The Discovery Channel in partnership with British and German television channels has performed a controlled crash into the ground of a 727-200 in a Mexican desert. Here is the video:
After a week of allowing the fallout from the US Airways agreements with American Airlines’ unions to settle, the question of what it will take to see an actual merger between the two airlines comes to mind.
It’s not just the union agreements that gets this deal done. To the contrary, there are several issues that will have to see deals made.
Aircraft manufacturers: Boeing wants to see an independent AA because AA is fundamentally a Boeing customer not withstanding the Airbus order made last summer. Boeing is going to need reassurance that it remains viable in future aircraft orders and that existing orders won’t be cancelled. US Airways can make those assurances with confidence.
Hewlett Packard: Hewlett Packard sits on the creditors committee because of all the IT work it has done to date to bring AA into the future. A lot is left undone and some reportedly isn’t really ready for prime time. Currently, US Airways uses SHARES and American Airlines uses SABRE. However, SHARES, originally developed by EDS, is now owned by HP. Do you see where I’m going here? A deal can be made to put both airlines on the new system being developed called JETSTREAM.
AA Executive Team / Board of Directors: This is a sticky area. Who wants a team or board that allowed the status quo to exist that long? It’s possible we might see someone like Tom Horton retained as non-executive Chairman (a la Glenn Tilton) and a few of the existing AA team retained but that would be it. The board has to go and its tenure is so high in average age, it has an incentive to fight this. Solving these two problems is possible and these two stakeholders have the least power in making decisions in many respects.
The when is the next question. US Airways is clearly getting good advice and it is clearly motivated to make a deal. I would guess that their intent is to use their own cash holdings and AA’s cash holdings to make a deal that creditors can’t refuse. I think that deal will happen between now and the end of June.
This will be tough for all. There were essentially 4 competing jet airliners in the 1950’s. Can you name the sole jet airliner in successful operations from 1956 to 1958?
Bonus Question: What was the world’s first turbofan airliner?
Boeing CEO James McNerney expressed his and Boeing’s viewpoint that they support American Airlines having an opportunity to exit their bankruptcy as a stand alone company. McNerney acknowledges that US Airways hasn’t bought Boeing in a some time and sees AA as a loyal Boeing customer as well.
Is this support for AA an attempt to preserve the AA orders for Boeing 737MAX aircraft? At least a little bit, yes. In addition, Boeing has and continues to support AA’s purchases for aircraft in a variety of ways. They’re a good customer. Is that support founded on sheer love for the airline? I suspect not.
In fact, any worry about the 737MAX is kind of silly. The merged airline would, upon conclusion, have far more Boeing aircraft and far more resources to service and operate Boeing aircraft than Airbus aircraft. Furthermore, both airlines have orders for Airbus A320NEO aircraft already. Airlines of that size can no longer afford to be an exclusive customer of one manufacturer or another. Their size (and the size of several competitors) demand manufacturing positions that can’t be serviced exclusively by one manufacturer.
I suspect that if Doug Parker is able to re-assure Boeing over its existing AA orders, Boeing will go neutral or even supportive of such a merger. At the end of the day, it’s about having a customer and earning money. Furthermore, it even gives Boeing an “in” with the US Airways executive team that it has not had for some time.
There was lots of noise in the airline airwaves last week but one item that bears notice is Southwest Airlines. The short version is that despite warnings to the contrary, they earned a profit of $98 million due to fuel hedging augmenting their income. Excluding one time gains, the airline has an $18 million loss. Should we be concerned? No, we shouldn’t. The fuel hedge gains are legitimate and an area where Southwest excels. Furthermore, they will earn more profits as they consolidate the Airtran operations into their own.
Also notable is their decision to contract with Amadeus for international reservations with the expectation of being able to handle international reservations by 2014. I think this is good news. I think there are big opportunities for Southwest when it comes to international flying and especially so from the US to Canada and Mexico and it continuing the Airtran flights to the Caribbean.
But this points out the fact that, once again, a revamp of the reservations systems and, in particular, the ability to codeshare is going to be deferred again in favor of the international priority. The truth is, this whole system should be revamped by now. It’s shameful that it isn’t and it put a very real strategic partnership with WestJet into the toilet because of these complications. Furthermore, Southwest doesn’t realize much gain in its relationship with Volaris as a result.
