American, US Airways advance consolidation, but can mergers be as effective as Chapter 11?
When tried to merge with in 2010, Continental Airlines CEO Jeff Smisek, called his counterpart at United, Glenn Tilton, to persuade him otherwise. “I did not want him to marry the ugly girl,” Smisek said. “I am much prettier.” Smisek was convincing enough then and has been leading the merged United Continental ever since. But now the “ugly girl” has found a partner—the much bigger . And with few options left, the 35-year history of consolidation in the U.S. airline industry since deregulation in 1978 takes an unusual turn.
It is unusual in several respects. The new airline—poised to become the largest in the world—will be effectively controlled by management of the far smaller partner, US Airways. One of the most outspoken characters in the industry and at the same time the longest-serving CEO of any major U.S. carrier, 51-year-old Doug Parker has pushed hard to make the combination happen. The merger is occurring in spite of the fact that American did not want it and arguably needed it less than US Airways. American CEO Tom Horton will remain, as executive chairman, but only until the new company's first annual general meeting. While unions or shareholders have stood in the way of other mergers, workers and owners/creditors have long been convinced that Parker's proposal is the way to go, even if American's management was not.
Union support and management caution may become important factors as the two carriers integrate over the next few years. As convincing as mergers may look on paper, history shows that it is often much tougher to reap the benefits in reality. A lot of mergers in the last three decades did not work as smoothly as the companies involved had hoped. In fact, some argue that while the deals have been beneficial for the industry as a whole, they typically have not been advantageous for the two new partners. And among those on the bleeding edge of consolidation in the past have been American and US Airways.
American bought Trans World Airlines (TWA) out of bankruptcy in 2001 just ahead of the major industry downturn initiated by the Sept. 11, 2001, terrorist attacks in New York and Washington. American subsequently shut down TWA's St. Louis hub and cut capacity roughly equivalent to the former rival's size. US Airways itself is an amalgam resulting from a series of takeovers. And it is still struggling to integrate America West, the latest carrier it bolted on, following a deal Parker engineered in 2005.
Among the more strategic issues the new American-US Airways combination must address is the shape of their future network. The carriers will have to resolve competition between US Airways' hub at Phoenix Sky Harbor International Airport and American's much larger one at Dallas/Fort Worth International Airport as well as their East Coast hubs used for transatlantic operations, US Airways' at Philadelphia International Airport and American's at John F.. Nevertheless, the merged carrier, to be based at American's Dallas hub, plans to operate more than 6,700 daily flights to 336 destinations in 56 countries without giving up any of the current hubs.
Combining the fleets appears to be the least of the challenges ahead. Although US Airways operates mostlyaircraft, American has already committed to a mixing of its narrowbody fleet, with large concurrent orders of and Airbus -family aircraft, says Craig Jenks of New York-based Airline/Aircraft Projects Inc. In terms of widebodies, a merged carrier would add just one type—the Airbus -200/-300. American has simplified its fleet to and , with scheduled for delivery in 2014. Adding the A330 will carry some cost disadvantages but also some revenue benefits, Jenks notes.
The industry's poor track record on specific mergers has led many to conclude that they do not eradicate fundamental airline weaknesses. But lately that perception has changed. The combinations of Delta and Northwest Airlines as well as United and Continental, among others, have arguably led to tighter capacity control. Evengave up its conservative stance and bought AirTran Airways in 2010.
The Delta-Northwest and United-Continental mergers featured similar divisions in fleet types. Analysts agree their examples—and fleet integration—will prevail over the long term. More broadly, recent precedents bode well for American and US Airways. “The challenges of implementing this merger are all challenges which have been shown to have been surmountable [in previous mergers],” Jenks says. “I do not believe there is a new challenge out there that hasn't already been addressed.”
The merger represents an evolution—not a revolution—of the competitive landscape of the U.S. airline industry, he adds: “It's simply a continuation of an existing trend.” Just three U.S. legacy carriers will remain, down from six only a few years ago.
As a whole, U.S. airlines have been able to orchestrate a remarkable turn-around in recent years. They have lagged behind European competitors—not to mention fast-growing carriers in Asia, the Middle East and Latin America—operating older fleets with uncomfortable seats and mediocre inflight services. But that is beginning to change. As their financial results have improved, U.S. airlines are beginning to invest in renewing old fleets. And offerings in long-haul premium cabins of United and American, for example, are again competitive with those of their European counterparts, which are now struggling financially and cutting back on service.
