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Feb062013

« THE END GAME: IT’S ULTIMATELY ABOUT RETAINING THE CUSTOMER »

Paint me a skeptic.  Paint me a contrarian.  Paint me stupid.  I’ve been painted with worse colors. I’ve been one of the lone voices really challenging the proposed merger between American and US Airways – one that any read of the newspapers makes clear will likely go forward. And to be honest, many of the concerns I have raised about the merger have been addressed in the talks underway.

By all accounts, the deal is done but for a decision about who will lead the new airline. The analysts and the unions are betting on Doug Parker in the leadership beauty contest between American’s Tom Horton and the US Airways’ CEO.  It’s the nature of this kind of deal to want to crown a winner.

I’m not going to weigh in on the relative merits of Parker over Horton or make this about personalities or executive legacy, which misses the point. In my view, the most successful mergers focus not on the victor to whom goes the spoils, but rather focus on building a leadership structure that brings the experience necessary to maximize the synergies and fulfill promises made to stakeholders.

So for that reason and many others, it would be an error to approach a merger of AA and US as another notch in Parker’s bedpost so he can impose his personal style on the combined airline. US Airways has done a very good job of running the airline it is, but it will take a breadth and depth of experience to a run the airline the new American would be. This is the case because this merger perhaps more than any others will require a delicate marriage of cultures and operating styles.

There is little comparison to the three big mergers that have preceded it:  Delta – Northwest; United – Continental; and Southwest – AirTran.  All three had some international angle to the redrawn networks. Northwest brought the Pacific to Delta and Delta brought some Latin America to Northwest; United brought the Pacific to Continental and Continental brought Latin America to United; and AirTran brought international capabilities to Southwest, providing Southwest the ability to “take out” a potential long-term nemesis in the lower cost AirTran. 

Other than strengthening American’s presence in the northeast US and along the eastern seaboard, US Airways brings little to American from a network perspective. US Airways will transfer a nice chunk of international revenue away from the STAR Alliance to oneworld, and, of course, the sheer size of the combined carrier would return the new American to the number one spot American lost when Delta and Northwest merged.

But to effectively run the combined airline, the new American can’t alienate its high-value business customers who won’t put up with the growing pains we’ve seen with United-Continental. And if the new airline is uncertain in its pace or fails to impress those most valuable customers – many of them the core of American’s revenue base – then a successful merger is far less certain.

The award for the biggest network airline merger failure should go to the team that put together the 1987 deal to combine PEOPLExpress, Frontier and New York Air into Continental Airlines.  The idea was to merge Texas Air Corp.’s holdings to form the nation’s third largest carrier.  But instead of creating a worthy competitor for the two largest airlines at the time, the combination resulted in a balance sheet bloated with debt, unit revenue deficiencies in every corner of the network and no commonality in the combined fleets.  The merged company ultimately filed for bankruptcy protection in in 1990, emerging three years after that.  Ultimately a new management was put in place and the turnaround is legend.  

An American – US Airways combination would not be Continental circa 1987. American is simply too good of an asset.  Nor do I think it will be Delta–Northwest circa 2008, in part because the execution risk strikes me as very high, particularly considering disparities between each airline’s model and culture. One flies to China, the other to Chattanooga.  As a result, they bring two very different customer bases to the entity as well, so customer expectations will differ, too. 

Many analysts have focused on US Airways’ deft courtship of American’s labor leaders as evidence that the US Airways culture is a superior model. But I believe that analysis focuses on the wrong stakeholder group.  At this late stage of the consolidation process, American’s ability to retain existing customers and win new ones is critical to the success of the new airline. A culture transplant alone won’t get the job done. The highest barrier to success would be the one set by a new leadership team that insisted upon its way or the highway in running a combined airline.

Collaboration is critical. That doesn’t mean Tom Horton must be a part of the new American if the architects of any deal determine he’s not welcome. Nor does it mean that the entire American team in place today is necessarily the best choice.  But if the leadership crown goes to Parker’s Phoenix posse, they would be making a grave error to impose the US Airways style on the new American without leveraging American’s successes and cultural assets.

American has proven adept at managing its regional affiliations, code share partners, joint ventures with British Airways and JAL and a loyalty program that arguably is more valuable than US Airways itself.  Its marketing and IT capabilities exceed anything US Airways has ever tried. And American knows far better than its potential new partner how to treat the premium customer who wants warm nuts and lie-flat seats in first class.

I can only hope that the “best of the best” of the two companies will be a part of any new one, because that’s the only way the new airline will compete effectively with first movers Delta, United and Southwest.

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Reader Comments (7)

All of that is great, so long as ALL current AMR management on the 6th floor are shown the exit and every single 5th floor middle-management goofball is made to justify his/her professional existence. If they fail that test, gone.

In my opinion the good parts of the airline are IN SPITE OF current management personnel. If the pilots or flight attendants do not show up for work it is called a strike. If management doesn't show up it is called the weekend or a holiday. Really people, get a grip. I sat in first class today and listened to two of AA's most highly regarded class of frequent fliers talking about the stupid new paint job and what idiots THEY thought AMR management was. Are you kidding me? It was all I could do to keep from bursting out laughing.

TOHO, Kennedy and the others over there - Get your resume's warmed up. You're gone and if you don't know it I want to be the first to tell you.

AMF,

Phil

02.7.2013 | Unregistered CommenterInTheKnow

This by far may be your best analysis yet, Mr. Swelbar. If folks on both sides are honest, they will admit that it will take a solid team from each airline to work together and blend networks, operations, employee groups, and overall cultures.

02.8.2013 | Unregistered CommenterCarl

Phil above,

You are a jack...

Phil above,

You are a jack...

As every exec who leads his or her company through bankruptcy, Tom Horton has gotten a bad rap. It's tough to make cuts and everyone hates the one who holds the scissors. But let's step back, Tom Horton and crew has brought AA through its bankruptcy in record time And has it competitive again. Not saying that he's the man to run a merged company, but the hate is misplaced.

02.8.2013 | Unregistered CommenterBob

In my experience, US Airways service is head and shoulders above American's. But I don't judge airline service by who offers better in-flight entertainment, either.

02.8.2013 | Unregistered CommenterDesertGhost

I think you really hit on a great point here. Both airlines must learn from each other, and then never stop learning. The US has many massive airlines that seem like they should perform better than they do; they forget to continue to change until it become necessary for survival.

02.25.2013 | Unregistered CommenterOhio State

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