How to Lead through a Merger: US Airways and American Airlines | Cold Contact

13:33Doug Parker: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.

13:43David Fubini:Well, the leadership team decision is incredibly important because it is sort of your indication to the rest of the organization of how you're going to run this company. Additionally, difficult here is because Doug had 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 actually five gentlemen, and then Elise Eberwine, who was

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15:00David Fubini:The glue that held them all together because she was the disciplinarian, by the way, amongst this group. And she turns out to be 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 yet 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.

15:35Doug Parker:Yeah, but it's obviously positioned as a merger. And 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?

15:45David Fubini:The place where they're really looking for co-leadership was how to lead the integration itself. The decision was, are you going to have an American Airlines person lead it or a U.S. Airways person lead it or 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 U.S. Airways leader, in this case was going to be Robert Isom, who at the time was the U.S. Airways head of operations, run the integration, everybody will say, well, fine, we know what's happening here. This is going to be U.S. Airways taking over us.

16:16David Fubini:We're going to do everything U.S. Airways way. That's just the way it's going to be. If you have co-leaders, in this case Bev Goulet, who is a 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 the debate. And now every decision then becomes a question about, is it the U.S. Airways way or the American Airlines way?

16:45Doug Parker:But you have to make a decision at the end of the day. Like decisions have to be made. Consultants get involved in these things inevitably. What's the role of the consultant in a situation like this?

16:56David Fubini:Usually it's three things. One is pattern recognition. coming in and sort of 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 of climbers you all are. But this is camp one, two, and three. Follow me. That's a little bit 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.

17:26David Fubini:Two, we basically try and help staff some of the more core teams, the teams that are really central to the value proposition that underlie the deal. There we could be deployed and be helpful and try and move things along. And third, we become the sort of honest broker, if you will, sometimes in these integration teams and 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.

18:00Doug Parker:Yeah. And does this start to get into some of the things that you would, you know, tell a leader that they need to hear but probably aren't told?

18:08David Fubini:Yes, we would be. This is where all the hidden truths come to play, right? So, for example, you know, Doug is taking over this big, huge airline. He of U.S. Airways was headquartered in Phoenix. American Airlines is probably no surprise to 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 it, I'm moving to Dallas.

18:42David Fubini:Not only am I moving to Dallas, here is where my kids are going to school, and here's what church I have joined. 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 about... Propel Fitness Water with Gatorade electrolytes, zero sugar, and vitamins.

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19:40Doug Parker:Terms and conditions apply. Need a hiring hero? This is a job for Indeed Sponsored Jobs.

19:45David Fubini: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 head of the NATO Supreme Commander told me when he once goes onto a battleship. He knew 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.

20:18David Fubini:That just wasn't going to happen. It required a fairly robust amount of reaching out to large numbers of different peoples. 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 the truth really was of the operations he was now inheriting.

20:38Doug Parker:I would imagine there's a fair amount of distrust, particularly on the part of American Airlines, and that probably extends through the organization. Things churning at this point, and people are suspecting motives that maybe aren't there.

20:52David Fubini:Oh, 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 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 the 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. You're in this period where you've announced the deal, but you don't have legal close and you don't have regulatory approval.

21:26David Fubini:So you're not allowed to 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 lawyers, the regulatory lawyers would say please do none of that because anything you do there could cause concerns in 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.

21:48Doug Parker:What are some of the mistakes that firms make when they're going through this process?

21:53David Fubini:Well, we've already covered one in great detail, which is losing the base business. 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 he not even read the PR statements? And I said, of course I read all that. That's not what I'm asking you. What is the real reason you did the deal, not what you said publicly?

22:24David Fubini: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 airline system, which was missing.

23:01David Fubini: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 American Airlines was just so much bigger than U.S. Airways and saw U.S. Airways as a little bit of a vacation airline or not a serious airline, not the way they were. And, of course, the U.S. 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.

23:32Doug Parker:So how do you do that? How do you even broach something like that?

23:35David 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 sort of...

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24:15David Fubini:They were crazy and they thought we were crazy. And we sort of 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 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 and was surprised to see security in the lobby.

24:49David Fubini: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 sort of 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 your former management here. I'm a different management. The last thing he did was great. Many of your listeners will remember American Airlines had this iconic silver airplanes, and they had decided to change what's called the livery, which is the entire look at the airline.

25:23David Fubini:And they'd spent a lot of money 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. People were slightly aghast because they spent fortunes actually developing this new livery. But he said, no, no, I want us to see this as 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 sort of white look and a different, much more up-to-date logo.

25:54Doug Parker:Yeah, yeah. I liked the silver, but that was just my opinion. Well, I'm sorry you would have been outvoted. 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. And, you know, is that something that you have to address head on? Like, how do you tackle that?

26:20David 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 are 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.

26:51David Fubini: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 was 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 U.S. 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.

27:32Doug Parker: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?

27:41David 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 U.S. Airways with systems that were operative and not go down. And several of the other airlines actually had to stop operations for a day or two because their reservation systems failed.

28:15David Fubini:So we learned from the failure of others that had gone before us and made sure that we did the IT system change in a very slow, very methodical, very risk-aversion-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 it probably, what normally you would think to try and do in several, you know, a year at 18 months, some of the IT transitions took as long as four to five years to make. Wow.

28:43Doug Parker: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. If there's one thing you want people to take away from this case and from the Hidden Truths book, what would that be?

28:57David 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 of 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, employed many of those approaches really well.

29:35David Fubini: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 sort of 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.

30:01Doug Parker:Yeah. 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.

30:08David Fubini:Thank you. It's been just a joy to be with you. Thank you.

30:10Doug Parker:If you enjoy Cold Call, you should check out our other podcasts from Harvard Business School, including After Hours, Skydeck, and Managing the Future of Work. Find them on Apple Podcasts or wherever you listen. Thanks again for joining us. I'm your host, Brian Kenney, and you've been listening to Cold Call, an official podcast of Harvard Business School brought to you by the HBR Presents Network.