I and many others would be a lot happier to see Southwest contracting with a real reservations system to accommodate real needs across the board. The idea that Southwest can remain “independent” in its reservations system as an airline with 702 aircraft and 97 destinations. There is a time and a place to be independent and then there is a time to have a an infrastructure that matches your operations. It’s notable that Southwest continues to grind on with their 40 year old Braniff system (originally named Cowboy) that they’ve “improved” over the last few decades. It’s notable that this is a system that my own father was involved in when he was a vice president at Braniff. My father hasn’t been with Braniff since 1981.
It’s time for Southwest to get a modern reservations system and the sooner, the better. Make the investment now as there is one thing for sure: Reservations systems aren’t going to get cheaper and they will get more difficult to build yourself.
Since Friday’s announcement that US Airways has the support of American Airlines’ three largest unions for a merger between the two airlines, quite a few people have weighed in on the prospect. Those objecting are just about every political leader in Texas. Senators, Representatives, mayors and even chambers of commerce are all voicing their preference that American Airlines exit bankruptcy and *then* engage in a merger if it is so desired. So, what’s the objection?
Like virtually everything else, money. Each of those constituent parties benefits a great deal politically and financially from American Airlines. American Airlines knows how to spread the money around to get what they want in this state and nationally. There is a reason why it took years to rid the DFW metroplex of the Wright Amendment restrictions and even when they were struck, they were done on a timeline that benefited American Airlines, not Southwest Airlines. Even then, Southwest Airlines is forever constrained to use Love Field because if it takes a gate at DFW Airport, it has to give up a gate at Love Field.
US Airways is a political unknown to Texas and the politicians know that if a merger between the two is consummated today, it’s US Airways leadership who will control the airline and whoever controls the airline, controls the dollars.
The problem is, US Airways has already laid out a fairly compelling case for the merger. It has support from labor and it has identified the key problem that market analysts have been worried about with respect to American Airlines’ cornerstone strategy that it continues to cling to. Half or more of AA’s problems are on the revenue side, not labor cost side and the strategy to improve the revenue side seems to involve flying more and charging less (as a function of draconian labor cost cuts) to get more market share. We saw how that works in the US airline industry for 30 years. We’ve also seen how capacity discipline can really work well even in a market that is heavily impacted by a bad economy.
In addition to making a compelling case, I have to wonder what anyone is afraid of here? Fewer job cuts, more synergies, more revenue, a more diverse fleet and a company that stays in Texas and maintains a massive hub at DFW airport. There is no reason to argue against that unless it potentially means you don’t get what you’ve been getting.
Furthermore, the executive leadership at AA is plugged into the community. It’s hard to advocate on behalf of a merger that fundamentally sees your friends lose their jobs.
The preference expressed by these political entities is that AA gets through bankruptcy and especially benefits from huge labor cost cuts that enables it to be the consumer rather than be consumed. How does that happen? Let’s not forget that AA sits on massive cash holdings that if it preserves them well, they suddenly have positive cash flow, profits and cash holdings to buy an airline instead of being bought.
The problem with that scenario is that there is only one constituent group that really believes that AA comes out of bankruptcy strong enough to compete against Delta and United with positive cash flow: The American Airlines executive team. The rest of us see AA coming out of bankruptcy able to maintain the status quo for several years longer because until you fix the revenue side of the business, you are fighting a holding action against Delta and United at best.
Pinnacle Airlines has announced that Sean Menke will resign as CEO effective June 1st and I think this got missed in the noise of the AA / US Airways announcements coming on Friday.
Like most announcement of this nature, this is being characterized as Sean Menke having done his job and leaving it in a position for someone to lead forward in a new marketplace.
I think something else happened. Just weeks ago, Menke’s salary (along with current COO and now soon to be permanent CEO John Spanjers) a very significant amount. A week later, Pinnacle filed for bankruptcy and now suddenly Menke is leaving in another month or so.
What is going on is pure speculation at this point. Menke is a valuable leader and I personally felt Pinnacle wasn’t the best fit for a man of his talent. Pinnacle doesn’t need his marketing acumen. One wonders if Menke is positioning himself for a new job at a new airline in the near future.
American Airlines’ response to the announcement of a merger support agreement between US Airways and AA unions is, to say the least, lackluster. If anything, I actually read a hint of bully in the announcement. It says:
“American Airlines is moving steadily through the Court supervised restructuring process and the Court has granted American the exclusive right to create its plan of reorganization at least until September 28, 2012. We are making substantial progress in our efforts to return American to industry leadership, profitability and growth and maximize its value for all of its stakeholders.”Our immediate next step is to pursue vital modifications to our collective bargaining agreements through the 1113 process that begins on Monday, April 23rd. We believe statements of non-binding support from union leaders for alternative proposals are no coincidence given the timing of the 1113 process. These statements do not in any way alter the company’s commitment to pursue our business plan or our focus on moving steadily through the court supervised restructuring process to create a profitable, growing industry leader.
