Issue 303: Red, White & Blue

More than 6,700 daily flights will be operated to 336 destinations in 56 countries. Significantly, the two airlines’ networks overlap on only 12 of 900 routes. Both airlines plan to retain and expand their respective hubs and routes, something regulators will view favourably during their deliberations on the merger over the coming months.

Combined revenues of approximately US$39 billion are expected to be generated. Based on recent financial performance, US Airways has been profitable, posting net income of USS637 million against American’s loss of US$1. 8 billion, which would equate to a US$1. 23 billion loss for the merged entity.

In fact, from its industry-leading position only three years ago, American’s fortunes have slipped to third place in the face of aggressive competition and market power mounted by Delta/Northwest and more recently United/Continental.

By 2015, however, the new American Airlines expects to leverage savings of more than USS1 billion. Respected independent US-based airline consultant and head of AirlineFinancials. com Robert Herbst said in an analysis of the merger the savings that could be derived from the deal could easily exceed the airlines’ current US$1 billion target.

The savings, he deduced, could see a reduction in US Airways’ core costs to match American Airlines post-reorganisation providing up to US$ 700 million. Add to that a reduction in American’s labour costs as a result of reorganisation some $800 million, and the planned one billion dollar saving is exceeded significantly. However, Herbst also see other opportunities, including annual revenue increases from corporate customers of up to US$450 million, the replacement of retiring pilots with lower-cost pilots and fuel savings of up to 20 per cent through the airlines’ new aircraft deliveries. The potential total savings are closer to US$2. 5 billion within the first 12 months, Herbst calculates.

Announcing the merger at Dallas/Fort Worth airport on February 14, Thomas Horton, current chairman and CEO of American Airlines said: “This merger provides enhanced potential for full recovery for our creditors. It is unusual in Chapter 11 cases – and unprecedented in recent airline restructurings – for shareholders to receive meaningful recoveries. ” Indeed, many see the merger of the two airlines as being a salvation for American Airlines.

Union strength

The positive labour relations US Airways has traditionally enjoyed have spilled over into the new entity, with unions reaching accord between them and in the end becoming active proponents of the deal.

Laura Glading, president of the Association of Professional Flight Attendants said of the merger: “Today’s announcement proves that everyone benefits when labor has a seat at the table.

“The new American will provide job security and fair compensation for all employees and another great option for the flying public,” she added. “I’m looking forward to working with our new colleagues as our operations and cultures combine. Flight attendants from both companies are eager to help build a strong and competitive airline and restore American’s prominence. ” The pilots were similarly supportive.

“Today marks the culmination of a strategy that APA began pursuing early last year. Our primary goals were to create a strong future for a post-bankruptcy American Airlines, and to protect and enhance our pilots’ careers. This merger accomplishes those goals,” said the Allied Pilots Association.

These are quite remarkable outcomes from a process that could have become mired in industrial unrest as typically occurs during such tumultuous change.

One encouragement for the unions, however, may have been that Horton – who has led significant labour reform at American for the last 18 months to the ire of unions – will not be leading the new company. With leadership of the new airline passing to the current US Airways CEO Doug Parker, together with the prospect of improved terms and conditions, unions were quick to embrace – and exercise – the potential of the merger.

Recipe for indigestion?

Behind the announcement fanfare lies a scale of change that risks giving the new American Airlines a serious case of indigestion. The new airline will be roughly two per cent bigger in fleet, capacity, workforce and revenues than its nearest rival, United. The magnitude of the merger cannot be over-estimated.

Both parties have agreed to rapid conclusion of the arrangement, aiming for the third quarter of 2013, which some analysts and staff groups see as perilously fast given US Airways is still settling down its acquisition of America West back in 2005.

The integration of reservations systems – which hallmarked US Air’s takeover of America West as being “one of the worst” in the airline industry – in itself will be a mammoth undertaking. Other IT systems, baggage systems, policies, final labour agreements, regulatory approvals and thousands of other processes will comprise a plan that also learns from the mistakes of earlier integrations that have affected reputation and performance at other merging airlines.

Fixing American’s poor reputation and flagging operational performance will also be a high priority as the airline seeks to regain ground it has lost to competitors.

In its current guise, American has suffered from lamentable customer service, a by-product of labour resentment and cost-cutting fatigue.

A recent traveller survey in the US found that a quarter of respondents said American Airlines has “the rudest personnel”. This may seem a trivial issue to headline how an airline might falter during a merger process, but it underlines some significant issues for the airline that if not managed carefully – and with due effort – could create challenges elsewhere in the merger process.

Operationally, American shares its poor customer service reputation with its on-time performance, being ranked 14th out of 15 airlines for punctuality and a high cancellation rate.

Maintaining the positive approach staff seemingly have to the merger will be key to the success of the deal. Unions have a strong hand right now because they have been instrumental in bringing the parties together.

However, achieving a balance between harnessing the currently positive industrial climate and not allowing its strength to run off the leash will be a priority for Parker.

The development of new products by American has already been announced by the airline. Inflight products will be streamlined to offer consistency on domestic and longhaul services. Lie-flat business class seats are currently being installed on American’s new 777-300ER and existing A321 transcontinental aircraft, and will also be fitted to the airline’s 777- 200 and 767-300 aircraft to make them consistent with US Airways’ current A330 fleet.

The combination of renewed motivation, product innovation, positive industrial environment and corporate momentum stand to create a period in which staff, unions and leadership can work productively on common ground to the benefit of customers – something that has eluded American Airlines for some time.

The last act

Generally speaking news of the merger, while unsurprising apart from the breakneck speed at which it is being driven, has been roundly welcomed.

Steven Pearlstein, columnist for the Washington Post said: “A marriage of American and US Airways is the final piece of consolidation necessary to put the airline industry on a sustainable financial footing after nearly three decades of over-expansion and hyper-competition that undermined profitability. ” In terms of legacy carriers, there is now little scope remaining for consolidation and any further endeavours by the major groupings would likely be thwarted for the anti-competitive effect they would render.

The American/US Airways deal is the fourth merger of major airlines in as many years. In 2008 Delta bought Northwest and United merged with Continental in 2010.

This final act in the consolidation of the US airline industry is huge and its implications far-reaching in an industry that must evolved to survive.

As Herbst said: “The merger of US Airways and American has far more positive benefits than negative ones. ”