Pay cuts are the hot point for the American Airlines unions and particularly so for the APFA (flight attendants union). The section 1113 hearings will move to abrogate those current contracts and unilaterally impose terms but that doesn’t mean the unions just have to unilaterally shut up and do nothing either.
American Airlines will still have a flight attendants union and will still be subject to NLRB (National Labor Relations Board) and the Railway Labor Act. In short, it still has to negotiate a lasting contract with the union and the union still can ultimately resort to labor actions against the airline. All the Section 1113 hearings do is potentially kick the can down the street for a few years more.
If the pay cuts are significant (and they almost certainly will be) and affect differential pay in particular, at what point do flight attendants just leave the business? It doesn’t happen very often today because seniority drives people to hang on. Seniority equals higher pay. Some flight attendants out there in the world did see the writing on the wall when it came to legacy airlines and jumped ship to other airlines such as JetBlue to start fresh and build a new career at a new airline. Some just left the industry altogether but those are few and far between in general.
But at what paycut do we see AA flight attendants seek work elsewhere? The interesting thing to me is that when flight attendants do leave the business, they generally move on to more financially rewarding jobs, not less rewarding. Granted, the economy today isn’t friendly to the idea of shopping for a new career. On the other hand, people are hiring and people are getting hired and there are plenty of jobs out there that could offer as much or more financial reward and quite possibly a better quality of life.
What also may be missed in this is that there is more incentive to jump ship for the junior flight attendants than the senior flight attendants. Retaining high paid, senior flight attendants doesn’t exactly help an airline much and that is particularly true for American Airlines.
Ryanair has launched another takeover bid for Aer Lingus offering a 50% premium over the current share value in the marketplace. Its previous bid was shutdown by the European Union on anti-competitive grounds. Etihad has expressed some interest and now Turkish Airlines is pondering an acquisition as well.
Oddly enough, no major airline group seems that interested in Aer Lingus. No other major European airline other than Ryanair seems interested. It’s down to scrappy outsiders who want a piece of the airline.
This is because the government owns a major stake in the airline and between it and Ryanair, there is a majority control issue. You can’t control Aer Lingus without one or the other selling their stake. Neither of those two parties is interested in selling their stake to someone that can either A) harm the Irish government politically or B) impact the competitiveness of the Irish airline industry. Or both (Ryanair).
I think much is made about the Irish government selling its stake and I agree that the current government is sending louder signals than most but at the end of the day, I don’t think Aer Lingus is getting sold or merged into any other airline.
I think Ryanair is interested in Aer Lingus from a long haul perspective and it provides growth in an area where Ryanair has not so far moved into. With such an acquisition, it gains not only the equipment but the know-how needed to execute a long haul international strategy.
Politically speaking, the Irish government has much to fear when it comes to politically fallout from such a sale. The airline is heavily unionized and those unions carry power when it comes to local politics in Ireland. Given the size of Ireland, all politics is local. Jobs are important in an economy that has been impacted by the Euro crisis, debt and a lack of economic growth.
An ANA 767 landed hard enough in Tokyo to bend the fuselage severely resulting in serious fuselage wrinkling forward of the wing. I suspect we’ve identified the next 767-300 to be retired from ANA’s fleet. Here is the video:
Southwest Airlines and Airtran mechanics have agreed upon a new deal and found a way to merge seniority satisfactorily. I wrote about this in February when Southwest mechanics derailed the last agreed upon deal. At that time, how seniority would be handled within the airline in general as well as in Atlanta was the primary issue.
Getting a new deal agreed upon and accepted since then is fast work by all those involved. I suspect that Southwest was able to alleviate some of the concerns involved with its moves into new aircraft and international flying. SWA has likely been able to find a way to ensure that all parties maintain some parity in their seniority and their quality of life is preserved.
Not every deal has been made the first time around in union integration in this merger but every deal has been done fairly swiftly compared to most any other merger.
Doug Parker of US Airways came to the DFW area with AA union leaders in tow to do media interviews in both Dallas and Fort Worth and make the case for a merger between US Airways and American Airlines. I have to believe that American Airlines executives would have liked to have arranged for his plane into DFW to be diverted.
