Can American Airlines Survive Without A Merger?

by on August 26, 2013 · 14 comments

in American, Travel Industry, US Airways

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I’ve been asked a lot about the US Airways/American Airlines merger and my opinion is that it will be bad for consumers for a variety of reasons. No one can predict what will happen to fares (numbers can be massaged to prove either case), but deep down I believe they will and I don’t think having less choices in the marketplace will benefit consumers. Does that mean the merger shouldn’t go through? That really just depends on your philosophy of government intervention in the markets – a topic I don’t care to delve into today.

One of the arguments in the comments section of my Top 10 Reasons I Don’t Want an American/US Merger to Go Through was that “AA & US Airways as standalones isn’t an option, the huge airlines will crush them,” but I don’t agree with that at all. I just don’t believe that bigger is always better when it comes to airline profit. Some of the most profitable airlines in the US are smaller, nimble carriers like Allegiant, Spirit and Alaska. I understand the need for airlines catering to business travelers to have strong route networks, but that can be achieved by strong partnerships as exemplified by Alaska Airlines.

In fact, today American filed SEC paperwork today showing that AMR earned a net profit of $352 million in July, excluding reorganization and special items, which apparently is “a record for any month in American’s history” according to my contacts there. All of this, even though the merger is currently at a standstill due to the Department of Justice lawsuit and likely won’t be seen by the courts until November at the earliest.

I firmly believe that if American can rework some of the labor contracts that for years has saddled it with higher operating costs than the other airlines who have been able to reorganize through bankruptcy, they can emerge as a standalone carrier and win in the marketplace. They’ve focused on building a fleet of new planes and building an in-flight product that I think consumers will respond positively to in the long run. I firmly believe they can compete on their own and don’t need a drawn-out merger to propel the airline to success. As a frequent flyer I’ve been through many mergers, including US Airways’ last merger with American West and they’re always painful from the consumer perspective. I was flying San Juan to Philadelphia on the integration day of US/America West and was stranded for hours as a computer outage grounded flights. That was a much smaller merger in comparison to the American deal, so I can only imagine what will happen with two behemoths try to merge not only technology, but vastly different corporate cultures.

Selfishly, I don’t want this merger to go through because I grew up flying US Airways and while they’ve improved over the years, they still have a nasty customer service culture that I don’t want infecting American, which is my primary carrier. I recently redeemed miles to fly my 90-year-old grandmother from Los Angeles to Charlotte in first class and the plane was delayed 8 hours due to mechanical issues. Fine, that happens. However, when they finally boarded they were told that the food had spoiled and to “just be happy the plane is taking off.” The flight attendants made one pass through the first class cabin after takeoff and then went into the galley for the entire flight. While there are bad customer service stories about every airline, American Airlines is by no means unscathed from criticism, I feel like US Airways has a “half-assed” culture that will inevitably poison the new carrier, similar to how United’s blase customer service has overtaken the once perky and customer friendly Continental. Most of my friends who flew Continental really wish they had the “old Continental” back.

Will the merger actually go through? That’s the million (or billion) dollar question that will be answered after the Department of Justice’s anti-trust lawsuit is brought before the courts. American and US are mounting a campaign to win in the court of public opinion, but with American’s record monthly results, I can help but think they’ll be able to survive and compete as a standalone carrier. If consumers only wanted gigantic mega-airlines, wouldn’t they have already left for United and Delta?

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  • r0m8470

    TPG, I noted this on your article:

    “if American can rework some of the labor contracts that for years has
    saddled it with higher operating costs than the other airlines who have
    been able to reorganize through bankruptcy, they can emerge as a
    standalone carrier and win in the marketplace”

    This may not be the right blog or forum to talk about this, but I am curious about:

    (1) How big of an impact the labor contracts are?
    (2) The smaller, nimbler, more successful airlines (like the Alaskas and the Allegiants of the world), or even Southwest, if you want to call them small – are they not in the same boat regarding labor relations and labor contracts?

    I also have a special concern about the merger – for selfish reason. My fiance and I are planning a trip back home to Asia – for our wedding later on this year, using FF miles flying on business class. In the case of AA folding, would this trip be in jeopardy? My hope is that it would not, considering that AA booked a profit but the state of the industry can be quite volatile. Knock on wood ……

  • Bill

    Brian — I selfishly would love American to stay by itself too, but just looking at their management plans it doesn’t seem feasible for them to not merge and survive. Their management wants to return to old method that nearly destroyed the airline industry of pushing way too much capacity into a market to “dominate” it, even if they make a loss. Just look at how their planning to use their A319s: add more and more capacity to markets.

    Maybe I’m wrong, maybe you’re wrong. But the economists, investors, and airlines all seem to agree that a merger is needed, and I’d tend to side with them.

