Let’s talk about competition among airlines.  Has competition been damaged over the past 8 years?

Truth be told, I felt it would be when the Merger Mania started.  I really did.  I thought that choice would go down, pricing power would go way up and airlines would become even challenging to fly for even business travelers.

That really isn’t what happened.

Before I go further, let’s all acknowledge that the financial crisis, resulting recession and US economy has impacted the airline industry in the worst ways.  Airlines have been smacked around on an unprecedented level.  Remember how much fuel has risen over the past 8 years?  Milk?  Even the guy who mows your lawn?

What makes you think those rise in costs are any different for the airlines?  Even the cost to borrow money in that industry is exceptionally high relative to prime interest rates.  No one believes in the long term viability of airlines much.  So, it’s hard for you and it’s hard for the airlines and their prices may be somewhat higher but they are not double or worse.  They climbed as did most of your other costs related to transportation.  That isn’t inappropriate.

I have railed at the “lock” that American Airlines has on DFW and how much higher people in the Dallas / Fort Worth area pay for air fares to other major cities as a result.  Similar situations exist in Atlanta, Chicago, Denver, Salt Lake City, Minneapolis / St. Paul, Detroit and elsewhere.  But it has been quite bad in the DFW area for years despite the competition provided by Southwest Airlines via Love Field Airport.

That has changed dramatically now.  Airlines are now competing with American Airlines in the DFW area for the first time in decades on many routes.  There is now real choice when going to Chicago or Denver.  I can fly to Newark (NYC) for fares less than $700 for the first time in a decade.

And the same is true in other cities now.  Those cities are seeing airlines which finally have enough scale and network that they are comfortable making a play for passengers in new, non-traditional markets without just buying the customers.

Witness Delta’s recent announced intention to take the West Coast Shuttle traffic away from the incumbents (United and Southwest Airlines.)  That would never have happened even 3 years ago.

We often talk about Southwest and the Department of Justice recently referred to them as largely irrelevant in competition when they filed their lawsuit.  But wait!  Southwest is already competing strongly against airlines such as American Airlines, United Airlines and Delta Airlines in their fortress hub cities and to take them as irrelevant is just silly.

Need I remind people that Southwest has entered non-traditional markets such as New York La Guardia and Newark Liberty Airports?  Southwest *bought* its way into the Atlanta market and it gave a world class beating to Frontier in both  Milwaukee and Denver.  In fact, United got its head kicked in by SWA in Denver as well.  Continental was so afraid of Southwest that as United it went to war against them operating (potential) international flights out of Houston.

There is more high profile competition in place today than we have seen in almost 2 decades.  Let’s celebrate that for a moment because it *is* good for the consumers.

Even the casual traveler has seen new options in the form of the ULCC carriers such as Spirit and Allegiant Air.  In fact, those ULCC carriers are actually keeping LCC carriers such as Southwest (who really isn’t an LCC anymore), jetBlue and Virgin America honest.

Even I can admit that I’m wrong and I admit it.  We *do* have considerable competition today and it is more healthy competition in the right ways than in the last 30+ years.

Filed under: Airline News, Deregulation, Mergers and Bankruptcy by ajax
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If we use the premise put forth by the US Department of Justice that the US Airways / American Airlines merger is bad for the consumer, then we need to take a very hard, long regulatory look at all of the US airlines, many of its busiest airports and taxes as well.

If anyone was truly concerned about competition in the airline industry, the Justice Department should have continued to block mergers as they did with the original United Airlines / US Airways merger (which was vastly smaller than the one being proposed today).  Instead, they did not.  Rather, a few years later they signaled with US Airways the idea that mergers were necessary in the airline industry landscape.

Quite frankly, I was perfectly happy to see the status quo maintained pre-2005.  That landscape saw:

• Delta Airlines
• Northwest Airlines
• United Airlines
• Continental Airlines
• US Airways
• America West
• Southwest Airlines
• AirTran Airways
• American Airlines
• Alaska Airlines
• jetBlue

It was a pretty well balanced mix of airlines of both the legacy and LCC flavors and pretty well distributed across the United States.  Barriers to entry were, compared to today, fairly low.

Then several bankruptcies occurred which included US Airways, United Airlines, Delta Airlines and Northwest Airlines.  One airline (America West) had to get a massive loan after September 11th and essentially reorganize itself to survive as well.  Another airline, American Airlines, got Billion Dollar givebacks from its employees to lower costs instead of performing a bankruptcy.

Of the 11 airlines listed above, 6 suffered exceptional financial trauma.  Another 2 existed on fine line of financial trouble:  AirTran Airways and jetBlue.  Only 3 managed their finances appropriately and saw appropriate returns on investment:  Southwest, Continental and Alaska Airlines.

So we permitted mergers and this is what happened:

• 2005:  America West takes over US Airways and retains the US Airways name.
• 2008:  Delta and Northwest merge as equals and retain the Delta Airlines name.
• 2010:  United and Continental merge as equals and retain the United Airlines name.
• 2011:  Southwest Airlines takes over AirTran Airways and begins the wind down of the AirTran name.

