As was inevitable, there are now public interest groups decrying a merger between US Airways and American Airlines as anti-competitive and bad for the consumer.  No surprise.

Industry consolidation has been good for airline profits and we definitely have seen airlines move towards a more sustainable business model as a result.  I would, however, credit capacity restraint for as much improvement in airline profits as anything else.  Frankly, all of the major airlines in the United States (with the exception of AA) have impressed me with their discipline in the marketplace.  It isn’t a discipline ever seen before and after 4 years, I think we’ve seen a transition to a truly different way of operating airlines.

That new model for operating as an airline includes looking at routes in the right manner, for once.  They are now being treated as “businesses” and evaluated individually for profitability.  In the old model, it was about market share at any cost.  The problem with market share at any cost is that it required unfettered, almost violent, competition between airlines on routes and found routes being operated at a substantial loss for years.  That has largely stopped now and I applaud the airlines for showing enough discipline over the last 4 years to make that stick.

Airlines also now seem to recognize that defending market share at any cost is a bad model as well.  Curiously, the one airline that seems to have continued to trouble itself with defending routes is American Airlines.  Until bankruptcy, the airline has “punished” intruders on its “turf” over and over again with high frequency, high capacity and extremely low fares to push out that intruder.

Finally, I think airlines have actually realized that providing a reasonable service experience is important again.  It’s not the service model of the 1970s or 1980s, no.  However, it also isn’t the embodiment of the idea that all a customer ever wants is a rock bottom price.  If price was truly the only key to winning on a route, Spirit Airlines and Allegiant would be exploding with growth never seen before.  They aren’t.  In fact, what we have seen is that broader offerings of service levels attract more revenue per seat and that’s what airlines need.

US Airways has, in many ways, been a leader in executing change to meet the new industry model.  It has figured out how to drive incremental revenue in ways that exceed most any other airline.  At the same time, they have steadily improved customer experiences across their lines both on and off the airplane.  They are now an airline that can be depended upon to deliver passengers to their destinations reliably and with their luggage.  Am I the only one to notice that US Airways is about the only legacy airline to not experience a major public embarrassment over customer treatment in recent times?

American Airlines is actually the antithesis of US Airways and has shown a strong reluctance to acknowledge the industry changes.  They’ve pursued market share, they’ve defended routes at all costs, they’ve been more price driven than any other legacy airline and many LCC airlines.  They have not upgraded or improved their cabin experiences in any significant way since the 1980s.   Their website drives customers away or at least angers customers.  Their aircraft are old, inefficient, and painful to fly.

The SuperLegacies, United and Delta, have done quite a bit to improve everything across the board and one thing that AA hasn’t done:  evaluated routes for profitability on  a regular basis.  Furthermore, UA and Delta now see opportunity on routes that have traditionally been owned by American Airlines.  They’ve even overwhelmed cities where American Airlines was once a major presence and a dominant player (NYC, Wash D.C., Chicago, Los Angeles).

SuperLegacies are now evaluating competitors routes and going after those routes which are yielding major revenue.  Delta and United both are targeting both AA and US Airways as well as holding their own against airlines such as JetBlue and Southwest Airlines.

Yes, American Airlines and US Airways need each other.  American’s operations need US Airways executives who know how to methodically fix operations in a lean manner.  US Airways needs American’s hubs and routes to build much better network yield.  Yes, US Airways can exist quite nicely as a stand-alone airline.  It cannot expect to rise to the scale of the SuperLegacies and compete both domestically and internationally over the long term without a merger.

A combined US Airways / AA company nominally looks like the biggest airline in the world once complete.  That won’t necessarily be true.  There will be consolidation and rationalization between the two airlines  but the entity will be a member of the SuperLegacy group and it will have the potential to compete in the market on a level playing field.  That’s all they can ask for.

3 SuperLegacy airlines, Southwest (who doesn’t quite fit into any category now), and a smaller stable of LCC carriers looks about right for the modern competitive landscape.  At this point, I actually think we will see increased competition over the long term among the Big 4 and that will be good for the consumer.  We will not, however, see that increased competition until there is a Big 4 and until those airlines have time to settle their operations in the new competitive landscape.  If the US Airways / AA merger were consummated by the end of 2013, I would expect a rational and highly competitive marketplace to be fully emerged by 2017/2018.

If there is an area where I see reduced competition in the US, it’s among the LCC carriers (and doesn’t include SWA).   I think the narrowed gap in costs and differences in revenue models between the LCC carriers and SuperLegacies removes the best business argument for an LCC carrier.  It will be a struggle for those carriers in the future and we do need them.  On the other hand, if a relatively new LCC carrier with rock bottom costs can’t compete against SuperLegacies, the market place has done its job.

So, no, I do not think the proposed US Airways / American Airlines merger is wrong.

Filed under: Airline Service by ajax