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Sep072012

« Facebook: Will American Friend US Airways? »

Much has changed since I last posted. Summer came and went.  I played some golf and worked some projects. My mom had major surgery.  And the usual drama in the U.S airline industry continued, including breathless speculation about the potential marriage of US Airways and American. 

I was thinking about this watching the dizzying rise and fall of Facebook’s fortunes as part of its Initial Public Offering (IPO).  Based on the price performance of the stock, the IPO has been anything but a success.  Circa 2000, it was thought to be a sure bet for anyone lucky enough to garner those initial shares offered.  Instead shareholders sued Facebook CEO Mark Zuckerberg and a number of banks, alleging that crucial information was concealed ahead of the offering.  At the heart of the lawsuit, according to Reuters news service, was the fact that Facebook and its banks failed to reveal "a severe and pronounced reduction" in forecasts for the company’s revenue growth, as users increasingly access the site through mobile devices. Investors, it happens, were so enamored of the Facebook “story” that too few asked tough questions about the company’s revenues.

I wonder if something similar isn’t happening with the US Airways-American story.  Where are the tough questions?  Or are reporters so taken by the Doug Parker storyline they’ve failed to look behind the pretty wrapping paper.

Mind you, I have not “friended” anyone at the unions representing US Airways or American employees. Not that they would accept the request. But if I were a line employee at American I would be demanding that my elected union officials, at a minimum, be asking the tough questions.

For me, the first question is how many employees are really needed at a combined US Airways and American. In its attempt at a shotgun marriage with American’s union leadership, US Airways suggested that it could hang onto more jobs than American would in restructuring.  That math deserves a second look.  For example, on a pro forma basis a combined American – US Airways network would be 3-4% larger than United – Continental yet it would have nearly 18% more employees.  Granted the number of employees will be reduced under either carrier’s plans, but someone is not telling the whole truth nor is it just found in the outsourcing of jobs. 

Where are the tough questions about airport overlap? Remember that when US Airways was singing the virtues of its proposed merger with Delta it talked about cutting capacity (frequency) in a large number of markets.  Many of those markets would have been smaller communities like Jacksonville, NC.  Today, American and US Airways offer 50-seat or less service in 60 common markets.  Can we honestly believe that all of that service will be maintained?  I think not, particularly when Delta has taken leadership in beginning to wean its system of the inefficient smaller aircraft and adding more 70-seat platforms and B717s.

Criticism of American’s stand-alone plan by the likes of Jamie Baker at JP Morgan point to the fact that a large portion of the proposed revenue synergies will be driven by the Ft. Worth carrier addressing its deficiency in the 70-seat jet arena.  Others cite concern that American would be dependent on a share shift away from incumbent carriers where a renewed AA will compete. 

Given the current significant overlap of the Delta network and the combination of American and US Airways networks, can we really believe that the new combination will stimulate new demand in the US Southeast?  Or will it be a share shift from Delta?  I am betting on the latter and that is a tough synergy to count on as the Delta network has a significant head start and a commensurate first-mover advantage in building presence where it and SkyTeam will compete with oneworld.  And that doesn’t even take into the account the fact that the two networks would be fenced off from one another while the pilots sort out lingering seniority issues?

To underscore the issue of share shift, Baker in his March 2012 report on the proposed US Airways – American combination suggests that a combined Delta – American probably could not pass muster with regulators based on the overlap of the two networks.  Imagine, then, the overlap a combined American and US Airways would have with Delta -- overlap in mature markets that offer little opportunity for significant stimulation of new demand. In that case, any market share model would point to a share shift among existing operators within the city pairs being served.

Where are the tough questions about capacity? This week, United announced it was cutting capacity in the face of weakening economic signals. If US Airways were truthful about their revenue and capacity plans they too would be signaling that the overlap between American service and its own would require a capacity haircut.  And in that case, you have little choice but to idle employees or furlough them.  We know the US Airways plan is designed to appease American’s unions.  What we don’t know is whether US Airways was honest with American’s unions in making clear the unions’ own contracts undermine the carrier’s ability to best manage its network, whether it be a cost disadvantage or restrictive pilot scope clauses.