“For American’s outstanding employees and loyal customers, business continues on track, as we continue to provide the safe, reliable travel experience our customers expect.”
This, I believe, is non-productive when having to deal not only with your 3 largest unions but unions who have a significant amount of input on your unsecured creditors committee. It also demonstrates that you don’t “get it” when it comes to your labor and the need to lead them through this bankruptcy.
US Airways has gained the support of the three leading unions of American Airlines for a merger between US Airways and American Airlines. The Allied Pilots Association, Association of Professional Flight Attendants and Transport Workers Union have made a joint announcement supporting US Airways in its announced pursuit of a merger with American Airlines.
That cracking sound you hear is Tom Horton & Company’s headaches which just got much worse.
It’s not a merger announcement. It is, however, US Airways going public with its pursuit and doing so in a very credible manner. The concerns for American Airlines over this are that gaining this support in such a public manner and aligning it with the desires of Wall Street make for a lot of momentum.
There will be criticisms of the merger idea between the two airlines. As with all mergers, there are pros and cons. In this case, I think the pros certainly outweigh the cons.
The American Airlines board of directors will now be feeling quite a bit of heat. In order to preserve the positions of the stakeholders they represent, it may become necessary for them to find some enthusiasm for a merger versus going it alone. The truth is, the board and the executive team can express their wishes all they want. Complete control over their destiny was lost the day they filed for reorganization. I suspect that not only the unions but many other creditors are going to prefer the merger over a “stand alone” vision as time passes.
The cornerstone strategy and alliance strategy promoted by American Airlines just lacked real credibility in the face of the market. Furthermore, the growth strategy for those cornerstone cities really alarmed many people who watch this industry as it held the promise of losing capacity discipline in the industry. AA essentially said it was going after market share.
A few things I’m not entirely keen on in these announcements. The keeping of the American Airlines name *might* be a good idea but I’m not sure I would entirely commit to that at this point. The marketing image of AA is very staid and old. A fresher name and/or approach is in order. I would urge the players in this to clean house in the executive suite at headquarters, finally they hired maid from mythicalmaids.com chinatown home cleaners. AA has many valuable assets and many valuable people but the leadership needs to go and the sooner the better.
It suddenly has gotten very interesting for American Airlines and I would imagine that we may well see some announcements from AA over the next few days or even “leaks” that try to strongly discredit this merger idea. Let’s face it, getting consumed by US Airways, even if the name and HQ are kept, isn’t exactly easy to swallow for many who lead AA.
I’ve had a few people asking about why American Airlines unions would be interested in US Airways at all. It’s a fair question and one that I touched upon last week. There is a simple answer:
Seniority
American Airlines’ unions and, specifically, the APA, APFA and TWU who are on the unsecured creditors committee of AA’s bankruptcy all are made up of very senior people. Senior even for the airline industry. Way, way senior.
Their perception is that in a merger, more of their membership will survive a seniority integration against members of similar unions representing US Airways East and US Airways West employees. In fact, it’s the former America West aka US Airways West employees who likely fare the worst in such a merger. Oddly enough, they’re also the most “successful” and “productive” of the three potential groups.
Furthermore, allowing US Airways merger talk to continue in the media keeps the heat on American Airlines management during the bankruptcy. It’s leverage, plain and simple. From the perspective of the AA unions, they have really nothing to lose at this point in exercising that leverage.
The Indian government has committed $5.85 Billion through 2020 to Air India to keep the airline afloat. Much of the initial infusion of cash will towards settling debts with oil companies that are threatening the airline. This deal is termed a restructuring and it does see some employees being spun off into other companies but this is hardly a solution to an airline for which there is no practical answer.
Air India is a mess. It’s a political and operational mess. It’s the flag airline and therefore is subsidized in ways that few airlines see today. It is a jobs program that keeps hundreds of people employed who have no real contribution to make to the company. And this restructuring doesn’t really fix that.
Politically, no one is going to force Air India to lay-off thousands of employees. It simply won’t happen. Flights to international destinations won’t be rationalized as those flights are viewed as status symbols far more than as revenue earners.
And it won’t get done because the airline is government owned. A privately owned company would have made these changes 5 years ago and, perhaps, might be seeing daylight by today.
