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This is a free preview of Porter & Co.’s Distressed Investing. In the full issue, analyst Marty Fridson details the turnaround of a leading American travel company: recommending its stocks to readers. To get the full issue, click here.

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A 20% Share-Price Bump When Suitors Come Calling

A flat-out “Nay!” from DOJ
Was a blessing in disguise,
And now this premium service play
Is flying calmer skies.
– Martin Fridson

Doug Parker didn’t like being looked at as the little punk in the room…

While airline industry giants viewed Parker’s U.S. Airways as a minor player, Parker – the small airline’s CEO – was quietly preparing for a full-scale invasion of the most iconic brand in the sky: American Airlines.

By late 2011, American Airlines (AAL) was a shadow of its former self. While rivals like United Airlines (UAL) and Delta Air Lines (DAL) had used bankruptcy and mergers to thin out their operations, American’s management, led by CEO Tom Horton, had stubbornly resisted. When American finally filed for Chapter 11 protection in November 2011, Horton's plan was standard: emerge as a stronger, independent carrier.

U.S. Airways CEO Parker saw things differently. He knew that for his carrier to survive the "duopoly" power of the larger majors, it needed scale. Parker had begun his aviation career at American Airlines in 1986, later becoming a VP at Northwest Airlines, then CFO at America West Airlines. On September 1, 2001 – just 10 days before the September 11 attacks – he was named CEO of America West. In 2005, he spearheaded the merger between America West and U.S. Airways. Under his leadership, U.S. Airways achieved significant revenue growth and profitability.

So Parker had earned a reputation as a leader and consolidation hawk – but, Take it easy, many airline veterans said: American Airlines was more than twice the size of U.S. Airways. To many, Parker's ambition looked like a "cultural leap" that was simply too great.

The primary obstacle wasn't just the math. It was the good-old-boy culture that often plagues legacy institutions. Tom Horton and the American Airlines board were fiercely protective of their independence. They viewed Parker as a scrappy upstart from a "discount" background. Horton explicitly told Parker that American was not interested in a merger until after American had successfully navigated bankruptcy on their own terms.

Parker knew that if he waited for American Airlines to emerge from bankruptcy, the opportunity would vanish. “I need to shake things up myself,” he said.

The Labor Coup: An Unconventional Anecdote

In April 2012, while American's management was locked in bitter contract disputes with its own employees, Parker executed a maneuver that remains a legend in aviation history. He didn't go to the executives in the board room – he went to the breakrooms.

Parker and his team held secret meetings with the leaders of American's three largest unions: the pilots, the flight attendants, and the ground workers. In a windowless room in a hotel near the Dallas-Fort Worth Airport, Parker made a stunning proposal. He offered them better wages and job security than their own management was offering – contingent on their support for a U.S. Airways takeover.

In an unprecedented move, the unions signed "conditional labor agreements" with the rival airline. It was a public undressing of American’s leadership. Suddenly, the incumbents were facing a united front of their own employees and their smaller competitor.

The American Airlines board was blindsided. Too proud to acknowledge their mistakes and capitulate to this puny outsider, Americans’ management threatened a "nuclear winter" of litigation and regulatory hurdles.

However, Parker’s alliance with labor had changed the gravity of the bankruptcy court. The creditors' committee, seeing that the workforce was fully behind Parker, began to pressure Horton to negotiate. Parker had effectively redrawn the borders of the conflict.

When the $11 billion merger was finalized in 2013, the results were a testament to Parker's strategic patience. While the new company retained the American Airlines name – a nod to the iconic consumer brand – the management structure told a different story.

Doug Parker became CEO of the new American Airlines. His management team from U.S. Airways – including Scott Kirby and Robert Isom – took the reins of the world's largest carrier. They hadn't just merged. They had performed a reverse takeover.

Parker overcame the obstacles of a defiant board, a bankrupt giant, and a skeptical industry by identifying the one variable the incumbents had ignored: the people. By winning the hearts and minds of the rank-and-file, the "scrappy outsider" didn't just survive the airline wars – he won them.

The company we are recommending this month has played the role of scrappy upstart for years. Now, it’s looking to tie its future to a larger airline – and it’s getting its house in order to maximize its attractiveness to any outside bidders.

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