By 2011, the competitive landscape was dramatically different and American Airlines had to throw in the towel (it should have in 2006, in my opinion) in November of 2011 by filing bankruptcy itself.  In the 2012 / 2013 period, the new airline landscape looks like this:

• Delta Airlines:  Revenues  $36.6 Billion (2012)
• United Airlines:  Revenues  $37.1 Billion (2012)
• American Airlines:  Revenues  $24.8 Billion (2012)
• Southwest Airlines:  Revenues $17.0 Billion (2012)
• US Airways:  Revenues $13.8 Billion (2012)
• Alaska Airlines:  Revenues  $4.6 Billion (2012)
• jetBlue:  Revenues  $4.9 Billion (2012)
• Virgin America:  Revenues $1.3 Billion (2012)
• Frontier Airlines:  Revenues $1.4 Billion (2012)

As you can see, the airlines that exist today are hardly equal despite the perception otherwise.  For instance, Delta and United Airlines both are roughly equal as airlines but the next biggest by revenue is American Airlines which is a staggering $12.3 Billion behind.  If you added US Airways revenues to American Airlines revenues in 2012, you still come in at just $38.8 billion.  Put another way, the new American Airlines Group would operate at roughly the level of United and Delta Airlines.

Southwest would be at a disadvantage seemingly but Southwest’s revenues are based entirely on US based operations and therefore see Southwest operating at parity with the other 3 large carriers.  So, now we have 4 carriers operating at roughly the same scale in the domestic US market.

The remaining four airlines:  jetBlue, Virgin America, Frontier and Alaska Airlines have combined annual revenues of $11.2 Billion or a number that is still less than that of US Airways.  It’s notable that those last 4 airlines are nowhere near national airline scale.  They are all regional or niche in their marketshares.  They can and will survive and at least 2 of them have every opportunity to organically grow much larger.

What my point in all of this?  Scale is critical in this industry and while those billions in revenues sounds healthy, airlines often earn zero profits on such revenues.  The dollars are large, the profits are tiny, at least until very recently.

If you stop the mergers now, you have two giants and three other airlines that would have to be labled as “at risk” over the next decade.  While you allowed that to sort out, the two giants would only become . . . more giant.  And the bigger they grow, the more influence they have on airports and route infrastructure.

So, if you feel the combination of US Airways and American Airlines is anti-competitive and anti-consumer, then you *must* be ready to “break up” Delta and United Airlines.  They don’t have the potential to be dominant.  They already are dominant.  So much so that they dwarf every other airline in the industry.

More on these subjects tomorrow.

Filed under: Mergers and Bankruptcy by ajax
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The Justice Department lawsuit against US Airways and American Airlines and the merger spends a lot of time citing city pair as routes where competition would be impacted.

These city pairs were interesting to me and we’ll see which ones they referenced later but right now, let’s focus in on what constitutes a viable route for an airline.

Non Stop routes are generally routes which the airline has identified that there is enough traffic between two city pairs to justify a one or more daily flight between the two cities where it would yield profit.  Airlines fly non-stop routes that are profitable, get it?

Profitable is determined by the distance, the type of aircraft that might be flown and how much the airline can charge for a mix of fares between the cities.

Distance is important because it determines, in part, fuel and labor costs.  If you fly farther, it costs you more to employ crew for that flight.  It costs more in fuel to fly that route.

The type of aircraft is important because if an airline can only fly low paying passengers and there are only enough passengers to fill a small aircraft, it may not yield enough revenue to cover all the costs associated with that flight.  (There are rare times when the airline will fly the route anyway to bring in more people from their network to fill other outbound flights at a hub destination but the number of times an airline will fly an unprofitable route for this purpose are vastly diminished.)

How much the airline can charge for various seats is highly variable.  For instance, if it is a city pair like DFW-ORD (Dallas / Fort Worth – Chicago), the airline will assume it can fill its business class seats with full fare business travelers each day.  That’s a lot of revenue from a relatively small group of people.  Next, the airline might see how many of its Economy Plus seating it can fill with higher incremental revenue (over economy fares).  Finally, Economy passengers will be evaluated.  Are there enough passengers flying at a base economy fare to provide enough incremental revenue to drive the flight into profitability?

Just because “X” number of people want to travel between City A and City B doesn’t mean there is a profit available to the airline for providing the service.

Because business fares provide a great deal of the profit to an airline, airlines look to fly those routes with non-stops.  Business fare consumers want non-stops because they typically are flying a lot and the savings in time and convenience is very valuable.  Cities often have a mutual attraction for each other and provide a great deal of travel between the two.  This is the case, for instance, between Chicago and DFW and Chicago and Denver.  It’s also true between New York City and Chicago and New York City and Los Angeles.

Leisure routes are the hardest to find a profit from.  Travel to and from leisure destinations such as Florida or Hawaii is centered around the lowest fares.  People traveling for leisure are typically willing to make a connection to get the cheapest fare.  However, leisure travelers are often traveling just once a year and that means they are not a reliable passenger for the airline on a week by week basis.

Finally, let’s remember that a route is also attractive for when it occurs.  For instance, a route leaving at 7am from Dallas / Fort Worth to Chicago will be very popular and therefore a route where you’ll charge a higher fare for a higher profit.  Similarly, you can imagine that a flight between those two same cities leaving at 10pm is not very attractive at all and the airline may charge far less to attract enough passengers to the flight regularly.

Here are some specific city pairs mentioned as being presumptively illegal for a merger

• Charlotte, NC – Durango, CO
• Maui, HI – Tampa, FL
• Hilo, HI – Miami, FL
• Austin, TX – Salinas, CA
• El Paso, TX – Honolulu, HI
• Des Moines, IA – Maui, HI
• Hilo, HI – Orlando, FL
• Indianapolis, IN – St. Croix, VI

Look the list of absurdity goes on and on.  Virtually all routes listed as being presumptively illegal for the merger are connections for both airlines.  For those routes where they are non-stops (of which US Airways and American Airlines have just 12 non-stop routes where they compete), yes, the competition is reduced.  That can be fixed by A) waiting for another airline to enter the market because if there are high fares, another *will* enter the market or B) asking the airline to accommodate a new airline on the route.  12 routes (out of hundreds of routes) and 12 easy accommodations at the worst.

