf.” That’s a very difficult message for some. Second, every competitor out there knows that you’re going through this process and there’s disruption. And they, by the way, add to that disruption quite willingly and fully. And then finally, there’s just the sheer anxiety that everybody has. By the way, that anxiety is not just in those who you’re acquiring, in this case, American Airlines. It’s also for those who are the acquiring company because, as US Airways is seeing, they’re saying, “Wow, maybe I won’t have a job when this gets all done, even though we bought these guys.” So, there’s big problems everywhere.

BRIAN KENNY: One of the first decisions that Parker has to make is who his leadership team is going to be, and that seemed like it was fraught with all kinds of peril and sending all kinds of signals.

DAVID FUBINI: Well, the leadership team decision is incredibly important because it is your indication to the rest of the organization of how you’re going to run this company. Additionally difficult here is because Doug had a team around him that had been with him as a leadership team since the America West days. And they know each other very well. I mean, these were close, close friends. They would talk about it being a familial relationship amongst the five of them. And there were five gentlemen and then Elise Eberwein, who was the glue that held them all together because she was the disciplinarian, by the way, amongst this group. And she turns out to be, by the way, one of the true stars of this story. And Doug would be the first to tell you that he couldn’t have done what was done here without her help. So, you have this group of five that have been together forever, and they’re now taking over American Airlines. And the question is, will you actually break up the group and include other American Airlines executives as would be appropriate if this was going to be a merger. If it was going to be a takeover, you wouldn’t have to worry so much about that.

BRIAN KENNY: Yeah. But it’s obviously positioned as a merger, so they are looking at co-leadership. What are some of the pros and cons of doing that? And how do you make it work, I guess?

DAVID FUBINI: The place where they’re really looking for a co-leadership was how to lead the integration itself. There, the decision was, are you going to have an American Airlines person lead it or a US Airways person lead it or a co-leadership? And that decision speaks volumes to those who are watching to say, “Well, if there’s only going to be one leader, and it’s going to be a US Airways leader…” In this case, it was going to be Robert Isom, who at the time was the US Airways head of operations, run the integration, everybody will say, “Well, fine. We know what’s happening here. This is going to be US Airways taking over us. We’re going to be doing everything US Airways’ way. That’s just the way it’s going to be.” If you have co-leaders, in this case, Bev Goulet, who is the former treasurer and CFO at American Airlines, and you have her be a co-leader, it’s a way of saying, “Oh, good, look, see, we’re going to actually decide what’s best from both groups.” On the one hand, that’s a very positive message. On the other hand, it takes more time because now everything is debate. Now every decision then becomes a question about, is it the US airways way or the American Airlines way?

BRIAN KENNY: But you have to make a decision at the end of the day. Decisions have to be made. Consultants get involved in these things, inevitably, and what’s the role of the consultant in a situation like this?

DAVID FUBINI: Usually it’s three things. One is pattern recognition. Coming in and being able to say, “Look, I can tell you what’s going to happen this week and next week and the week after, and so let’s just talk about what needs to get done given what’s going to go on.” And so just having a sense of, “It’s base camp. I’ve climbed this mountain before. I don’t quite know what the weather is going to be. I don’t know how great climbers you all are, but this is camp one, two, and three. Follow me.” That’s a little bit the first role that we tend to play because we’ve done this before, and many managements haven’t done transactions of this scale or this type. Two, we basically try and help staff some of the more core teams, the teams that are really central to the value propositions that underlie the deal. There we could be deployed and be helpful and try and move things along. And third, we become the honest broker, if you will, sometimes, in these integration teams, in that we can not necessarily make the call, because that’s not the role of the consultants. It is, though, to make sure that we have all the data to actually enable the call to get made. So those are the major roles that we tend to play.

BRIAN KENNY: Yeah. And does this start to get into some of the things that you would tell a leader that they need to hear, but probably aren’t told?

DAVID FUBINI: Yes, we would be. This is where all the hidden truths come to play, right? So for example, Doug is taking over this big, huge airline. US Airways was headquartered in Phoenix. American Airlines is, probably no surprise to anybody, headquartered in Dallas. And so the very first question is how does Doug indicate, by virtue of his own actions, the power of role modeling, if you will? Which is an incredibly important part of the repertoire of a CEO and something, as I say in the Hidden Truth, that very few CEOs do well. And so, Doug, one of his very first acts was to say, “Look, I’m moving to Dallas. Not only am I moving to Dallas. Here is where my kids are going to school, and here’s what church I have joined.” And he literally said that was one of his first announcements. And all the people in Dallas went, “Oh, okay. Now we understand. He understands what it means to be in our environment.” So very important role modeling. A second part of the book talks a lot about the fact that you are often, as a leader, not told the entire truth. I tell this story that an admiral who used to be the NATO Supreme Commander told me, once he goes onto a battleship, he’d know two things with certainty when he got to the bridge. One, he would never be handed a cold cup of coffee, and he would never get the entire truth about what was happening on the boat. And this is what CEOs, I think, need to understand, and certainly Doug came to understand, was that he wasn’t going to get the full story about the quality and nature of the issues at American Airlines from one individual. That just wasn’t going to happen. It required a fairly robust amount of reaching out to large numbers of different people. That’s where consultants can certainly help play as well. He also would talk to people who used to previously work for American Airlines, and he’d actually go and talk to others, even competitors, to talk about what the truth really was of the operations he was now inheriting.