So far, AA hasn’t reached any agreements with either the pilots or flight attendants. The pilots refused to send the last and best offer to its membership and we’re not surprised whatsoever. At the end of the day, even with the contracts abrogated, AA *still* has to come to terms with its unions and it’s doing a very poor job of that. Even the bankruptcy judge has pointed out that both parties will be stuck with each other.
There is a perception in these struggles that unions are always about more money. It is often portrayed as more, More, MORE on the part of airline unions and the thing is . . . it isn’t true. More money is rarely the true issue with employees.
We hear over and over again that more money doesn’t make for a more happy employee or a more productive employee. It’s quality of life that does so. The secret to Southwest’s success with its employees and productivity isn’t the high wages (although they are very high), it’s the cooperation that exists between company and unions that provides high quality of life.
Furthermore, employees really do want to see their companies succeed. Company success provides more stability than anything else for employees. So when American Airlines union leaders start talking about how they recognize that concessions will be fairly drastic no matter what the bankruptcy outcome and that their chief focus is now on company viability, don’t go thinking that is a smokescreen.
It isn’t. American’s biggest problem with its labor is not money. It’s a loss of confidence. That loss of confidence didn’t happen over night and it didn’t happen accidentally. There is little leadership at AA and that has been true since Gerard Arpey took over many years ago. AA executives are very, very good at managing certain aspects of an airline. They manage finances and fleets very well. They can apply the science in running an airline with the best of people out there.
What they haven’t been able to do is inspire employees and bring about both revolutionary and evolutionary change. They haven’t been able to get their labor to start marching together and working together to compete. That’s leadership and leadership isn’t accomplished by cutting management ranks and consolidating responsibilities. It’s about finding one Great CEO who then has to find many great managers to execute a vision and leadership.
Believe it or not, US Airways and Doug Parker do this. They do it despite big problems with their pilots and flight attendants. Despite the bickering that exists in those two labor groups alone, they still operate an airline that has improved its quality in every area and dramatically so. They get employees to cooperate and to excel at their jobs. Look at the fantastic job done in cleaning up the problems in Philadelphia, for instance.
AA unions see that and recognize what’s been lacking in their own company for a long time: leadership.
QANTAS is moving from 4 flights / week to daily flights in its DFW to Australia operations. QANTAS flies non-stop from Sydney to Dallas and non-stop from Dallas to Brisbane with follow on service to Sydney using the Boeing 747-400ER aircraft it has. Previously, it’s been reported that QANTAS load factors have typically exceeded 85% and that the flights have, at times, been load limited or range limited as a result of both passenger and cargo demand.
In other words, this route is *really* succeeding for QANTAS and is attracting a lot of American Airlines network feed. Most felt that this route would go to daily service fairly quickly and it has after about a year of service. My prediction is that the next step will be to add an A380 to the route. Think I’m crazy? I’m not.
The 3 class 747-400ER carries 364 passengers and travels the route at the very limit of its range. 85% load factor for that aircraft translates into about 310 passengers. If the aircraft is being load or range limited with those load factors, it sounds as if there is more demand than can be supplied by the 747-400ER. An A380 can supply 450 seats, ample cargo capacity and has more than ample range to fly DFW-SYD and SYD-DFW without being load limited or range limited at all. 310 passengers equates to 69% load factor for the Airbus A380. If QANTAS continues to stimulate demand and work well with AA making DFW a gateway city to Australia (which is very attractive to east coast residents), an A380 absolutely could be justified as the next step.
Remember the JetBlue flight where the captain had to be locked out of his own cabin due to unstable behavior on his part? The aircraft diverted to Amarillo, the captain was hospitalized and the passengers were accommodated with another flight crew and compensated for their inconvenience. Well, a group of those passengers is now suing JetBlue because they were “in fear for their lives” during the episode.
No doubt it was a tense and even scary moment in some respects. Unpleasant at the least and inconveniencing as well.