For some reason, the DoJ is very worried about routes to and from Hawaii to absurd locations in the US.  How many people think that all 3 people traveling between Tampa and Maui regularly are worried that much about fares?

And I”m not sure we should factor in for concern that husband and wife who travel annually to St. Croix from Indianapolis.

On the routes that *do* count, we already know from historical information over the past 3 years that other airlines will enter non-stop markets where fares are high and the yield for profit is good.

On the routes that do count which comprise at least 90% of the DoJ complaint, I would suggest that we fire AAG Baer for being stupid about the airline industry.

Filed under: Airline News, Mergers and Bankruptcy by ajax
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Some in the media have decided to blame Doug Parker for this development with respect to the Department of Justice lawsuit to stop the merger.  Some like Mitchell Schnurman of the Dallas Morning News for instance.

I believe that is disingenous at best.  Schnurman has been a huge promoter of the merger and Parker to lead the new company.

Did Parker drop the ball?  I do not believe so and here is why:

This announcement has stunned everyone including even those within the government itself.  It caught analysts with decades of experience off guard.  It caught *all* newsmen off guard.  Anyone who could possibly have had an inkling of what was to come has expressed genuine surprise at this development.

So why should Parker be any different?

The truth is that I think that it is possible although highly unlikely that airline attorneys may have gotten a tiny signal from the DoJ but the way Mr. Assistant Attorney General Baer is behaving, I strongly suspect he kept things very secret so he could have his days in the sun.

Parker artfully negotiated all the turns in this deal and, yes, even handled the government deftly.  He had no need to be especially cautious in this deal as the DoJ goes because it defies any logic or precedent that the DoJ would find anything more than the need for givebacks at a single airport:  Reagan National

In fact, I think the way Parker has played this so far indicates he is more than the right man to lead this new company.  He has shown restraint, good humour and a creativity that you just don’t see in most of today’s airline CEOs.

In fact, I’ll go one step farther:  I think Parker has become an airline CEO.  I mean that kind of CEO who operates his business with larger than life personality and a passion that burns.  His zeal for earning a profit is only exceeded by his thrill at being in the airline business.

And it is a lot more than you can say for a lot of other airline CEOs today.

You can bet that Parker has received calls from a wide variety of other airline CEOs commiserating with him on this development because it was both unfair and threatening to the industry as a whole.

Filed under: Airline News, Mergers and Bankruptcy by ajax
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Assistant AG Bill Baer, the face of the Department of Justice’s decision to file suit against American Airlines and US Airways to prevent a merger appears to be both naive and ignorant.

It is said:

“The bottom line, he said, was that the best solution was to try to kill the deal rather than try to find ways to make the merger more palatable.”

So, in other words, this fellow decided that it was better to kill a deal against two inferior airlines in favor of 3 vastly superior airlines because he thought that was a solution to competition.

Doesn’t that sound naive and ignorant?

He goes on to say:

“We filed the lawsuit today because we determined that the merger – which would create the world’s largest airline and leave just three legacy carriers remaining in the U.S. – would substantially lessen competition for commercial air travel throughout the United States.  Importantly, neither airline needs this merger to succeed.  We simply cannot approve a merger that would result in U.S. consumers paying higher fares, higher fees and receiving less service.“

It creates the world’s largest airline barely.  Just barely.  With United Airlines and Delta Airlines, they are really a Big 3.  From a domestic perspective, you would have had 4 major national airlines competing in all substantial markets against each other.

Delta Airlines, United Airlines, Southwest Airlines and the new American Airlines.

And given the moves made by Delta Airlines recently to attempt to take control of the California “shuttle” market, I would say that there is another bogeyman that bears watching and a lawsuit if he truly believes that competition is threatened today.

He also says:

“If this merger were to go forward, consumers will lose the benefit of head-to-head competition between US Airways and American on thousands of airline routes across the country – in cities big and small.  They will pay more for less service because the remaining three legacy carriers – United, Delta and the new American – will have very little incentive to compete on price.   Indeed, as our complaint shows, the management of US Airways, which will run the new airline, sees consolidation as a vehicle to reduce competition between the airlines and raise fees and fares.”

I repeat:  There wouldn’t be 3 legacy carriers.  There would be 4 US Super Carriers and they are already taking square aim at each other in the marketplace today.

Furthermore, US Airways and American Airlines have something like 12 direct city pairs in which they compete.  That’s it.  Mr. Baer believes that US Airways competes with American Airlines by offering lower fares on one-stop service against American Airlines.

Those who watch the industry and, you know, have a clue, will tell you that one-stop routes don’t compare to non-stop routes.  US Airways offers those competitive fares for the incremental revenue, not because they succeed in stealing customers from American Airlines.

Remember who the money making customer is:  business travelers

Who hates less than non-stop flights?

Business travelers.

I’m telling you that Assistant AG Baer almost seems senile in his arguments.

Baer goes on to say:

“The big three airlines – American, Delta and United – don’t like this aggressive price cutting by US Airways”

Who here believes that any of those airlines is frightened of US Airways and its so called aggressive price cutting?  That statement is so ludicrous as to make one wonder if Mr. Baer did any investigation at all.

“Today, American does not charge if you redeem frequent flyer miles.  US Airways charges an average of $40.  If the merger is allowed, US Airways is planning to take this frequent flyer benefit away and make American’s frequent flyers pay redemption fees.  By eliminating this competitive distinction between American and US Airways, the new airline generates an additional $120 million in revenue.  But you pay the price.“

Mr. Baer has clearly never redeemed miles on either airline and particularly hasn’t redeemed miles on American Airlines.  I assure you that there are fees associated with most redemptions for miles on American.   But notice how he villifies the US Airways management for daring to earn a profit.