BRIAN KENNY: I would imagine there’s a fair amount of distrust, particularly on the part of American Airlines, and that probably extends through the organization. With things churning at this point. And people are suspecting motives that maybe aren’t there.

DAVID FUBINI: Absolutely. You can’t imagine the amount of concern, debate, rumors that go on here. So, part of the challenge that we spoke about earlier about keeping the focus on the base business, when all of that is going on, it’s really hard to go out and make the sales calls and ensure the planes arrive serviced and on time. There’s a huge issue there, certainly. The other thing to remember about these sorts of situations is that you’re unable to announce, as a CEO, your decisions, because you are only in this period where you’ve announced the deal, but you don’t have legal close and you don’t have regulatory approval. So, you’re not allowed, because of FTC and justice rules, to say, “This is what we plan to do.” I mean, you can do some of that, but the regulatory lawyers would say, “Please do none of that,” because anything you do there could cause concerns, in now this case with the bankruptcy court and with regulators. So, you’re left, as a leader, to have to talk about the process you’re going to use to make decisions rather than the actual decisions.

BRIAN KENNY: What are some of the mistakes that firms make when they’re going through this process?

DAVID FUBINI: Well, we’ve already covered one in great detail, which is losing the base businesses. Really, that’s almost one of the key elements. The second is forgetting, in some strange way, why you did the deal. One of the first things I would often do when I was asked to join two CEOs and talk about the transaction they’re about to do, I would say, “Well, please tell me the reason you did the deal.” And they’d all roll their eyes and go, “My heavens, did you not even read the PR statements?” And I said, “Of course I’ve read all that. That’s not what I’m asking you. What’s the real reason you did the deal? Not what you said publicly. What is it you’re really trying to achieve here?” And when you actually understood the real reasons for the deal, you have to make sure that your integration architecture matches that aspiration. So, if you’re a pharmaceutical firm buying another pharmaceutical firm, if you’re really buying it for the R&D operations, then make sure that you are integrating the R&D operations in a thoughtful manner. So, keeping focused on the real reason you did the deal was quite important. And here, the real reason for the deal was to get scale and get it fast and get it into the marketplace so that operationally you brought real effectiveness to the American Airlines system, which was missing. So that would be the second thing you really have to focus in on. And then most people really do undervalue the cultural challenges here, which are quite significant. Not the least of which was that American Airlines was just so much bigger than US Airways and saw US Airways as a little bit of a vacation airline or not a serious airline, not the way they were. And of course, the US Airways people would say, “Look at those American Airlines people. All they care about is wealthy business leaders who can afford their inefficiencies, and we have just got to fix this thing.”

BRIAN KENNY: So how do you do that? How do you even broach something like that?

DAVID FUBINI: Well, the first is to be transparent and open with each other, you do have this differences of opinion. Doug Parker, when he came to class, which he was very kind to do, he said, “Look, we thought they were crazy and they thought we were crazy. And we just had to sit back and say, ‘Look, we both can’t be right, so let’s try and better understand each other.’” So, one was transparency and openness is absolutely incredibly important, and there’s another hidden truth that you don’t see enough of in communication and with openness to your communication. So, one, being open to, and being willing to be challenged. That’s something many CEOs are not willing to do. Doug said, “Look, I’m here to be challenged. Tell me where I’m wrong.” Second, a lot of symbolic activity. One of the first acts Doug Parker did was he walked in, was surprised to see security in the lobby, and he just said, “Look, this is silly. We don’t need all this.” So, he took all that down. He did away with executive parking, he did away with the executive dining rooms, he did away with this huge office structure that prevented the senior team from being seen by others. So, he broke all those barriers literally physically down and said, “Look, I’m not the former management here. I’m a different management.” The last thing he did was great, as many of your listeners will remember, American Airlines had these iconic silver airplanes, and they had decided to change what’s called the livery, which is the entire look of the airline. And they’d spent a lot of money actually developing the new look of the American Airlines. And Doug Parker said, “Look, before we go ahead with this, let’s put this to a vote of the entire employee population.” And people are slightly aghast because they’d spent fortunes actually developing this new livery. But he said, “No, no, I want us to see if this is one airline. So I’m going to put it to a vote.” And of course, the new airline livery was voted on positively, and that’s why every American Airlines plane now you see has this white look in a different, much more up-to-date logo.

