Doug Parker has successfully pulled off the David eats Goliath (again) merger of US Airways and American, and will take the reigns as CEO of the combined company. We applaud that decision, as consolidation is essential for both carriers, as new leadership was clearly needed at American.
American Airlines has been known in the industry historically as innovative, but also somewhat aloof and arrogant. While some of that was justified by the carrier that invented yield management, super saver fares, and the frequent flyer program, those innovations are now thirty years old, and American’s innovation waned in recent years. The carrier that was the world’s largest five years ago was surpassed by the consolidated Delta-Northwest and United-Continental combinations. Having stubbornly avoided restructuring in Chapter 11 until long after most of the industry had do so, American found itself at a cost disadvantage vis-a-vis it competitors. This continued to weaken the company, which eventually was forced to succumb to the inevitable Chapter 11.
Moreover, during that process, American lost its edge in customer service and quality, moving down the rankings of on-time performance. American once held an advantage in attracting high yield business customer, many of whom remained loyal to American. But in recent years, competitors have closed the gap, and American’s service, with unhappy personnel, slipped dramatically. The combination of losing innovation, losing a long-held advantage in customer service, and the disadvantage of a smaller network in business contract negotiation negatively impacted American’s ability to attract high yield business travelers, the lifeblood of a network carrier.
Interestingly, the CEOs of each combination have come from the smaller, and more nimble carrier – Richard Anderson from Northwest and Jeff Smisek from Continental are leading Delta and United, respectively.
This isn’t the first time Parker has taken over a larger carrier, as while running smaller America West took he took over the larger US Airways, keeping the name of the larger carrier, just as he will do now. US Airways has been successful under his leadership, earning a record $637 million last year. The question is can he do the same with the new American, with restructured costs when it emerges. We believe he can.
This takeover was masterfully handled by Parker, who moved quickly once American entered Chapter 11 to build support from American’s employees, who were mired in labor disputes with Horton and his team, as well as American’s creditors, by demonstrating that a consolidated operation would generate more value than American standing alone.
Kudos to Doug Parker and the US Airways team. We wish them success in their task of restoring American to its former glory.
Impacts we see:
- Airbus – A good win for them. US Airways is Airbus biggest customer. American has a lot of NEOs on order so the combined airline becomes Airbus’ biggest customer.
- Boeing – No immediate impact, with orders for 787 and 737Max on the books. But the new airline does have unused route authority to China under US Airways that should be exploited. This would almost certainly be be ideal for a 777, depending on where it is used. The current authority uses PHL as the origin in the US. Could it be moved to JFK, ORD, DFW or even west to LAX?
- Embraer – Good news because American already has already committed to the E-175+. Embraer and Bombardier will likely compete for a future order in the 100-130 seat segment with the E190+/E195+ against CSeries.
- Bombardier – New potential. Consolidation means pilots contracts are going to be messy – note that the US Airways and America West pilots are not fully integrated yet. The new airline will need to revisit the 100-130 seat airplane segment, and this could be a good opportunity for CSeries. There might also be an opportunity for the Q400 – because network airline requires fast planes operating at low cost to serve small markets, and the Q400 fits that role quite well in today’s high fuel cost environment.
- oneworld – A huge win. Combined this airline offers better feed for BA in PHX, PHL and CLT. Plus other partners like JAL acquire better support for new service to places like SAN. Generally oneworld is potentially the biggest beneficiary from the merger.
- Star Alliance – Not as good news. Lufthansa depends on feed in CLT and without this feed their flights to FRA and MUC may no longer be economic. United can fill some, but not all of the gaps left by the departure of US Airways in North America.
- Passengers – The worst possible news. Consolidation only means one thing – fares will rise. A tighter supply of seats is coming, as fewer airlines means tighter capacity control and more limited competition. This is already underway (American is replacing 767-200s with A321neos) and fares will rise with aggressive revenue management systems. The new Big 3 plus Southwest will control more than 75% of the market.
- Airports – some have to be nervous. The merger was expected and contingency plans have been tweaked. But at the end of a thousand Death Row delays, inevitably comes the hangman. We suspect many communities are going to lose some of their air service as route systems are rationalized. While we don’t expect the same type of impact as was felt by Cincinnati when Delta closed its hub, there are nervous folks in some communities wondering if all of the combined hubs will survive.
Ironic that the customer seems to be the big loser in this deal.
Yet the whole point of this exercise is to get customers back to American. More importantly, they need to get customers that will stay loyal to this new brand. How do they propose to achive this if they plan to cut service and increase prices?
Seems to be a disconnenct between their needs (loyal, high rolling customers) and their execution (reduce capacity and increase prices).