The new American Airlines: Winners and Losers

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Photo by Simon Clancy, http://www.flickr.com/photos/39551170@N02/

When Bankruptcy Court Judge Sean Lane said of the US Department of Justice settlement with US Airways and American Airlines, concerning their proposed merger, “The settlement easily satisfies” the bankruptcy requirements for American Airlines, and that the group that sued to block the deal “utterly failed” to prove the merger would harm them, the last hurdle the two airlines had to pass was removed.

US Airways and American Airlines will merge on December 9th, with the combined company called American Airlines Group Inc., flying under the banner American Airlines. Doug Parker, head of US Airways, will assume that role for the new American Airlines.

There’s been much discussion of who will benefit, and who will be hurt by the merger of these two airlines into the largest airline in the world. Here’s my take.

The biggest merger winner is the new American Airlines. The final merger plan barely differs from the original plan. While the airline must divest itself of slots at both Reagan Washington National (DCA) and LaGuardia (LGA) airports, and sell gates at a number of airports, they represent just 0.25 percent of the merged American’s capacity.

The gate divestitures, hub and service commitments required by the settlement would all likely have been done by the new American anyway. The hub commitment, for example, lasts only three years, about the time the airline would take for a full evaluation.

The biggest merger loser is the US Department of Justice (DOJ). Whether or not the DOJ was correct that the merger would be bad for the American traveling public, the actual case they brought was weak, in my opinion. The DOJ suit had problems in part because it argued there would be an adverse impact of increased concentration at DCA, reaching 49 percent, while in the past they had explicitly approved Delta at LaGuardia, and United at Newark, both slot controlled airports like DCA, to have a concentration in excess of 49 percent.

Other arguments which weakened their case was their argument about capacity levels and growth plans, and “Advantage Fares.” Since airline deregulation, the Federal government abrogated its ability to control those levels. With regard to “Advantage Fares,” the DOJ evidence was not particularly convincing and undercut by the numbers, in that only about 0.6 percent of the total US air travel market would be affected.

Had the DOJ case been stronger, the settlement would have been stronger.

As explained in my column, What is the future of the new American Airline’s hubs, Philadelphia (PHL) may end up being a winner, with more international flights. Phoenix, on the other hand, may be a loser, becoming downsized once the three-year moratorium on hub maintenance is ended.

Business travelers will be winners with new American. American’s coverage on the East Coast was weak outside of New York, and it didn’t have great coverage in Europe. US Airways didn’t have strong service in the Midwest or Asia. Combined, their coverage melds nicely for business travelers who worry more about schedules and network coverage than price.

Leisure travelers may be in part losers, as with reduced capacity along some routes, fares will likely increase. Some small cities in particular may eventually lose coverage with the loss of the new American’s lower concentration at DCA.

American’s frequent fliers are domestic winners. American’s only domestic partner is Alaska Airlines. Now, combined with US Airways routes, American’s domestic coverage, especially in the East, is substantially improved to earn and redeem miles.

US Airways fliers are domestic winners in that they will be flying in some newer planes soon. Doug Parker has stated the new American will focus on a better inflight product.

How American and US Airways elite frequent fliers will do is “up in the air” right now. What happens could go either way. Will American’s eight annual system-wide upgrades for top elites continue, or will it be reduced to US Airways’ two upgrades. US Airways has more elite levels which can be beneficial for some. How the new American’s frequent flier program is structured could have a major impact on mid-tier elites.

US Airways offers unlimited complimentary upgrades to First Class on domestic, Central American and Caribbean flights, but that’s only an option for American’s Executive Platinums. We don’t yet know how this will play out.

US Airways award fliers will be big losers with the loss of the Star Alliance and move to OneWorld. Star Alliance had 27 other carriers including ANA, Singapore, EVA, Lufthansa, and South African. OneWorld has far fewer members, and together they have a much smaller network.

US Airways and United frequent fliers living/working in the area between Philadelphia and northern New Jersey are losers in so far as they had the choice of flying from Newark and taking United, or Philadelphia and using US Airways, to rack up frequent flier miles in their more frequently flown airline. That choice will be eliminated as the new American will no longer be in the same alliance, Star Alliance, as United. This choice will certainly affect me.