Take notice:  American Airlines is in bankruptcy and doesn’t earn profits.   US Airways does earn exceptional profits.  But we don’t want airlines earning profits.  Is that clear?  Profits are *bad*.

Baer addresses the elephant in the room:

“You don’t need to go far from this very city to see another worrisome effect from the proposed merger.  Across the Potomac River, the merged airline would dominate Washington Reagan National Airport, by controlling 69 percent of the take-off and landing slots at DCA.

And, it would have a monopoly on 63 percent of the nonstop routes out of Reagan National.”

I guarantee you that the airlines’ were prepared to make a deal on this.  However, where was Mr. Baer’s worry when Delta and US Airways did a deal to get their monopolies on La Guardia and Washington National Airports respectively?

Where is his concern about the massive dominance American has in Dallas / Fort Worth?  Or Miami?

Where is his concern about United’s massive dominance at Newark and Chicago airports?

Or Delta’s control of Atlanta, Salt Lake City, Detroit and Minneapolis?

The insanity being offered by both Assistant AG Baer and AG Holder is a giant disservice to consumers and constituents.  Their massive lack of understanding of the industry will do substantial harm to the airline industry of the United States for as much as 2 decades.  It will potentially relegate US airlines to a secondary status in the world market.

And while you consider all of the above, consider that it comes from a blue leaning, moderately liberal Democrat.

Filed under: Airline News, Mergers and Bankruptcy by ajax
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Robert Crandall has gone postal over the merger lawsuit writing OpEds for the Wall Street Journal and providing quotes to the Dallas Morning News that require the use of “expletive deleted”.

Crandall echoes what the rest of airline industry world has said: The government is entirely naive and ignorant of the airline industry and leaving Delta and United as giants ultimately sees US Airways and American Airlines likely failing in the very long view.

Frankly, he said it way, way better than I did. But, then, Robert Crandall is well known for being scary smart, very articulate and very, very direct in his opinions.

Filed under: Airline News, Mergers and Bankruptcy by ajax
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US Airways and American Airlines will fight the lawsuit and they have a very credible chance of winning.  However, regardless of the outcome of a lawsuit in court, real damage has been done already.

Both airlines have seen their stock prices drop considerably.  Furthermore, by making them the very public target of a Department of Justice lawsuit, real damage has been done to their business by casting them in a negative light.

American Airlines suddenly doesn’t have a bankruptcy exit plan that is viable.  Regardless of what CEO Tom Horton says about American Airlines being viable without a merger . . . it really isn’t.

Oh, it could exit and linger around for a few years.  Sure.  But creditors will get cents on the dollar, employees will lose more jobs and ultimately the next step for the airline could be a second bankruptcy.  This time a Chapter 7 filing.

Is it that gloomy for American or am I being dramatic?  Consider that the DoJ has declared war on airline mergers.  None will be entered into by other airlines for at least a considerably lengthy time.  American has no prospects to merger with other airlines either.

And American has already begun suffering a brain drain as a result of announced post merger leadership.  As an airline, its prospects are very dim going forward without a merger at this time.

US Airways can make it . . . kind of.  But I wonder if they can thrive now.  This is an extremely unfair sucker punch to the best airline management in the world presently.  How do they find another smart, viable merger partner with this swirling around the drain?

Can they win?  Yes.  The landscape is littered with precedent and our anti-trust laws are actually kind of weak compared to what people think they are.

But the economic damage will be done already and the merged entity will spend extra years trying to play catchup to 3 other airlines that will have a very, very substantial head start.

That is not the picture of competition.

And there isn’t a financial analyst out there who isn’t alarmed and appalled at this development in the airline industry.  Expect all airline stocks to suffer a while.

Furthermore, consider that airlines have just been told that their federal government does not intend to allow any future growth through mergers and acquisitions.  The path to growth organically is exceptionally expensive, time consuming and requires letting go of capacity constraint.

No one wins in that scenario.  It becomes a bloodbath.

Filed under: Airline News, Mergers and Bankruptcy by ajax
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Texas, Arizona, Florida, Pennsylvania, Tennessee, Virginia and the District of Columbia have all decided that they have a stake in the merger of US Airways and American Airlines and joined the Department of Justice in their suit to block the merger of those two airlines.

OK, so, let’s take a look at that.

Texas and Arizona hate the idea of a merger but because of entirely different reasons.  Arizona hates it because it knows that corporate jobs which are high paying will be lost.  That’s a fact and no one should deny it.

Texas doesn’t want the merger because, frankly, it’s an insult that a company from Arizona and a man such as Doug Parker should be upstarts and take over an Texas institution:  to wit American Airlines.  If you think this sounds silly and foolish, then you do not live in Texas and have not operated within the political / business landscape of Texas.  The speculative statement I could make is that it frankly wouldn’t surprise me to learn one day that AA CEO Tom Horton’s political buddies (Texas Senators, Attorney General and even the Governor) decided to help make this stink on his behalf.

To add more stink to the Texas move, I think politicians in Texas is trying to prevent its neighborhood from being busted by a dirty foreigner.

That will hurt Southwest Airlines quite badly in the future and those guys don’t care because Southwest has never pandered to them in the manner AA has.

Pennsylvania is still pissed that US Airways pulled out of Pittsburgh.  Never mind the fact that as a large focus city, it made no money for the airline and the decision to withdraw from that city was largely made by the management of the airline that was US Air and which managed to steer its company into bankruptcy not once but twice.  When incompetent management can even see that serving a city like that is folly, you know that it is folly.

But Pennsylvania is angry and they’ve found an avenue to get political retribution.  And they’re taking retribution against the wrong management even.  But politicians never claimed intelligence, just power.

