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.

Filed under: Airline News by ajax