Tuesday, December 10, 2013

The "new" American Airlines is taking off!

By now, anyone who follows me on Facebook knows I'm a fan of the new combined carrier.  I have been a supporter of Doug Parker and Scott Kirby since the days of them pulling America West Airlines out of the post-9/11 morass and an almost certain 2nd bankruptcy that the little airline could never have gotten out of.  In fact, under Paker and Kirby's tutelage, America West was the very first airline to pay back the government backed "stability" loans that were issued to US carriers in the wake of the terrorist attacks that grounded an entire industry.

Fast forward to 2005,  and Parker & Co. have taken America West off of life support, enacted a series of policy and staffing changes systemwide that made it so much stronger in such a short period of time that they went looking for a bigger partner to dance with.

Enter US Airways. 

After a tumultouous decade of mergers and growth in the 1980's that made USAir into a large competitor on the East Coast (especially once they acquired the Trump Shuttle), the 1990's ended up being the airline's decade of hell.  First, there was the period of time when Stephen Wolf (late of United) and Rakesh Gangwal ran the airline down to its knees with massive orders from Airbus, then a badly executed code-share with British Airways, and a rash of well-publicized accidents and crashes that put the East Coast juggernaut on the ropes.  Once Wolf and Gangwal left, a revolving door was left spinning and a host of airline and travel industry cheiftains took over the reigns for small amounts of time trying to keep the airline flying.  Needless to say, the dot-com bubble burst and 9/11 almost killed USAir.  They entered bankruptcy for the first time in 2002, after a failed merger attempt with United Air Lines.  Their average costs were still sky high after exiting bankruptcy in 2003, and the Board of Directors looked for a savior to buy the carrier, but not after another year and a half of staggering losses on top of a government-backed stability loan.  US Airways entered bankruptcy for a second time in 2004, and it was likely it would not exit bankruptcy on its own.  America West came to the rescue and brought US Airways out of bankruptcy in 2005, the first merger I was an active part of, acting as operational consultant.

Now it's 2013, and American Airlines is in bankruptcy, and US Airways is looking to merge with someone to gain size in order to compete better with the newly combined United Continental Holdings Corp. and the recently enlarged Delta Air Lines (by way of their merger with Northwest Airlines).  Doug Parker struck a deal with the American unions first, then the Board of Directors of both carriers, solidifying the chances of the merger going through.  After a prolonged court battle against the Dept. of Justice, the combined airline was given the all clear sign for merger on November 12, and the first signs of the combined carrier were announced yesterday, December 9, with the legal close of the merger and combining of both carriers under the new American Airlines group moniker.

I've recieved a LOT of questions and concerns with the new merger and here's the timeline of events on what will happen during the merger process and what it all means.

A Gradual Transition: For the foreseeable future, especially with the upcoming holiday season, the airlines will operate separately and system-wide changes will roll out gradually. It’s expected to take 18-24 months for the merger to be completed.

Expanded Service: The airline will offer 6,700 daily flights that cover more than 330 destinations in more than 50 countries, at least for the first 3 years.

Limited Choices for U.S. Travelers: Following the American Airlines merger, four airlines will now control more than 80 percent of U.S. flights.  But that's not necessarily a bad thing as most people think.  This will allow the network carriers (American, United, Delta) to better compete with the Low Cost and Ultra-Low Cost Carriers in the United States, while upgrading and improving service to better compete with Foreign Carriers on International flights from the major gateway hubs.

The New American Hubs: Though the airline had to give up high-competition slots in New York LaGuardia and Washington Reagan, it will still have a substantial footprint. The airline will have hubs in Los Angeles, Miami, Chicago’s O’Hare, Philadelphia, Phoenix, Charlotte and New York’s Kennedy International for the next three years at current service levels. Here's the thing about those slots...the majority of them were already leased out to the other airlines that are purchasing them, so there's no real major loss of service from the new airline, save for maybe a handful of flights to better align the schedules of higher yielding flights.

How Mileage & Loyalty Programs Will Change: The airline has yet to announce its complete plans for frequent flyer programs. Combination efforts are underway. By January 7, travelers can earn/redeem miles reciprocally for with American Airlines or US Airways program. Flyers will keep their existing miles in their respective accounts, and full integration into the AAdvantage brand has not been set yet.

A New Alliance: As the merger is structured, US Airways will no longer be in the Star Alliance as of March 30, 2014. Instead, it will join American and the airlines in the oneworld alliance whose partners include British Airways, Cathay Pacific, Japan Airlines and Qatar Airways, to name a few.  This is a much better deal for US Airways, which was an almost useless 3rd wheel in North America for Star Alliance, constantly in the shadows of much larger rival United.

The inclusion in oneworld is a godsend, as it allows US Airways (while it is still a seperate operating entity) access to the lucrative American-British Airways-Iberia trans-Atlantic joint venture.

Unions Support Merger: The merged airline currently employs more than 100,000 workers and that’s anticipated to change. Currently, the merged airline has the support of  the Association of Professional Flight Attendants for American Airlines. It doesn’t not have the support of mechanics and machinists for US Airways, represented by the International Association of Machinists and Aerospace Workers, who have held out support until its contract is finalized, even though originally they were on board.  But then again, the IAM has never been one to go along with management for ANY airline during a merger process.

Technological Foresight: Following the still ongoing technology, service, and reliability bumps that preceded the United/Continental merger, CEO Doug Parker has hopes of a smoother transition. Initially, the airlines will operate with separate websites and separate reservations systems. Eventually, the merged airline will be using the Sabre reservation system, which American invented back in the late 1960's and has turned it into a powereful weapon against competitors throughout the years.

The Most Valued Travelers: CEO Parker has set a goal for $1 billion in new revenue and savings. Business travelers are a big part of this new plan. With the merged airline, the airline will reach more destinations and will have, “more ability to compete for corporate customers” according to new American President Scott Kirby.  This is not an unatainable goal, considering the massive amounts of corporate travel contracts American has out of its cornerstones of New York City, Los Angeles, San Francisco, and Boston.

A Stock to Watch? One Bloomberg News report had analysts estimating that the AAL stock will be worth close to $40 a share by 2015. Yesterday,  the stock rose more than 4 percent to trade at $25.18 a share as of 3:30 pm.  My Travel Investment Firm is a strong proponent of the new company's future and invested heavily in both companies, and will continue to invest in the new company.

Rising Airfares? While the common rule of mergers is diminished capacity, CEO Parker swears that is not his intention. According to his statement to the press: ”We’re keeping all the airplanes, keeping all the people,” he said of the merger. “So supply should be unchanged. As long as demand stays the same, nothing should happen to prices.”  I expect this to stay true for the duration of the merger process, expected to take at least three years.  After that, we will see how the new airline adjusts to those current levels.  Fares, naturally, will rise according to supply and demand, but that's not necessarily a bad thing.

There are two additional key dates later in the year, according to people familiar with the matter.  On April 1, US Airways will adopt American’s meal windows and catering, and on September 1, the US Airways soft product (i.e. in-flight service) will mirror American’s.  Also by that date, new aircraft being delivered to US Airways will have the new AA interiors.

All in all, not a bad start to this merger, and I see the new carrier being a successful and profitable venture in the near to mid-term future.  Congrats and kudos to both sides.

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