Tennessee is pissed at Delta and is therefore just lashing out.  It really doesn’t have a dog in this game for either of its 2 major cities nor its minor cities.  But Delta recently put Memphis into a small “focus city” role and Tennessee is angry about that and it wants revenge against anyone it can find.  So US Airways and American Airlines are its whipping boys since it can’t get to Delta.

Florida is scared to death that it will lose American Airlines international flights to Charlotte, North Carolina.  That’s hilarious but it also shows you just how corrupt Miami has been about holding on to American Airlines.  They know that their airport is expensive, shoddy and not up to standard and they fear the alternative that is Charlotte.

Washington D.C. is in this because Congress does *not* want to see *any* flights to stupid, small cities reduced for fear they’ll have to fly from Washington Dulles to go home on the weekends.  Since Washington D.C. is entirely dependent on Congress for financial largesse, it does what Congress wants done.

The states involvement in this is about various States’ Attorneys-General wanting to get elected to higher office.  Sadly, this merger isn’t about them protecting their constituents, it’s about showing how tough they can be.

What is epically stupid is that their actions will severely and materially harm their very own constituents.

I’m talking about the combined employees of these two airlines.  Because rest assured that American Airlines is now frantically wondering who else to cut to reduce costs further in order to keep their heads above water.  US Airways labor just lost a ton of money potentially by seeing this deal killed which saw their membership achieving substantial salary gains when the deal went through.

And the viability of these two airlines as stand alone entities is questionable if the merger doesn’t go through despite what both CEOs have said to the contrary.

Delta Airlines is rubbing its hands greedily and the well oiled machine that it is will now engage in exceptionally predatory behavior towards those two airlines.

Jeff Smisek is having a tall tumbler of Scotch tonight and celebrating that he may well see his airline survive and succeed now that he has an advantage in having made it through the “merger door” just in time.

Southwest Airlines and its crew is looking at the landscape and realizing that Delta and United will take aim against it quickly in light of the fact that the only way Southwest can hope to grow going forward is organically.

There is no merger future for Southwest.  None.  It just went “poof” until and unless the merger suit is found in favor of US Airways and American Airlines.

Creditors who were set to realize payback on all their debt with American Airlines just saw their chances evaporate like a drop of water on a Texas highway in August.

The Collective States have participated in an extraordinary act of treachery against their own citizens so that their politicians may appear “tough” for one more day.

Filed under: Airline News, Mergers and Bankruptcy by ajax
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My thoughts on comments made by Assistant AG Baer:

Q. Why is the focus on the legacy carriers?

BAER:  I think if you look at the documents we cite in our complaint, you’ll see the legacy carriers focus on each other. They say to a large extent, Southwest and the other low-cost carriers are not competitive constraints in many, many respects. They are for the routes they fly. But for example Southwest flies only about one third, maybe a little more than that of the routes that US Airways flies and American flies. They’re not a constraint on those other routes.

Note:  American Airlines flies about 3400 flights per day.  Southwest Airlines, curiously enough, flies about 3200 flights per day.  So, I really don’t know where Baer gets the idea that Southwest isn’t relevant.

Legacy carriers don’t exist anymore.  All have been entirely remade via bankruptcy and merger(s).  To act as if Southwest isn’t a competitive constraint on United Airlines, Delta Airlines, American Airlines and US Airways ignores a few facts.

1. Delta Airlines considers Southwest a major competitor in its home Atlanta market.
2. United Airlines has been given massive fits by Southwest in Denver most recently and in California for 2 decades.
3. American Airlines is so unaffected by Southwest Airlines that it has spent 3 decades fighting to keep Southwest blocked from competing in the Dallas market.
4. Southwest and US Airways have gone head to head in several markets and in Philadelphia, one would argue that US Airways won.

Q. Since DOJ has approved mergers in the past of American’s two largest competitors, it’s difficult to see why you would disallow this merger. And the airline industry was about to become a viable industry, and your lawsuit would prevent that.

BAER:  It’s a fair question. But if you look at the financial performance of US Airways and American Airlines over the past year, just the last quarter, each on its own is reporting record earnings. These two airlines are viable, healthy and in a position to be competitively aggressive and successful on a standalone basis.

The financial performance of American Airlines is not impressive to date and, in fact, it is exceptionally marginal when compared to Delta and United and . . . wait for it . . . US Airways.  It has a long, long way to go before it enters territory where it is earning on a par with its scale.

Now, US Airways has arguably done the best job of any airline given its handicaps but I also would argue that you should not penalize US Airways for succeeding and if you are going to look forward, then you should be looking forward at the likely long term fate for US Airways.  Over time, this airline will begin to face without more scale.

Q. You wrote that fares would go up and that the airlines would coordinate on setting fees. Why do you say that?

BAER:  We mentioned this in the complaint. There are documents that we cite out of the US Airways pile that talk about their efforts to take American’s fees, which in some cases are lower than the US Airways fees today, up to those levels. Even a few dollars in an increased baggage fee basically translates into tens of millions of dollars in extra revenue for the combined airlines but extra costs for the consumers.

I read this as a complaint that US Airways has been successful in raising its profits to cover the cost of its capital and therefore should be punished for being creative in operating its business in an industry that has had massive collective losses for 3 decades.  In other words, it’s better for the consumers to have an airline industry that remains predatory, sick and unable to stabilize and grow.

Q. Have you blocked any other merger with a lawsuit since the United-US Airways merger in 2001?

BAER: We also opposed, if I remember right, Northwest-Continental roughly about 11 or 12 years ago, I think. We were looking very seriously at the US Airways’ hostile bid for Delta about five or six years ago when that was abandoned. It’s not the first time. In terms of what we would have done if, when and but, it’s impossible for me to actually offer predictions. What we do is we take our look at the ones before us and when we see a problem, we go hard.