But a lawsuit here is just silly. Fear alone and fear that lasts a short time and fear from an event that had a good and successful outcome isn’t justification for suing an airline for millions. I wouldn’t question the fear but I do strongly question just how much fear one experiences when the airplane stays in control and the misbehaving captain is corralled and controlled in fairly short time? It’s not good, it’s not ideal but let’s face the facts: It wasn’t the worst situation that could happen either. Try a landing on a short runway in rain with a 20 knot crosswind component.
Shame on the passengers for their agreeing to be a part of this lawsuit. This is acting like a child rather than adult on their part.
The APFA and its leader, Laura Glading, are pointing at greed on the part of American Airlines CEO Tom Horton for the reason a standalone exit from bankruptcy is being pursued. I generally find the APFA to be a bit over the top and militant in their communications and they tend to follow the model of making it personal with company executives.
But even a militant organization finds a valid argument now and then. Past CEOs of airlines exiting bankruptcy have seen huge rewards from the stock they hold. Both Doug Steenland and Glenn Tilton received tens of millions of dollars. So has Delta CEO Richard Anderson. It’s a lucrative position to be in.
APFA aren’t wrong that its to the benefit of Tom Horton and his executive team to see that kind of exit. The market valuation of AA is liable to raise their rewards dramatically. It might not be “greed” but there is a huge financial incentive.
And I do think that kind of financial rewards clouds the thinking of such teams when it comes to finding an appropriate exit from bankruptcy that BENEFITS SHAREHOLDERS.
US Airways CEO Doug Parker made a more detailed case for the US Airways / American Airlines merger they are pursuing at the annual US Airways shareholders meeting. Parker is in the position of having to denigrate the airline he wants to merge with somewhat in that he has to make a case that the stand-alone approach doesn’t bring profitability while the merger approach does.
Parker argues that the two airlines together can compete globally whereas the without US Airways, American Airlines doesn’t quite get there. The problem with that viewpoint is that he’s arguing scale at various point while also saying that US Airways doesn’t *need* a merger partner to continue its profitability. So why can’t American Airlines survive without US Airways?
The answer is that the two airlines both face long term profitability risk when facing Delta and United in the marketplace. US Airways *does* need a merger partner just as badly as American Airlines does. US Airways brings an executive team, a profitable operation and network that is complementary to American Airlines. AA brings scale to the table.
The labor issues still linger out there and while they aren’t as rosy as Parker makes them out to be for such a combined airline, they also aren’t as bad as some make them out to be as well. One thing US Airways has proven is that you can run a profitable airline with a fractured labor force. They’ve done it.
Labor unions, particularly pilots and flight attendants, have got to realize that their ability to survive is predicated on accepting new models of flying at the airlines. Preserving jobs is one mandate and that’s understandable. But all unions are going to have to accept the idea that preserving those jobs may require flying on smaller aircraft at vastly lower pay scales.
AA may do US Airways a favor in getting the labor contracts thrown out in court. If a merger goes through, a new contract could take several years to get negotiated into place while new, lower terms are imposed upon the unions which save the airlines money until that new contract is agreed upon. If the unions wants to realize salary improvements, they’ll have to cede some ground on productivity, health benefits and retirement funding. The sooner they do so, the sooner they realize real gains in overall compensation and particularly so on the US Airways side.
On a related note, the USAPA (US Airways pilots union) is now expressing moderated concern about a merger from their point of view. This isn’t surprising since AA pilots would dominate a combined airline from both a seniority and numbers perspective.
American Airlines has announced direct, non-stop service from Miami to Asuncion, Paraguay with 4 flights per week starting in mid-November. Here is the kicker: These flights will be on AA 757 aircraft.
The distance between the two cities is just a bit over 3800 nautical miles and within the service range of the 757 but I suspect there will be a bit of planning done for non-scheduled fuel stops as a “just in case”.
While the flights are interesting and fit within the capabilities of the 757, I suspect these will not be pleasant, comfortable flights for those in economy class. It will be close to a 10 hour flight on a narrow body aircraft and American’s 757s aren’t well known for being a newer bunch of aircraft. The interiors and seating haven’t been refreshed in some time. First/Business class should be comfortable but I wouldn’t expect much from the back of the aircraft.