  • tassojunior

    AA /US would actually keep the airline saddled with the higher labor costs as that was the deal US made to get the unions to support the merger. An independent AA could probably lower it’s labor costs to those of UA and DL.

    I have no doubt AA would thrive independently. As for US…..

  • joeypore

    Brian, did you receive any sort of compensation for the 8 hour delay and poor customer service on US Air?

    I completely agree though. The new American as it is, has given the whole airlines a makeover. I’ve noticed the employees seem to actually take pride in the company, and it gives me hope.

    I really hope US doesn’t infect AA…

  • mmobley45

    Fact of the matter is, AA is a business airline. The top 2% of the customers drive 75% of the revenue, and the USAir markets would have opened up a lot more routes for business travelers. At the top tier travel levels, AA is still the best, and would have only done wonders for USAir’s customer service. It makes no sense to block it, and its terrible that the government would do so. The tiny markets, and low budget travelers that rely on USair, could have moved to another budget travel airline if prices were raised. Sounds politically incorrect, but at the end of the day AA is a business, and travelling is not a individual “right”.

  • FlyerGuy

    I could not agree more. There are many service level areas where US is far behind AA and those decisions were made by the current US management. Just look at the F service on a three hour flight. They just introduced an app, which is years behind other carriers. They have very old school GIDs at their CLT hub, while others have TV monitors with tons of flight data available. An active social media team? Hardly.
    There seems to be a culture of doing the bare minimal of what the customer will accept and nothing more. I don’t see how the US team will make a 180 degree turn, as they claim they will, and offer the service levels customers expect from a leading global airline.

  • Mitch B

    Not the point of your article…but I miss Continental

  • cthej

    So, if this merger does not go through, (which the little Teddy Roosevelt in me hopes it does not), does this rank as just another monumental flop business decision by the AA leadership? That is to say, when the handshakes and smug smiles were proffered between Mr. Horton and Mr, Parker, shouldn’t Mr. Horton have known that this was a real risk? Good business sense would say so. Like you, I think AA will do fine as a stand-alone (which was Horton’s stated goal going into bankruptcy), but in the meantime this little high-five will cost more millions…sheesh.

  • Brian L.

    Horton wanted to emerge from bankruptcy as an independent airline. The merger was forced on him by the creditors and the militantly irrational AA unions, who drank the Kool-Aid that Dougie was selling them. The failure of the merger (and I think it’s pretty much dead) IS NOT on him, it’s on Dougie.

  • cthej

    Tks. I wondered why he changed mid-stream.

  • MarkWorth

    I have no horse in the race although I would probably be happier with AA as a standalone entity but I have to wonder what would happen with the union´s hatred of current management at AA if it doesn´t go through.

    I think the title of this article says it best:

    American Airlines-US Airways Merger: Not Over Until the Fat Lady Sings

  • BEM

    I really hope this merger does Not go through. If you think that the United/Continental merger was rough. You will be in for a ride if this merger happens. The last time I flew US Air was in 2010 from Phoenix to JFK. The flight attendants were really unattractive and nasty. In fact, they were screaming at the passengers. I have also taken them a lot from New york to Charlotte and I feel they have the worst customer service of all the airlines. They might be on par with Spirit.

    AA can emerge from bankruptcy by themselves. Since the get go, it was known that US needs AA more than AA needs US. AA has very strong hubs such as DFW, MIA, LAX, ORD and JFK. Plus, they are making an effort in updating their fleet. If they were to emerge from bankruptcy they will be fine. i don’t know how US Air will really add value to AA. The only thing that might add some sought of value is their CLT hub, and it would be dehubbed in favor for MIA. US Air’s other two hubs PHL and PHX are very secondary and will be dehubbed.

    US AIr has a very poor customer service culture plus their CEO, Doug Parker is a big time cost cutter. He was the one who introduced charging for bags ( first in the industry) and charging for drinks. People should be worried what he will do once he is potentially running the largest airline in the world!!

  • HumerousUserName

    AA will not fold. They will be around in some way, shape, or form…’re fine, and congratulations

  • HumerousUserName

    I’d prefer AA staying stand-alone, but that’s a tough outcome. AA’s biggest stumbling block as a stand-alone is the acrimony between the Unions and ANY Management. I was in their building right after Horton too over, and the union leadership had already pointed their guns at him for “taking the bonuses and hurting the rank-and-file” when the concessions were made. He was 2 days into the job. Until AA gets a CEO that will act more like Dougie, and manage the relationships with the unions, politicians, etc., and have a COO run the airline day-to-day, they’re not going to solve the problem. Until the Unions pull their heads out of their collective arses and realize everyone loses, nothing will change.

    The playing field does seem slanted: Justice let SWA/AirTran, Delta/NW, UA/Continental merge without a whimper, but they’re going to block this one.

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