And Mr. Baer shows his ignorance in that the “merger” between Northwest and Continental wasn’t so much a merger as it was a joint venture.  Nonetheless, the DoJ did object to it and caused its demise.  That was also in 1998, not “10 or 12 years ago”.  It certainly wasn’t objected to in the current anti-trust landscape over the past 8 years.  The US Airways bid for Delta never got to the point where Justice would have even thought about beginning an investigation.

A very big concern of mine and, apparently, a concern of several financial analysts is that this investigation led by AAG Baer has, for the first time, focused on connecting flights in the competitive landscape.  To compare a one (or more) stop route with a non-stop route when it comes to air fares and competitive airlines is . . . bad, sloppy, foolish, naive, silly and many other adjectives.  And a good judge with a bend towards business will see that for the wide gaping hole that it is.

Baer also keeps a very hostile tone in his dialogue about these two airlines that strikes me as exceptionally personal.  Acting this surly this early on in the process just seems to communicate a personal bone to pick and that never serves the public well.   This seems out of place for an AAG and I wonder what his tone will be when the courts find that with carve outs, this is a merger that is lawful.

Finally, Assistant AG Baer keeps using phrases about the consumers getting the shaft.  That’s a pretty inflammatory piece of rhetoric and unprofessional and unbecoming of an Assistant AG.  It also reflects a partisan attitude which is not what we want in our government.

Let’s be clear:  The analysis offered by the DoJ is bad on so many levels as to beg the question “Who did this work?  A 13 year old?”

The repeated language about airlines now earning profits continually implies that punishment is due.  This is an industry which has been sick since 1978.  It only finally started to get its health 2 years ago and it is far from out of the woods in anyone’s opinion.

Knowledgeable analysis of the landscape today would find one very big concern that would exist without this merger:

Delta would be King, United would be Queen and the rest of the airlines including US Airways and American Airlines would be serfs.  Even Southwest Airlines, the darling of the “pro-consumer” bunch would be at very real risk.

Why?  Because Delta and United have the scale to dictate terms in the marketplace.  The others have no choice but to follow.  Because Delta and United will ultimately earn a health return on capital and be able to responsibly fund themselves whereas the others will have to rely on sickly cashflow and financial crisis every few years.

I am incredulous at how the DoJ tries to make arguments here first praising US Airways for being well managed and then in the very next sentence adopting the position that they should be punished for that very success.  They have seemingly picked through the various available arguments, chosen the ones that serve their personal interests, tossed them into a poorly crafted complaint and then gone out behind a lectern to declare that when they object to such a thing, they come “hard”.  (Yes, that word was used by Baer yesterday).

Isn’t it notable that the European Commission who would, in my opinion, ordinarily have a strong concern about competition issues surrounding this merger as it relates to flights into and out of London Heathrow (at minimum) found it necessary to only ask for and receive  a single slot pair for flights between Philadelphia and London?

One of the most regulatory oriented agencies in Europe who have no trouble shooting down proposed mergers (Ryanair and Aer Lingus, for instance) only asked for a single route to be flown by someone else.

Something smells very bad.

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The Department of Justice along with the Attorneys-General of six states (Texas, Arizona, Florida, Pennsylvania, Tennessee, Virginia and the District of Columbia) have filed suit to block the merger between US Airways and American Airlines citing concerns about the anti-competitive nature of the merger.

Before I go farther, let me say that this decision has one single merit behind it and that is the fact that I will be able to write weeks worth of blog entries on the inherit stupidity of this lawsuit.  I won’t be bored.

At first glance, what I am most upset about is the fact that this decision is founded on either some of the worth work done in investigation for a major airline merger or it is founded on political moves and either is distasteful beyond belief.

One example that grates on my nerves to a high degree is the citation that with this merger, only 3 legacy airlines will be left in the United States.  In point of fact, there haven’t been any legacy carriers left in the United States since the day after American Airlines filed for bankruptcy.

Those guys are gone.  They have neither the market power nor the market share they are credited with.  Indeed, they are now beginning to fiercely compete with each other in the domestic landscape.

And, more accurately, that statement ignores what factual data exists on the competitive landscape.  With this merger, there would not be 3 legacy airlines but, rather, 4.  They completely ignored Southwest Airlines.

Southwest Airlines holds about an equal share of domestic traffic in the United States compared to United Airlines, Delta Airlines and the combination of American Airlines and US Airways.

So, what the US DoJ and its cronies from The States have implied here is that 4 exceptionally healthy, broadly national and high competitive airlines is undesirable.  Instead, it is more desirable to have 3 highly competitive airlines with 2 other weaker airlines with substantially reduced market prospects going forward.

For the first time in nearly 50 years, airlines are either earning the cost of their capital or on the verge of it.  The required financial performance to be viable businesses in this industry is only just now being realized.

But political buffoons unable to do homework located in Washington D.C. have decided that now, long after Pandora’s box was opened, now is the time to try to draw a line in the sand.

The statement being made is that they are concerned about the high cost of air fares and believe that those air fares may, in fact, go up and “harm” consumers.

This statement goes to the idea that air fares are artificially high.  Interesting and before I go on, let’s not forgot the the forthcoming analysis of this idea comes from someone who has little sympathy for airlines and the fixes they get themselves into with respect to costs.

It is unsustainable for any airline going forward to be unable to earn a return on capital investment.  The capital markets will simply not buy into the idea of continuing to loan money to enterprises who cannot pay interest on their debts.

And unable to merge, they must go bankrupt again.  This time they will go Chapter 7.