A few weeks ago, American Airlines conceded publicly that it would examine all options for exiting bankruptcy rather than just the stand-alone approach it had been evangelizing up to that point. This was due primarily to the campaign for merger that US Airways has been engaged in and the unsecured creditors committee desire to see all options reviewed.
Since that time, there have been quite a few indicators that American Airlines simply paid lip service to the court of public opinion without actually engaging in the act of reviewing merger potential. PlaneBuzz made mention of an internal town hall put on with CEO Tom Horton and the view that Horton isn’t acknowledging that a merger decision or any decision on AA’s exit from bankruptcy lies really at the hands of the bankruptcy judge and the unsecured creditors committee. In short: Once you’re in the bankruptcy court, your control over your destiny is very limited.
In addition, AA has proceeded in its talks with unions with the clear intent to win its Section 1113 motions to abrogate the union contracts. What I mean is that they haven’t made progress with the unions although I’ll concede that they have so far managed to engage the pilots enough that they are returning to the negotiation table. However, they largely went through the motions with the unions by all accounts.
CEO Tom Horton was in Beijing for the IATA conference and was quoted by Bloomberg saying: “We’re very focused on restructuring independently,” Horton said. “That has to be our focus now and anything else for the time being is a distraction.”
The problem with these developments is that the UCC (Unsecured Creditors Committee) for this bankruptcy is the one that forced AA to publicly acknowledge that it will examine all options and statements and actions like those on Horton’s part speak loudly to so far ignoring the wishes of the UCC.
And it’s notable that a large part of the UCC is made up of AA unions. The bankruptcy judge has made it clear that even if union contracts are dissolved, American Airlines still has to do a deal with the unions and unions still have to get a new contract in place. His message is that the two parties better start figuring out how to make things work under the legal framework that will continue to exist or both sides are in trouble with respect to a successful outcome. US Airways having top level agreements in place with AA unions shows at least a willingness to get a deal done that hasn’t existed at AA in more than a decade.
I will note that American Airlines does seem to be trying hard to come to terms with others on the UCC to kick the legs out from underneath US Airways. They have managed to come to terms with HP over terminating HP’s development of AA’s new passengers service system that was to be called JetStream. New IT VP leader Maya Leibman has now indicated an AA preference for buying a new system off-the-shelf and adapting AA business practices to the system rather than building a one-off system to meet the business practices of AA. That isn’t exactly the wrong direction at this point. There is less risk involved and it at most brings AA at the level of Delta and United.
HP has plenty of horsepower to offer in passenger reservations anyway. It operates the SHARES system already, for instance, and that is the one that United adopted from Continental.
But how do other creditors view advantageous terms being agreed upon with key members of the UCC? What is a union response to another UCC member getting a quick resolution vs their own membership? And can AA pull off a similar deal with Boeing and Airbus that keeps those orders on the books and Boeing happy as a member of the UCC? Maybe. Then again, maybe US Airways waves a follow on order for more Boeing aircraft to replace aging Airbus equipment? You never know.
At the end of it all, one doesn’t sense that AA has done anything to explore other options that involve mergers. To the contrary, one senses that they have retrenched and gone about their own ideas of what to do without regard to the opinions and desires of creditors. When a big majority of your creditors are your own employees who are already angry at your actions against them, there comes a time to pay attention and I don’t think any leadership at AA is paying attention.
Periodically it’s fun for mainstream media to hype the Chinese threat to Boeing and Airbus in the coming years. Irresponsible people point to the homegrown aircraft the ARJ-21 and the coming Comac C919 as evidence of this.
There are a few problems with this. First, the ARJ-21 really isn’t quite 100% homegrown. It is a regional jet based on tooling that China had from its assembly of the MD-90 aircraft. It’s wing was designed by Antonov and it’s cabin cross section, nose and tail are identifical to the DC-9 series.
Second, this aircraft hasn’t proven all that ready for real use. The wing designed failed stress testing thus limiting flight test envelopes at the direction of the Chinese Civil Aviation Authority. There are some reports that this jet is not particularly light for the mission conceived of for it and it isn’t being designed to be exactly a leap ahead of existing regional jets that not only do the job as well or better but which have far superior support in the world (Embraer E Jets and Bombardier C-700/900/1000).