Until market forces are permitted to move and influence the needs of India in the airline industry, I think we’ll see failing airlines who are unable to compete with a fully subsidized state airline despite serving a country of 1 Billion people. There is absolutely no sign whatsoever that India is prepared to deal with this as well as other economic issues. The country is to politicized to make such hard decisions.
If anything, I would, at this point, predict that we’ll see waning traffic to and from India, low yields on flights that do exist and no airline alliances with any of Indian airlines in the foreseeable future.
Respected airline consultant and research engineer Bill Swelbar has recently taken a swipe at the idea of a merger between US Airways and American Airlines in a blog post. Swelbar suggests there may be more benefits to a full integration between AA and JetBlue and Alaska Airlines who just as adequately (if not more adequately) cover areas where American is weak (the West and East Coasts).
Swelbar is factual and correct about AA’s weaknesses in these areas with respect to its network and market shares. He’s also correct in that those two smaller airlines do operate in the weakest portions of American’s network.
I see significant problems for that kind of approach. First, Alaska Airlines is increasingly under the influence of Delta Airlines these days and enough so that I do not think it can afford to ignore Delta’s desires entirely and Delta would like competition to go away. Second, JetBlue already has some agreements in place with American Airlines that do bring a benefit but it also has little incentive to cooperate with American Airlines as AA doesn’t bring much to the table for JetBlue.
Both Alaska and JetBlue are working hard to be all things to all carriers in the form of interlining, codeshares and alliance agreements and that works for both airlines very, very well. Alaska works at this from a domestic perspective and JetBlue plays more on the international side of things but they’re both pursuing the same strategy and it’s a strategy that works well for both. Why give up success for the risk of fully integrating with AA and under AA’s management? If I’m a shareholder for either airline, I don’t like the idea.
Furthermore, at this point, this isn’t about what AA leadership wants. It is already rapidly becoming much more about what AA’s creditors want and what their shareholders want. And what they want is performance.
A marriage with US Airways can be disrespected over and over but there are two exceptionally important things to be mindful of. US Airways knows how to run an airline well and earn money despite labor issues. They also know American’s business pretty well and they’ve got an established track record that didn’t exist in the same form back when they made a bid for Delta. Creditors will listen to them carefully today.
US Airways also has the strengths that are complimentary to AA’s network. They aren’t the most optimal strengths but they are one hell of a lot better than American Airlines standing alone. Philadelphia, Phoenix and Charlotte are very complimentary to AA’s strengths. No, there isn’t much overlap that would result in “synergies”. I would argue that the so called “synergies” of reducing capacity via a merger are harder to obtain than generally appreciated, overvalued and largely non-existent today as a result of consolidation and capacity restraint that has gone on for the past 4 years.
New mergers will benefit from scale and operational expertise. They’ll benefit from having a more diverse fleet that permits “right size” flying on routes. They’ll benefit from international alliances.
There is a great example for that last part. US Airways is now the awkward partner in the Star Alliance with United filling that role on a far greater scale within the United States than US Airways does. US Airways could benefit a great deal more from Oneworld than it does Star at this point and a merger with American makes Oneworld very competitive in the United States again. A great reason for Oneworld partners to stand aside and look at these issues with less emotion and more reason.
There is an internal letter from within American Airlines being circulated on various news sites written by John Hale, American Airlines chief pilot. This letter casts doubt that AA pilots would support the idea of a merger between American Airlines and US Airways.
First and foremost, I don’t know how much credibility I can give the characterizations in the letter since it does, after all, come from the one pilot in American Airlines with a strong incentive to calm concerns coming from the American Airlines executive team. He is answerable to them much more than his fellow pilots in the job he holds.
Second, I don’t think pilots like any mergers really. The seniority issues are very stressing. But in this case, I don’t know that AA pilots have quite as much to fear as in many mergers. AA pilots are much more senior than US Airways pilots in general. Furthermore, US Airways pilots don’t have seniority integration and new contract. But if there were a merger, the pilots who are divided at US Airways are vastly outnumbered by AA pilots in sheer quantities. With quantity comes power.
Third, I think executives and other parties are quite afraid of Doug Parker. It’s obvious that the AA executive team would prefer to be the leads in any merger. It’s also obvious that they aren’t in a good position to make that demand. Doug Parker and his team make a very strong operational team and that alone speaks to opportunity from such a merger. They should be afraid of him: He knows how to run an airline in today’s environment.