BRIAN KENNY: I liked the silver, but that was just my opinion.

DAVID FUBINI: Well, I’m sorry. You would have been out-voted.

BRIAN KENNY: I didn’t get a vote. I was going to say, so many of the things that he did, I would think would make him a hero with the rank-and-file people, probably with the unions as well. But I would imagine it would cause a lot of strain on the relationship with the management folks at American Airlines. Is that something that you have to address head-on? How do you tackle that?

DAVID FUBINI: Well, it is inevitable. I mean, as your opening suggested, there is a little bit of some Machiavellian elements to mergers and acquisitions. There’s just no doubt that when you put two organizations together, certainly ones of this scale, you have two corporate centers, which you don’t need. So, there are going to be people that were not going to be necessary for the going forward organization. That does mean choices have to get made and people will have to leave. That’s unfortunate, but that’s the reality of just not needing two corporate centers. So, clearly that was the first choice that was made. And there, Doug decided that he would keep his five close colleagues with him, with Elise, and that they would layer in a few American Airlines people to the most senior level. But that was, frankly, something he had decided early on. He wasn’t going to do this transaction if he couldn’t do it with his team. And one of the reasons he did this transaction that he did was he could bring along his team. The first level of management reporting to Doug was pretty much the US Airways team. But below that, it was probably much more equitable between the two airlines. And if anything, American Airlines people probably dominated because it’s at that level where their skills were most necessary to have, given the scale differences between the two airlines.

BRIAN KENNY: And some of the really hard decisions, I would imagine, come down to things like operations and technology systems, and where are you going to place your bets on those things?

DAVID FUBINI: Huge issues. All the other airlines who had gone into bankruptcy had struggled to come out of bankruptcy without major troubles to their IT systems, to their operational systems, their reservation systems, and most importantly for most of the flyers, their frequent flyer programs. And so, this became a huge issue going forward was how to actually come back out of the bankruptcy of American Airlines and now the merger with US Airways, with systems that were operative and not go down. Several of the other airlines actually had to stop operations for a day or two because their reservation systems failed. So, we learned from the failure of others that had gone before us and made sure that the IT system changed in a very slow, very methodical, very risk adverse based way. I’m probably not the one to be talking about the details of this, but the fact is that that was the fundamental view of the team. And so probably, what would normally you would think to try and do in a year to 18 months, some of the IT transitions took as long as four to five years to make.

BRIAN KENNY: Wow. David, this has been a great conversation, as usual. Thank you for sharing your insights about this really interesting merger with us. I have one more question before we let you go, and that would be, if there’s one thing you want people to take away from this case and from the Hidden Truths book, what would that be?

DAVID FUBINI: Well, I think the first thing is how difficult it really is to be a new leader of a new organization. The whole Hidden Truths book talks about the challenge of doing that. Particularly if you’ve not been a CEO before and a leader before, you realize that all of the things you learn to do to get to that position and be given that opportunity to be a leader don’t actually work and they’re not that much value now that you’re at that senior most level position, and you have to learn a whole new set of skills. And so that hidden truth is something that should really motivate people. And certainly Doug, in this case because he had been a former CEO, actually employed many of those approaches really well. The other important thing about mergers and acquisitions is to realize, we talk a lot about corporate strategy here at Harvard. Well, corporate strategy these days, for the most part, always includes some acquisition-oriented approach. And so, it’s a fundamental part of corporate strategy now to do mergers and to do acquisitions. This is a learned skill that we all have to develop because in today’s world, organic growth alone is not going to be sufficient to drive the needs of shareholders. You have to also acquire.

BRIAN KENNY: It sounds like people would be lucky to have you on the merger team if they attempt to go down this path. David, thank you so much for joining us today.

DAVID FUBINI: Thank you. It’s been just a joy to be with you. Thank you.

HANNAH BATES: You just heard Harvard Business School senior lecturer David Fubini in conversation with Brian Kenny on Cold Call.

We’ll be back next Wednesday with another hand-picked conversation about business strategy from Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you’re there, be sure to leave us a review.

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This episode was produced by Anne Saini, and me, Hannah Bates. Ian Fox is our editor. Special thanks to Maureen Hoch, Nicole Smith, Erica Truxler, Ramsey Khabbaz, Anne Bartholomew, and you – our listener. See you next week.