To give you some idea as to American’s scope disadvantage, in July of 2012 American operated 7,175 70-seat departures or 231 per day.  That sounds like a lot except when you take into consideration what the competition is operating.  Delta offered nearly 36,000 departures with aircraft between 51-76 seats and United offered 26,000.  Hell, US Airways with a tiny network operated 13,000. There is no doubt that the ability to offer two-class service in smaller markets, at the right time of the day, equates improved revenue.

I do not need to be sold on the virtues of consolidation despite the best efforts of US Airways’ public relations firm when they sent me Baker’s report. 

I appreciate that few city pair combinations are overlaps between US Airways and American.  Baker identifies 33 East Coast markets that could gain access to the oneworld network as a result of US Airways becoming a new member of the oneworld alliance.  They range in size from Hartford to Elmira, to Lynchburg to Greenville, NC.  Lovely cities all, but not likely to tip the balance of power to a new combination when compared to Delta and United.  And hopefully a judicious British Airways recognizes this as well. 

The real balance of power is about the West Coast and New York.  US Airways does still operate the Northeast Shuttle but it sorely lacks at New York JFK and Boston.  A much deeper relationship with jetBlue does more for American than does a messy merger with US Airways.   And I am not talking about a merger with jetBlue.  US Airways does not give American what it needs in the West either.  So if this becomes all about Lynchburg and Richmond then I think this is probably not the right deal no matter what Wall Street, Doug Parker and the chorus of reporters tell us. 

Are there alternatives that do not add capacity to the system? The naysayers claim American’s stand-alone plan will add capacity to the system to the tune of 20 percent.  But Delta is replacing 50-seat RJs and bringing on more 70-seat platforms and 717s, and no one is crying foul about what that might mean from a capacity point of view.

My bet is that United and Delta continue to poke at US Airways to keep up the fight for American.  Not because a merger will be a silver bullet to improve the industry but because they would love to compete for traffic and revenue as the two go through a complex integration.  With Non-Disclosure Agreements now in place, I can only expect that the due diligence will spur the tough questions this pairing deserves and yield real answers that might temper the enthusiasm of stakeholders who believe another merger will produce the same results that first movers United and Delta enjoyed.

I have heard from many who question my skepticism about this potential merger when I have been an ardent supporter of consolidation in the past.  My interest is, and always has been, in the economics.  Facebook may have a lot of “friends” but show investors the money.  Can the economics of a US Airways-American marriage create a carrier that can not only compete in the vicious US domestic market but also with the global networks?  I remain unconvinced.

References (2)

References allow you to track sources for this article, as well as articles that were written in response to this article.
  • Response
    Facebook: Will American Friend US Airways? - Aviation Articles and Commentary - Swelblog / Swelbar on Airlines
  • Response
    Response: wine vacuum pump
    Facebook: Will American Friend US Airways? - Aviation Articles and Commentary - Swelblog / Swelbar on Airlines

Reader Comments (10)

Welcome back Bill! Thank you for pointing out the basic questions that have to be asked, it seems like everyone is getting caught up in the notion that fewer carriers equals more pricing power. While true, I, like you, remain skeptical that a US-AMR combination is going to achieve this.

What is it that Bill Clinton said the other night...show me the arithmetic.

09.7.2012 | Unregistered CommenterBryan

Welcome back. I missed you - more specifically, I've missed your perceptive thoughts on the airline industry.

I don't think you will EVER be convinced the merger will work regardless of the facts...

Nice work on being Horton's mouthpiece.

I guess that's one way of paying your bills.

Had this been an unbiased piece, you'd have nothing to write about.

I'm still laughing at the part where PHX doesn't help AA in the west.