However, while these improvements are certainly the result of capacity discipline and cost-reduction—in other words, consolidation—the better financial performance may not be primarily due to the mergers. Chapter 11 bankruptcy protection has proven to be a very efficient restructuring tool for the big U.S. legacy carriers, to the envy of their international competitors. Achieving the same kinds of benefits by merely combining two carriers requires a much more tedious effort spanning years.
President/CEO David J. Barger says the merger is good news for his carrier and the U.S. airline industry as a whole. “It's a consolidating industry, which is rationalizing capacity with leaders who are focused on return on invested capital for our shareholders,” he said during a Feb. 13 address to the Royal Aeronautical Society's Washington branch. “This capacity rationalization is going to be good for the industry and very, very good for JetBlue.”
Barger notes that the U.S. airline industry has not, in aggregate, made a single penny of profit in its 99 years of existence. He hopes the American-US Airways tie-up will usher in a more profitable era. “Somebody asked me, 'Are you looking for the platinum age?'” he says. “We'll take the silver age.”
He adds that the consolidation and resulting antitrust reviews could create some “disruption opportunities” that would give JetBlue more slots at lucrative airports such as.
Among the skeptics of the American-US Airways deal is Virginia-based consultant George Hamlin, who does not think the merger was essential to US Airways' survival in a sea of bigger competitors. He argues that increasing the size of operations will not necessarily produce cost efficiency. US Airways has a better cost structure than American, Delta and United when adjusted for stage length, Hamlin says, while Southwest Airlines' is better than any of the four legacy carriers. “Big is not necessarily better,” he notes.
Jenks thinks otherwise. If not essential, the merger certainly represents the “best possible outcome” for US Airways, he says.
Although the merger must still pass regulatory muster, few foresee major problems. The Justice and Transportation departments have to approve the pairing, but in recent years they OK'd the Delta-Northwest and United-Continental mergers, both of which had more overlaps.
Whether the tie-up represents sound policy is another matter. Consumer advocates worry about higher fares, but some economists say that airline stability—noticeably lacking over much of the U.S. industry's history—will prove to be the greater good. The financial community welcomes this merger and industry consolidation as a whole, though passengers are left with fewer choices. But all the previous mergers did not lead to raising fares: U.S. travelers are paying less for tickets than in 2000. And Parker asserts that having three strong network carriers will give many U.S. fliers more options, not fewer.
Government regulatory authorities could still ask the merged carrier for certain concessions, if they determine that its combined marketshare would be too large. It might be required to divest some takeoff and landing rights at certain slot-controlled airports, such as Washington's National, where the merged carrier would dominate.
Other changes await on the regional front. Three wholly owned regional carriers—AMR Corp.'sAirlines and US Airways' Piedmont Airlines and PSA Airlines—will continue to operate as distinct entities. American Eagle eventually will be the brand for those.
The US Airways-American combination may not look so significant from a global perspective, but there are some important ramifications to keep in mind. There will now be three big airline blocks in each of three major air transport markets: China (, and ), Europe ( , - and International Airlines Group) and the U.S. (American, United and Delta).
The merger will lead to one major change in the alliance world, with thelosing U.S. partners, as the combined carrier will stay in American's Oneworld.
With Joseph C. Anselmo in Washington.
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|Employees||AMR Corp., 81,400; American Airlines, 66,600; US Airways, 32,213|
|Destinations||American, 260; US Airways, 198|
|Hubs||American Airlines, 5; US Airways, 3|
|Aircraft||American Airlines, 608 (mainline) and 281 (regional); US Airways, 340 (mainline) and 282 (regional) as of 2012|
|Full-Year 2012 Operating Revenue||AMR, $24.9 billion and US Airways, $13.8 billion|
|Full-Year 2012 Operating Expenses||AMR, $24.7 billion and US Airways, $13.0 billion|
|Full-Year 2012 Operating Income||AMR, $107 million and US Airways, $856 million|
|Full-Year 2012 Available Seat Miles||AMR, 166.2 billion (consolidated) and US Airways, 88.4 billion (consolidated)|
|Aircraft||717 (mainline) and 562 (regional for Delta Connection)|
|Full-Year 2012 Operating Revenue||$36.7 billion|
|Full-Year 2012 Operating Expenses||$34.5 billion|
|Full-Year 2012 Operating Income||$2.2 billion|
|Full-Year 2012 Available Seat Miles||230.4 billion (consolidated)|
|Aircraft||699 (mainline) and 554 (regional)|
|Full-Year 2012 Operating Revenue||$37.2 billion|
|Full-Year 2012 Operating Expenses||$37.1 billion|
|Full-Year 2012 Operating Income||$39 million|
|Full-Year 2012 Available Seat Miles||248.9 billion (consolidated)|