More to come.

Filed under: Airline News, Mergers and Bankruptcy by ajax
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I’ll be preparing several blog posts on the decision by the Department of Justice to block the US Airways / American Airlines merger.

My first reaction is that this is potentially the most disruptive thing to happen to the airline industry since September 11, 2001.

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There are times when I feel as if I’m the only guy watching this industry and shouting about the need to improve both revenues and profits and not by cutting yet more costs.

Cost cutting is good.  Cost cutting in the airline business is great.  But no amount of cost cutting ever fixed a business or an industry.  Have you ever heard of a company that became great or restored its greatness by simply cutting its costs?

It simply doesn’t happen.  Companies lifespans are extended by cutting costs.  They can be a way to get the markets to temporarily bump up the stock price.  It certainly can be a process that will improve merger prospects or even simply improve the money in the pocket of the top managers.

But it doesn’t make a business great.

I’m struck by the similarities going on between IBM and American Airlines today.  Each business has a long institutional history and a tradition of being successful without being glamorous.  Each has been in transition for a long time and each has struggled to be successful in the landscape in which it sits today.

For more background on IBM, take a look at this I,Cringely blog post about IBM.

Sounds awfully familiar, no?  The process of extracting life from the company and not paying attention to the revenue side of the business stands out in stark contrast to the competitors each company faces.

American Airlines has been headed down that same path for years.  Markets even rewarded their cost cutting for years as well while never really taking a long, hard look at how management was preparing for the need to improve revenue.

When I was self-employed in a business in the late 1990’s, we suffered an exceptional and abrupt downturn in our business.  After my partners and myself literally paid ourselves a couple of hundred dollars a week for a month, we realized that we couldn’t just cut costs.  Despite things being rather dire in our business, we embarked on a campaign to win more business with the only promise being made that we wouldn’t be too proud to go to anyone with hat in hand to ask for business.  Our mantra was that we would grow ourselves out of trouble.

We took on jobs we would have never done before and some that were actually a bit distasteful.  But at the end of 7 months, our business was not only thriving, we made record revenue *and* profits the very next year while maintaining a lean operation.  I paid more income tax that next year than I ever have in my life prior to that year.

American Airlines cut costs and didn’t invest in new equipment for years.  It ignored the death by a thousand cuts being handed to it by other airlines across the country.  And when those cuts began to be noticeable, American’s solution was to crouch in defense and concentrate more eggs in fewer baskets by focusing on its corner strategy.

Has anyone noticed that no one talks about the corner strategy anymore?  Not even Tom Horton who used it to great effect early in the AA bankruptcy process.

There is a very real, tangible reason why the US Airways executives had to take leadership in so many areas among the planned merger of US Airways and American Airlines.  US Airways management knows how to grow a business.  American Airlines management knows how to crouch in defense.  It’s an institutional mindset that doesn’t get changed easily and does most often get changed by  transfusions.

The crisis of the two companies has been averted but there is a lesson there for all companies in the industry and, most especially, for someone such as Southwest Airlines.  When you start stagnating and crouching in defense, it’s a very bad sign.  You can manage to keep your head above water for years but you can’t manage to get traction and win in the business.

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US Airways and American Airlines have received approval from the European Commission for their merger contingent on the combined airline giving up slots for a Philadelphia – London Heathrow route.

I previously stated that I thought the EC might want more and color me surprised that they do not.

This leaves things pretty much in the US Department of Justice’s hands for final approval although the Bankruptcy Court does have to also approve the bankruptcy plan.  The Bankruptcy Court approval is nearly pro-forma at this point as the two airlines have their ducks in a row and overwhelming support and approval from creditors.

The DoJ is taking its sweet time and while they cannot take forever, they do seem to be dangerously dragging this approval out.  Most likely due to pressure from Congressmen who don’t want to lose routes/airlines/jobs in their constituencies.

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A number of parties have filed their objections to the bankruptcy plan for American Airlines and its merger with US Airways.  Most of these objections are pro forma so that the parties don’t lose standing going forward out of bankruptcy.  It’s necessary and not an obstacle to the merger whatsoever.

Some of the objections strike me as simply vindictive (Let’s wave at USAPA, the most dysfunctional pilots union in the US and that is saying something).  A few others strike me as people fighting a battle that was lost nearly 15 years ago (Hello ex-TWA pilots).  Why spend so much money on attorneys and courts when the case law is so badly against you?

What I am most struck by is how -non-constructive several creditor parties are in bankruptcies such as this.  This is, quite literally, the best deal *anyone* is ever going to get in an airline bankruptcy.  Everyone gets their money and gets to move on with life.

The destructive acts of small groups having major temper tantrums simply amaze me at times.  At other times, they remind me of Eastern Airlines and what Charley Bryan (head of the IAM at Eastern) did to that airline.

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With more and more leadership announcements going on with respect to those who will have a position in the new American Airlines Group when US Airways and American Airlines merge, I see a pattern.

That pattern is that US Airways leadership is being used to provide cohesive leadership structure and certainly leave no doubt as to who is in charge of this merged company:  Doug Parker.  I’ll admit that my fears that Chairman Tom Horton will attempt to interfere are unchanged.  I think that there will be a number of attempts to direct the merged company.

Now I think they will fail.  Doug Parker is building a leadership team that clearly has its loyalties in the right place.  American Airlines leaders are being used to fill functional roles whereas US Airways leaders are being used to fill leadership roles.  There is nothing wrong with this approach.  I like it.

This is a group of leaders who will have incentive to work together and to succeed (or fail) together.  I see little opportunity to breed divisions in these ranks and I think that will only benefit the airline.  The right, successful people are in charge.  The ones who comes from a company with a winning and profitable track record will be the leaders and that is only right.