09.10.2012 | Unregistered CommenterJohn

Just as a matter of course, when accusing someone of biasing or ignoring facts, you should probably state what facts they are biasing or ignoring...

And second, if you think BHM or BNA would help them in the East, then you have a legitimate argument on the PHX comment, but if you think that those are less that stellar ideas (BNA was tried for years, and failed) then you probably want to rethink how PHX would help in the west...just saying. They would be much better served in West through SEA or even SLC, but at least geographically, not PHX.

09.10.2012 | Unregistered CommenterBryan

I found the article to offer a refreshing view of the situation. I have always wondered how the staffing numbers would have added up. None of the me too mainstream media, not one of them, asked the tough questions such as these that Mr. Swelbar has highlighted. How could 3% increase in size, when compared to united, need 18% more staff as would be the case when the two airlines are combined? Still awaiting some one smart enough to reconcile that variance.

09.10.2012 | Unregistered Commenterry by

Finally, some common sense on display. The numbers do not add up and with the way AA's unions are jumping up and down about a merger, one would have to conclude that the bulk of the job cuts will be on the US side of the equation.

09.11.2012 | Unregistered CommenterCarl

Staff will have to be reduced. It happens sooner or later in every merger. I wonder if it will come from those pesky us air pilots who refused to sign their contract.

09.11.2012 | Unregistered CommenterBob

It has been awhile! This was a good article to chew on so to speak. I can't say that I know for a fact how it would turn out if there was a merger so I won't make any assumptions.

09.12.2012 | Unregistered CommenterH. Edwards

There are a couple of things at work here.

I find it interesting that some pilots on some airline forums complain that there aren't enough people to cover American's operations. I think it's a smokescreen, but ...

There's a difference between a possible US / AMR merger and the aborted US / Delta hookup. The US / Delta merger would have been a completely parallel one, a la Penn Central. And most who study transportation history (or dabble in it) know what happened with the Penn Central.

With US / Delta, New York and Philadelphia would have been redundant. Charlotte and Atlanta would have completely overlapped. And Phoenix, Salt lake City and Los Angeles would have made for a crowded western operation. That's far less of a problem with American and US Airways, in my opinion.

While there is some (I believe minor) overlap between US Airways and American, the amount is far less that what it would have been between US and Delta. US and American, on balance, are complimentary. Each fills holes in the other's network.

New York and Philadelphia is a far less problematic overlap between American and US than it would have been between US and Delta. American's presence in New York is much smaller than Delta's. And Philadelphia provides a true east coast hub (a la Newark) for a merged American, unlike Delta's bifurcated New York operation. New York and Philadelphia would have different functions in a merged American.

Adding American's flights to US Airways' formidable presence at Washington Reagan would create a powerhouse focus city. I personally think there will be some divestitures there, say about 42 slot pairs (the same number US picked up in the Delta slot swap).

As I see it, Charlotte and Miami have different functions. There's little overlap there. Charlotte and Atlanta would have completely overlapped in the US / Delta scenario. I think the combined US / Delta would have spun off Charlotte (possibly to American).

In the west, Phoenix and L.A., like New York and Philadelphia, have different functions.

Overall, US and AMR compliment each other far more than they overlap.To compare its overlap to US / Delta is illogical, in my opinion.

The 800 pound gorilla is the labor situation; specifically, the relatively high number of employees. Without access to internal company data, none of us knows for sure what the real situation is or could be. That's why potential merger partners go through the process of due diligence. We don't know what will be proposed regarding buyouts, early retirement packages, work rules changes, etc. What's the overall age of the workforce? How many pilots will be forced to retire at both AMR and US?

It seems to me that most of the labor issues at both US and AMR, whether merged or not, will be solved within ten years, by retirements. Then the current group of pilots and flight attendants who feel they're entitled to bankruptcy inducing pay and benefits will be gone. In fairness to many of them, It's hard to give up these things.

09.25.2012 | Unregistered CommenterDesertGhost

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