Official American Airlines US Airways Merger Announcement and What It Means For Consumers
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There’s a new power couple on the runway. In a whimsically appropriate Valentine’s Day announcement, American Airlines and US Airways officially announced their merger today in a press conference from American’s hub at Dallas-Fort Worth DFW. You can find information on the new merged airline on a site that went live today.
Financial analysts and media were invited to listen in on the announcement on a conference call with American’s Chairman and CEO, Tom Horton, who will be the Chairman of the new combined airline, and Doug Parker, the Chairman and CEO of US Airways, who will take over as CEO of the new airline.
Along with their comments, the two went through slides exhibiting various figures like new route networks, market share, statements of support from their unions and more materials, and you can see slides from the presentation here.
Some of it includes my predictions about potential winners and losers of a merger that I covered in my post yesterday when media outlets were reporting that the boards of both airlines had agreed to a merger, as well as in my advice for frequent fliers on maximizing a potential merger from Monday and aspects of both airlines I covered in a post on how to prepare for such a merger.
The conference call did not shed a ton of new light on the specifics of how a merger will take shape and affect flyers, but they did share some interesting facts and figures about a new, combined airline, its routes and the financials of the deal, which is reportedly worth $11 billion.
Both Horton and Parker gave opening remarks. Parker also noted (much like Jeff Smisek did during the Star Megado) that he is a major proponent of airline industry consolidation because it allows airlines to be “intensely competitive but also sustainably profitable.”
Parker said that there would be a one-time cost of integration estimated at $1.2 billion over the coming years, including integrating technology, standardizing aircraft and merging management and services.
The new airline will fly over 6,700 flights a day to 336 destinations in 56 countries. Some of the more interesting slides of the presentation included a look at both a new combined domestic route map:
And a new combined international route map:
Parker noted that the airlines only overlap on 12 routes, and that 130 cities served by American but not US Airways and 62 cities served by US Airways but not American would be available to flyers of both once the merger goes through and that the new merged airline will be a part of Oneworld.
This complementary aspect of their route maps is one reason they expect the merger to be approved by the government without any major issues. They also noted that they have the support of unions at both airlines, which should also help speed the merger along.
There is also a a colorful (if vague on numbers) graphic showing the anticipated increase in the new airline’s market share in terms of seat miles that should make it the largest airline in the world once everything is consolidated:
Not including regional fleets, the new airline will have a total of 801 narrowbody planes and 147 widebody jets totaling 948 mainline aircraft.
In the midst of its bankruptcy restructuring, American has an order for 517 new narrowbody and 90 widebody international aircraft deliveries over the coming years, and will retrofit its existing 777-200 and 767-300’s to include the new premium seating and classes of service, and US Airways plans to update its fleet with the new classes of service as well eventually.
The new airline plans to keep its aircraft orders on track, Baker explained, because there is a lot of opportunity for aircraft replacement on both airlines (as anyone who’s flown a domestic US Airways flight lately can tell you!). Plus the combined capacity of new fleet and its flexibility to move aircraft around will aim ensure there’s plenty of room to absorb the new planes and put them on the most profitable routes.
In terms of frequent flyer programs, there were hardly any details at all apart from the fact that combined the two airlines have over 100 million members in their programs (though that number is probably inflated due to overlap between the two). American Airlines did send out an announcement that for the time being, each airline will maintain its current loyalty program — the American AAdvantage program and the US Airways Dividend Miles with the assurance that existing AAdvantage and Dividend miles, elite-qualifying miles and elite status ware secure, and that lifetime status granted under the Million Milerprogram will remain intact.
In response to questions about the fate of the two airlines’ hub cities, neither was ready to talk about network rationalization just yet, but said the plan was to maintain all hubs currently served by both companies. However, they recognize that as market conditions change they must be careful to make decisions that yield highest return for shareholders and there will probably be changes to their network, but they expect those changes to be built on notion that the airline will maintain and build upon existing hubs.