It’s likely that the ARJ-21 will enter into service and find itself wholly irrelevant.
The same fate is likely for the Comac 919. This is a paper aircraft conceived as a competitor to the Airbus A320 series and Boeing 737 series aircraft. The C919 will use a CFM LeapX engine and is targeted to have a range that is significantly less than current Airbus and Boeing models have much less the new A320NEO and 737MAX aircraft. I already smell trouble here.
Comac is using technologies from avionics companies and engine manufacturers but lacks experience at integration and production that make such an airliner possible on a commercial basis. In many respects, for such an airliner to gain credibility in the marketplace, it almost has to be better than A320NEO and 737MAX offerings and it isn’t. Not on paper and certainly not in real world performance. It’s sub-par in every way.
The belief that a superior price will win over airlines is wrong. That superior price is unlikely to be less than what aircraft manufacturers are already offering airlines making large orders and price is only one component of acquisition. Other things involved are its cost to operate, cost to maintain and support from the manufacturer. The Comac 919 is not going to meet or beat either Airbus or Boeing in these areas.
So why would any airline buy such an aircraft? Because the Chinese government told them to, that’s why. It has orders but they come from Chinese airlines and in exceptionally small quantities.
Until China takes on a project that it can achieve integration and competitive operating economics on, it won’t learn how to build a major airliner. The idea that a chinese competitor arrives in the market place even in 2020 is silly. At this point, one could use a crystal ball and guess. My guess is that it is 2030 or beyond and by that point we’ll see Boeing and Airbus offering hyper-efficient new airliners that raise the stakes even higher. 2030 seems a long way off but it is only 18 years away. Look how long it took Airbus to gain marketplace traction with its product line under what were arguably far superior conditions compared to Comac’s. When you do, even 2030 seems awfully optimistic. It could happen but I, personally, wouldn’t bet money on it.
The Oneworld alliance has designated SriLankan Airlines to become a member of the Oneworld alliance. The statement talks about this happening in 18 months but it is safe to say that that is likely to take a bit longer as integration into the alliance typically takes considerable effort on the candidate members’ part.
SriLankan Airlines is a good fit with Oneworld despite its small size. It currently serves a great majority of Oneworld hubs and focus cities. SriLankan has flights to hubs such as London, Singapore, Tokyo, Frankfurt, Dubai, Delhi, Hong Kong, Rome, Moscow, Dublin, Athens, Paris and Brussels. All of which are served more than adequately by Oneworld partners and most have dominant Oneworld airlines operating from them.
What’s in it for Oneworld? For one, it adds Sri Lanka to the map and that’s an area experiencing exceptional growth since peace settled on the country. It also provides connecting service to destinations in the region such as the Maldives and southern India. Colombo, Sri Lanka is potentially an excellent connecting point for partners airlines to use as a stopping point for flights from Australia to the Middle East and/or Europe.
It’s good for Oneworld but I’m waiting for American Airlines to start blowing its horn about this being a fundamental part of their revenue strategy with codeshare partners. If that happens, I’m laughing.
Air India and Boeing have come to an agreement on compensation for 787 delays allowing first delivery of a 787 to proceed to Air India. Air India has been making noise about compensation since 2008 and has often floated a number approaching $1 Billion.
The big driver in Air India’s push for compensation is its own horrific management. One could do 4 or 5 blog posts on that alone. The Indian government hasn’t pushed for a rational operation and the integration of the two airlines, Air India and Indian Airlines. Right now, the airline has a too many constituent groups fighting for the work and the entire company is overstaffed by the tens of thousands. No one in India wants to anger constituent groups such as pilots unions as the political implications stretch far beyond just the airline itself.
Furthermore, the Indian government has pursued trade policies that are hostile towards foreign companies in an attempt to gain all the economic benefit it can from these companies and often in an internationally unfair manner.
Playing hardball with Boeing was a mistake, however. The aircraft that Air India ordered are too easily sold to others clamoring for the 787. Ironically, Boeing could probably sell these aircraft for more than the sale price to Air India. Boeing could afford to take the long view despite the problems that it has experienced with the 787 and production.