I would contrast this with the Continental United merger where it seems that Jeff Smisek willing took on way too many United loyalists.  That ship has been slow to change and correct directions when necessary and I still don’t see a cohesive team in place at United.

So, well done Mr. Parker.  This is looking like a merger with the potential to meet or exceed expectations on all fronts at this time.

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Various Attorneys General of states have decided to investigate the merger between US Airways and American Airlines.  These attorneys general led by the Texas attorney general have joined the US Justice Department in the probe of the merger and this couldn’t be more transparent as bullying.

These states are threatening risk to the merger in order to prevent losing hubs.  Actually, this is about making the airline guarantee jobs in their states and one should remember that every attorney general is a potential candidate for governor in a state.

It’s naked bullying and given that these airlines are involved in interstate commerce, really outside their purview.

All airlines should protest this behavior and lobby against it because while it affects US Airways and American Airlines today, it will affect another airline tomorrow.

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Now we have a real net profit for American Airlines in May of $65 million.  It is something to crow about and it is worth celebrating at American Airlines.

Let’s take a moment and let them enjoy that truly good news.

Since this announcement was made and since I’ve read Tom Horton’s comments on this profit and expectations for the 2nd quarter (a profit for the 2nd quarter is expected), I have had a very odd, uneasy feeling.

Would it be tempting for someone to sabotage this merger in the hopes of running the airline as a standalone?

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By several accounts, the US Justice Department is investigating the US Airways / American Airlines merger and a focus appears to be on the control of approximately 70% of all the slots at the airport by a single airline.

I would think so.

Frankly, I had not appreciated just how dominate this arrange would be at this airport.  I feel certain that the combined airline will be required to give up slots to merge and it won’t be a tiny few.

It would be nice if the airlines could arrange a deal themselves rather than be forced to give these up for a giveaway.  I suspect Parker & Company could strike a deal that would see value going to an airline while they received value in return.

And this highlights, once again, the problem with slots and how they’re awarded to airlines at our major airports.  There needs to be a better way that is more dynamic for the market place.

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The executive leadership announced for the merged entities of US Airways and American Airlines (AMR) aka American Airlines Group tells a good story.

First, Doug Parker is firmly in charge.  Very firmly.  Second, Doug Parker is going to go forward trusting the team that got him where he is today.

The team is:

• Scott Kirby, 45, president overseeing marketing, sales and operations.
• Elise Eberwein, 48, executive vice president for human resources and communications.
• Beverly Goulet, 58,  chief integration officer. (AA executive now)
• Robert Isom, 49, chief operating officer for US Airways, COO for American Airlines Group.
• Stephen Johnson, 56, executive vice president for corporate affairs such as legal and regulatory issues.
• Derek Kerr, 48, chief financial officer.
• Maya Leibman, 47, chief information officer overseeing technology systems.  (AA executive now)
• William Ris, 65, senior vice president for government affairs.  (AA executive now)

Additionally, Dan Garton (CEO of American Eagle) will be leaving and I’m sorry to hear that.  I do hope that Garton may have another very good position lined up elsewhere.  He had been made CEO and President of American Eagle with expectation that it would become an independent company for him to run.  Now, not so much.

These were the right choices.  This is a real “A” team lineup.  This is not a political lineup but a real lineup of truly the best people for the positions.  Will Ris will leave soon but he’ll be of great benefit for the next few years of integration.  Beverly Goulet is essential as she knows where all the bodies are buried and she is very, very smart.  Maya Leibman is exceptionally talented and brings something that this new airline will need:  Someone who has been there and done that on reservations systems.  She’ll have the unenviable task of merging systems here and her knowledge of what has already been tried will be very helpful.

If I’m an investor or employee of the company, I am very happy about this announcement.

If I’m middle management at American Airlines, I’m a little shaken and worried for my future.

What this is not is a repeat performance of the ContiUnited merger.  Jeff Smisek went political with that merger and consented to keeping United staffers under pressure from then Chairman Glenn Tilton.  Retaining those people retained United’s old way of doing things and kept the Continental Breath of Fresh Air from entering the organization.  I’m not sure Smisek can turn it around at this point.

But Doug Parker has clearly decided to use those who do have a successful track record and who brought him to this dance.  He’s clearly positioning himself to follow the Delta / Northwest model of “how to integrate two airlines” and I firmly believe that this should cause creditors and financial analysts to get much more comfortable with the merger and its approval.

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Congressmen have a well known fondness for Reagan National Airport in Washington, D.C.   They can work their 5 or 6 day week and catch a flight from this airport to home in short time.  The drive to Dulles can be very painful and particularly so towards the end of a week.

So Congress doesn’t want the merged airline of US Airways and American Airlines (aka American Airlines Group) to lose slots because of their merger.  The fear is that lost slots will result in lost routes to home states for Congressmen.

They aren’t wrong to fear this.  A divestiture of slots at Reagan National would almost certainly see them fall into the hand(s) of low cost carriers, at least in part. Low cost carriers won’t use those slots to fly to Albany, NY non-stop.

They will be used by a Southwest Airlines to fly to someplace like Austin, TX.  Or, perhaps, JetBlue to fly to Denver.

Should the new carrier be allowed to keep all its slots at Reagan National?  I’m sure everyone in the airline industry would shout out “Yes!”.  Personally, I think that certain airports with Reagan National being a perfect example should not be dominated by one airline.  Greater access by other airlines at that airport would be more appropriate.

Why?  Because it isn’t all about the people who live in Washington D.C.  It’s also about the people who live in other cities who have that need to travel to Washington D.C.  A little more competition and a little less domination at airports would be preferable.

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