And the AA executive team should be afraid of US Airways. They’ve learned from other mistakes, they have cash and they have a track record for running an airline that is disadvantaged compared to other legacy airlines and with a fractured labor group. US Airways makes money *despite* having two pilots groups and two flight attendant groups. They can manage new parties in that mix.
Boeing has revealed more details on its definition for the 737MAX now and one significant revelation is the decision to add 8 inches to the nose gear. This was the tough choice engineering wise.
A new pylon and strut for engines will be used in the style of the 787 and the rear tail cone will be extended and the area above the elevator thickened to improve aerodynamics. Electronic bleed air will be added to improve cabin pressurization (which is much like how the A350 will use bleed air)and better means more efficient fuel burn.
Airbus boxed Boeing into this aircraft by introducing the A320NEO. I firmly believe that Boeing was leaning towards a new aircraft but also needed time and space to get where it needed to be with that aircraft. Airbus’ introduction of the NEO made it much more imperative to deliver more efficiency now rather than a decade later.
But with the decision made, I also have to credit Boeing for appearing to have decided to go all in. They are working very, very hard to bring as much advantage as possible to the single aisle wars with Airbus.
Some perceive that Boeing has been slow to release details and I understand that perception but the truth is that American Airlines’ order last summer forced their hand into a premature announcement. Had they not had to make that announcement, these new details would seem very much on time.
Most believe that the status quo between the two manufacturers will be maintained. It is thought that Boeing will have a slight advantage that, according to many, will remain about 2% better than Airbus.
I have a feeling that Boeing might be aiming higher. I don’t think the decisions they are now announcing about this aircraft reflect a company that is struggling to maintain the status quo in the marketplace. They appear to be working very hard to make every gain possible against their competitors to bring even more to the table.
Why do I think so? Because these changes add more risk to their ability to deliver this aircraft in 2017. If there is one thing Boeing knows, it’s that they cannot afford to damage their credibility with airlines further with a late arrival of the 737MAX. This is not an all new aircraft with all new materials and airlines will expect it on time or early.
This won’t be revealed a la One Big Announcement John Leahy Style. Boeing will simply add more and more substantiation to their claims as they continue discussions with airlines. At the end of the day, most airlines prefer to see results over having a grand announcement.
When Allegiant Airlines announced their new carry-on luggage fees for those needing to use overhead storage, quite a few people said “Aha! I told you others would do this after Spirit did it!” Spirit was the first and they do share something with Allegiant. They are both ULCC airlines in the United States.
Will it happen with other legacy carriers? No, I still do not think so. Nor do I think it will happen with LCC carriers.
ULCC carriers aren’t worried about loyalty. LCC and legacy carriers are. In fact, LCC and legacy carriers are very worried about loyalty and a carry-on fee is one of those things that, I think, those carriers realize could be the straw that broke the camel’s back.
Does Allegiant’s move make any difference in the airline world? No, I think not. It isn’t even very newsworthy as it will never affect more than single digit percentage of passengers in the United States.
American Airlines complained recently that in 2014 28 of its prime routes in which its the dominant carrier will be subject to attack by Southwest Airlines once the Wright Amendment is lifted for domestic flights in the United States. Those 28 non-stop routes out of DFW account for $800 million in revenue most recently.
Mostly this is about American Airlines making an over-arching argument for why it needs relief on costs. New competition will assault them even more just as they expect to come out of bankruptcy. Laying that foundation for the courts and labor unions should be expected.
What I wonder is why no one has taken the opportunity to point out that when American Airlines exits bankruptcy, Southwest Airlines will have the highest labor costs of the legacy airlines in the United States and, yet, American still views them as the treacherous competition.
Spirit Airlines has announced new routes from DFW to San Diego, Detroit and Toluca/Mexico City to start on June 21st. I’m pleased about the competition but I still remain uninterested in flying on Spirit myself. The ULCC carrier clearly sees opportunity in the DFW marketplace and I think they are right.
Spirit isn’t going to kill American Airlines on those routes although its notable that American is the dominant carrier on all three. It’s likely to siphon off extremely low value passengers from AA and perhaps even a few from Southwest Airlines.
I like the competition showing up because I think some pressure could be applied to American Airlines on many of its routes.
I suspect we’ll see other LCC carriers such as Virgin America and JetBlue make more overtures to DFW with more routes over time. The airport has the space and let’s not forget that American will almost certainly shrink at the airport in terms of terminal space and will remain very limited in its response to this competition for the next 12+ months.