Air India needs these aircraft. They will serve routes in a fuel efficient manner and help “right size” the company. It inevitably was going to have to figure out how to pay for these aircraft and get them into service. They are not, however, the magic bullet for Air India’s problems. We’ll talk about that in another blog post in the future.
American Airlines and the Allied Pilots Association extended their mediated talks in bankruptcy court yesterday and that has made everyone perk up as to what is going. My bet is that these talks were extended at the encouragement of the judge overseeing them rather than either party being truly close to an agreement.
That said, if an agreement were to be reached, it would be a big blow to US Airway’s merger plans, I think.
Deal’s aren’t always all about numbers. Sometimes psychology plays a part and if AA were to get the APA on board with its plans, it would be a psychological blow to those advocating for a merger.
In its execution of the new, better plan for increasing revenue, American Airlines has announced a new codeshare partner for international flying. American plans to begin codeshares with Air Tahiti Nui on flights between Los Angeles and Tahiti (Air Tahiti Nui) and between Los Angeles and 15 destinations in the United States (American Airlines). American has said for 6 months that it would increase its partnerships to enhance revenue and network opportunities in its system.
If you detect sarcasm in the above paragraph, you’re right.
To paraphrase a certain financial analyst at JP Morgan Chase: Is that all you’ve got, American?
Ryanair owns a significant stake in Irish airline Aer Lingus and Ryanair CEO Michael O’Leary has made no secret of his desire to take over Aer Lingus and merge it into Ryanair. Ryanair’s hostile takeover bid was rebuffed 5 years ago but it retains a 25% stake in Aer Lingus to date.
British fair trading authorities have initiated an investigation into Ryanair’s Aer Lingus holdings and has questioned whether this is in the best interest of competition on routes between Ireland and the United Kingdom. In light of the fact that IAG was permitted to buy BMI and fold its operations into British Airways, I am somewhat suspicious of the UK’s interest in Ryanair.
The truth is that Ryanair is a lightening rod for controversy and Michael O’Leary makes it hard to ignore the airline. Ryanair’s holdings in Aer Lingus are a bit odd but, in my opinion, have actually forced Aer Lingus to behave more like a private airline which has only benefited the consumer. A merger between the two airlines seems a bit weird to me, however. The cultures between the two airlines aren’t compatible nor are the fleets at this point. Additionally, Ryanair has no real experience in operating an airline with long haul routes.
The UK is likely making Ryanair a focus of attention because of its bad boy antics in the UK and across Europe. It’s an airline that continues to make far more money than most european airlines and a thorn in the side of many governments. Europe isn’t above spanking such bad boys from time to time but that is all it is, a spanking.
I doubt that Ryanair would be forced to divest its holdings in Aer Lingus but I also doubt that anyone will permit it to merge with Aer Lingus either. Ireland’s government holds a larger stake in Aer Lingus and it has been most schizophrenic in its treatment of the airline by signaling a desire to see it privatized and at the same time holding on to its ownership stake like a valued family keepsake. If anything, the Irish Government has done more harm to Aer Lingus and the consumer than Ryanair could even be accused of.
Brazilian airline Azul, founded by David Neeleman (JetBlue founder), has decided to merge with another Brazilian low cost, secondary market airline Trip. Neeleman describes the merger as adding 4 years of Azul growth at a stroke.
Both airlines are serving the same kinds of markets from the same hub using the same aircraft. Azul currently has Embraer E-190 and E-195 jets as well as ATR turboprops. Trip has E-175 and E-190 jets as well as ATR turboprops. In other words, fleets fit well together and route structures work well together.
This isn’t a complementary merger. Expect serious route harmonization with freed up assets deployed to new routes. Some routes will see increased frequencies or larger aircraft deployed to accommodate harmonized routes.
With this merger, the two airlines will become the third largest Brazilian airline and one that upon completion could give some serious competition to other Brazilian airlines such as TAM and GOL. With the strength that this new airline will have in secondary markets, one wonders just how long it will be before Azul contemplates purchase of new, larger aircraft such as the A320 or 737.