  • sirwired

    You and I are on the same page about the DoJ lawsuit. All the DoJ accomplished was a couple months of delay, as US/AA didn’t give up a thing they didn’t plan on giving up when starting their merger planning. Everybody and their brother knew there were going to have to be major slot sacrifices at DCA. And you are correct that it’s pretty likely some cities are going to lose direct DCA service. However, I expect many of those cities will retain service through IAD (United) and/or BWI (Southwest), so they’ll still have service to the metro area, and with the new Metro Silver Line to IAD coming soon, Dulles won’t be nearly as inconvenient to town as it was.

    Don’t tell Charlie the DoJ was a loser; his article talked about how “groundbreaking” the settlement was.

  • http://upgrd.com/roadmoretraveled MeanMeosh

    “US Airways fliers are domestic winners in that they will be flying in some newer planes soon. Doug Parker has stated the new American will focus on a better inflight product.”

    While the newer planes are pretty much a given, you are assuming that the US Airways management team taking over AA will adopt the AA product model and enhancements, and introduce them throughout the new system. I wouldn’t be so quick to assume that. Doug Parker and Scott Kirby both made their money at US by cutting service levels and expanding the scope of ancillary fees. It wouldn’t surprise me at all if they end up doing the same at the new AA, especially if there are integration problems or if we go through another economic downturn in the next few years, giving them an easy excuse to expand the LCC model. Maybe they’ll prove me wrong, but I just don’t trust these guys when they assure us that the new airline will look more like AA than US.

  • NedLevi

    Charlie let’s his columnists express their independent thought, even when he doesn’t agree with their point of view. I applaud him for that. No article or column I’ve ever written for CT has ever had its theme, message, or anything of substance altered or deleted. It takes a high quality publisher/editor to follow that policy.

    While United, via United Express, at IAD may pickup some cities lost due to the changes at DCA, I have my doubts how many they will pickup, in part due to IAD itself, but they would be in a position to do so, if they desire and if they think they can make it pay, considering their costs, and the costs of operations at IAD. According to a survey by the prestigious and well known airport management consultants, the John F. Brown Company, costs of operations at IAD are about 30% higher than DCA, and the difference has been growing. I think it will turn out that serving some of the dropped cities from the new American won’t be cost possible for United.

    Southwest, in my opinion is far less likely to pick up these cities because of their equipment. They don’t have the small planes needed to efficiently fly the routes I expect to be dropped. I don’t see them picking up the Reagan dropped flights much at all.

    Thanks for your readership and your expressed opinions about my columns, even when we’re in complete disagreement. I always enjoy reading your point of view as you talk to the issues.

  • NedLevi

    I think that Parker already recognizes the difference in the new American, and the current US Airways. Business travelers will be very important to the new American, more so than with the current US Airways. Business travelers look to considerably more than price when making their flight choices. Parker knows that.

    Moreover, the cost of implementing technology to provide a better inflight product has come way down. Do I think we’re going to see screens in the back of every seat? No. Do I think we’re going to see free meals in economy, even on longer domestic flights? No. I do think we’re going to see more self-serve entertainment and productivity options via the Internet on American planes, options which will go over well. Many of these options will be provided to American passengers via GoGo, and based on my knowledge of what GoGo is offering now, and looking to offer in the future, I think American passengers will be quite pleased.

    I also think we’re going to see improvements in cabin crews, which will cost little. I believe it’s clear that the new American management and their cabin crew union reps are aware of the need for improvements and all want the new merged airline to succeed, and are aware of what that will take. I think we’re going to see other improvements because they will be revenue driven.

    US Airways has been my main airline due to where my home base is located. I fly on them often, and in the last year have seen significant personnel improvements.

    I’ve got to add, to get rid of those horrendous 737’s which US Airways still has in service will be fantastic.

    Time will tell if the promises of the new American Airlines team will become reality. Time and economic conditions will tell the tune over the next 5 years, which will be the amount of time for everything to settle in, in my opinion.

    Thanks for your readership and taking the time to comment.

  • sirwired

    Huh… I never would have figured DCA as cheaper than IAD. I thought the MWAA would have been pushing to reduce traffic at DCA (via fees), as IAD operates on far fewer constraints. (More space, more runways, fewer delays, fewer security issues, more room for growth, etc.)