Though it is still a ways in the future, the likely plan now is to implement American Airlines’ technology and reservations systems on the new airline since as Baker noted it’s usually easier to put the larger airlines’ systems in place at the smaller airline during a merger than the other way around.
No credit card deals have been made yet, so if you haven’t already already gotten in on the Citi AAdvantage cards or the US Airways World Mastercard (the higher Chairman’s Preferred credit card offer is no longer available, but the general one with a bonus of 30,000 miles after your first purchase is), now is the time to do so before the frequent flier programs merge. Update: The current best offer on the card is for 35,000 miles after first purchase and 10,000 miles on each subsequent account anniversary and first year’s $89 annual fee waived.
What This Means For Consumers
Airline CEOs like Doug Parker of US Airways (and now the new airline) and Jeff Smisek who oversaw the merger of United and Continental claim that airline consolidation is a good thing both for the industry and consumers because it makes airlines both more competitive and profitable. Consumer advocates usually spread gloom and doom about them, though, claiming that these mergers will drive up the cost of airfares across the board.
I don’t think we will see a huge increase in airfares since there is still a lot of competition in the marketplace not only from the other legacy carriers but also low-cost carriers like Southwest, and newer entrants like JetBlue and Virgin America, which are highly competitive on some of the same routes that newly merged airlines like this one and United fly. Not only that, but there is also a ton of competition on international routes from other carriers, as well as a lot of other factors that go into airfare pricing like the cost of oil, that mergers seem to have little actual impact on airfares. In fact, as this CNN Money article points out, a PricewaterhouseCoopers study found airfares have only risen 2% per year on average since 2004, and there have been several major mergers including those of Delta and Northwest, and United and Continental, since then.
That said, I’m sure the airline will cut some routes so there is less capacity and consumers in some marketplaces will see airfares rise in the future. However, since the two airlines only overlap on 12 routes, hopefully that impact will be minimal, and this is also why the merger might get government approval pretty quickly.
Rather, the real problems with airline mergers tend to be the huge hassles they create for consumers including increased incidents of reservations errors, flight delays, lost baggage, as well as the tensions that arise from combining two distinct workforces. According to the same CNN article, after US Airways last merger (with America West in 2007), passenger complaints about the airline to the Department of Transportation doubled, and complaints about United skyrocketed by 60% after its merger with Continental last year. So it seems we’ve got some more headaches in store.
On the positive side, the goal is to create a stronger, more competitive airline and to improve the experience of flying the airline both in terms of service as well as the airline’s new aircraft and seating products, so hopefully that will all mean a better experience for consumers on nicer, newer planes.
There’s no way of predicting exactly how long this process will take, but Parker and Horton expect the merger to go through by the third quarter of 2013, and then the two airlines will start the effort to combine fleets, workforces and operations in earnest. That could take years, though.
Delta and Northwest announced their merger in April of 2008 and closed on it in October 2008 after receiving all the government approvals necessary, but it wasn’t until January 2010 that the two airlines officially started flying as a single airline – over a year and a half after the initial announcement.
With Continental and United, the two airlines announced their merger in May of 2010 and merger closed in October, about five months later. It wasn’t until May of 2011 that the two started combining some airport functions, and the new airline didn’t announce details of merging the two frequent flyer programs until September 2011. The FAA granted the new airline a single operating certificate in November 2011, and in March 2012, the airlines finally combined their website into a single United one and the new frequent flyer program rules go into effect – nearly two years after the original merger announcement (and that’s not even counting the fact that merger discussions between the two started way back in 2008!).
The other major current merger underway is the takeover of AirTran by Southwest, which was announced in September 2010, but which is still not complete – in fact there are only a few codeshared flights even at this point.
So although the merger today is big news, it will probably be at least two years until the new, single airline emerges, and there are bound to be a lot of complicated integration steps between now and then – and only time will tell what this means for consumers.