Growth after this merger is consummated will likely come from using larger aircraft and flying more routes to mainline cities. That will require a larger airliner and one that Brazil doesn’t make to date. Furthermore, the success of Azul makes one wonder when destinations outside of Brazil will be contemplated.
It’s a strong merger and one that makes complete sense even when considering Neeleman’s desire to grow organically and on his own terms.
US Airways is approaching its desire to merge with American Airlines with much more strategic thought than its past attempts to merge. Their argument was made first with labor agreements with AA unions and now they’re talking about cost synergies.
There is a bit of optimistic in US Airways discussions. They present the rosy picture that is quite attractive. However, it’s no more rosy than the arguments that got made in other mergers over the past few years.
Synergies are available and they will occur. They never show up as fast as expected and complexities always drive change in those synergies after a merger has been made. That doesn’t mean they aren’t real and it doesn’t mean you can’t count on them. They are and you can.
This feels like phase 2 in the merger argument. First labor, second costs and I think we’ll next see an argument made on revenue opportunities.
Revenue improvements are what those who know the airline industry want to see in American Airlines. Costs are important but everyone knows those can get fixed in this bankruptcy. But without revenue improvements, AA’s bankruptcy won’t succeed.
Capacity restraint and a fairly stagnant airline market make analysts concerned that AA’s current plan for revenue growth is going to spur fights among airlines for market share. They’re not wrong. American Airlines wants to move more heavily into international flying and that means competing more heavily against Delta and United on destinations where AA is not only the underdog but finds itself in the position of having to fight for enough market share to fill an airplane enough to get a toe hold. That toe hold is going to come on the basis of price and significant drops in prices mean significant drops in revenue for all airlines involved.
One reason I like the US Airways / AA merger idea is that US Airways is strong in two regional areas of the United States where AA is weak. The southwest United States (not Texas, Texas is its own area) and the Southeast United States. US Airways offers an attractive hub in Phoenix that can serve Asia/Pacific destinations, South America and the entire West Coast of the United States.
Charlotte, North Carolina offers an entry into the Southeast that AA has never had. American does point to Miami in this argument but Miami is far more a “gateway city” than a hub. Charlotte isn’t Atlanta but it does offer convenient connections to the entire Southeast and that’s something AA doesn’t have today.
American has strength in the middle of the United States with Chicago (where it isn’t competing so well against United) and Dallas / Fort Worth. It has decent gateway city/focus cities in Los Angeles, Miami and New York City. Let’s not call them hubs because they aren’t being operated in quite that manner. AA’s core strengths are exactly in the areas where US Airways is weakest. That’s a good thing.
Philadelphia works well with AA’s focus in the Washington DC area and AA’s focus in Washington DC augments US Airways dominance as well. In fact, so well that I suspect that divesting slots in the DC area will be required before a merger takes place. In addition, US Airways has managed to compete effectively enough against Southwest Airlines in this part of the country and I think any management team that can do that deserves strong credit.
This is far from over. I still think we may hear a real merger announcement this month. The pressure is on AA and it isn’t going away. Their Section 1113 motions in court to break the union contracts only garnered them more unpopularity both in the public and within the industry. No one sees their moves with their union labor as being particularly good for a bankruptcy exit.
There is a story making the rounds that US Airways and TPG may partner in a merger/acquisition of American Airlines and it’s got some legs. Some seem surprised by this and some seem impressed by this. I’m neither surprised nor impressed. It just makes sense.
US Airways probably could muster the cash necessary to buy off certain creditors and probably could use some of that rather large cash reserve that American Airlines is holding on to in order to pay off people too. But why not spread the risk?
TPG isn’t adverse to the airline world. It’s made good (and bad) investments in airlines and unlike most, has generally done very, very well. It’s Chairman, David Bonderman, continues to sit as non-executive Chairman and shareholder of Ryanair in Ireland. These guys know the airline business.
So why not partner up with them? This is a company that could provide excellent finance advice, access to relatively cheap capital and who doesn’t need to be educated on what makes a good airline. That’s just smart, good business.
