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.

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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.

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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.

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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.

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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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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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There are news reports that Republic Holdings has entered into negotiations with third party to sell Frontier Airlines.  Frontier, as it exists today, is made up of Frontier Airlines as bought by Republic as well as Midwest Airlines also purchased by Republic.

The two purchases were an attempt by Republic CEO to diversity his company.  That attempt was arguably quite unsuccessful.

I never sensed that Republic knew what to do with both Frontier and Midwest.  There seemed to be a lack of ideas on how to make these airlines rev up and win for Republic and even basic marketing seemed to defeat them.

When Frontier was for sale, Republic bested Southwest Airlines in price for the airline and that never once felt very smart to me.  In hindsight, I think Southwest likely bid appropriately and when it lost, it did the right thing in walking away and looking for other opportunities.

Who is the buyer this time?  Who knows.  I would speculate that it could be an Ultra Low Cost Carrier such as Allegiant or Spirit and that wouldn’t necessarily be a bad thing.

It could be a mainstream airline but the only one I would learn towards in jetBlue.  It certainly isn’t going to be Virgin America although I’ve long harb0red the idea that jetBlue combined with Virgin America and Frontier Airlines c0uld, at once, become an airline that spanned the United States and even might win big.  But I appear to be the only one who thinks that.

Would Southwest buy the airline?  No, I don’t think so.  Frontier doesn’t offer opportunities that it offered several years ago.  Southwest is a very different airline today with very different needs.

Could it be any of the other legacy airlines?  US Airways?  American Airlines?  No, no way.  United Airlines?  No, that airline is too busy with solving its own problems.  Delta Airlines?  I don’t know why given that Delta has Frontier bracketed in all markets already.

The truth is that I don’t even see jetBlue as a big contender.  That airline has been stuck in a rut for several years and nothing has changed in its operations to make me think they are looking for a risky purchase.

I think Frontier is going to go to Allegiant Airlines.  Spirit Airlines has too much good organic growth going on today but Allegiant is looking to adopt the A320 series aircraft and Frontier offers some opportunities that are complementary more to Allegiant than Spirit.

Time will tell but I don’t see Frontier lasting very much longer as an independent airline.  It’s be sold or liquidate at this point and the reasons to buy that airline wane more each day.

Update:  (The above post was written on Monday, 7/29/2013 and scheduled)  There is some new information that investors and directors currently associated with Spirit Airlines are the buyers for Frontier.  These directors are William A. Franke and John R. Wilson.  Franke is the current Chairman of the Board for Spirit (Ben Baldanza is President & CEO) and John Wilson is a director whose term ends in 2014.

Bill Franke is a former Chairman and CEO of America West and current managing partner of Indigo Partners (a major investor of Spirit) and John Wilson is a principle at Indigo Partners with a background in finance at several airlines including America West Airlines.

Indigo is selling its shares in Spirit Airlines asap and these two are withdrawing from the board asap.  Do the math.  I was wrong, this isn’t Allegiant buying Frontier.

But . . . while Spirit Airlines and Allegiant Air are doing great as Ultra Low Cost Carriers . . . how many ULCC airlines can the US handle?  Frontier has a management team that has been positioning it as another ULCC (not very successfully in my opinion) and continuing that direction leaves me wondering why would you bother?

ULCCs aren’t stimulating more air travel at this point.  Their robbing some low hanging fruit from other airlines on routes that have high fares.  ULCCs don’t attract the attention of the SuperLegacy airlines because they don’t put frequencies up against the SuperLegacy airlines on routes.

Only time will tell but it does look like Indigo Partners will become the new owners of Frontier.

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Southwest Airlines posted a $224 million profit last week for their 2nd quarter and guess what?

That’s actually down from last year.  Not terribly so but it is down.

By any observation, Southwest is flying with record passenger loads and increasing their revenue regularly.

So why are profits down?

I have a sneaky feeling that Southwest is suffering operationally.  From my own anecdotal observation over the past few years, this airline seems to find it very hard to get an airplane ready to depart on time now.  The planes are flying nearly 100% full on major routes and that presents problems that Southwest, as an airline, isn’t designed to handle well.

I even wonder if Southwest’s staffing for its operations is adequate to the current job.

And I wonder more and more if Southwest is making the AirTran merger become another version of its IT problems.  In other words:  Is this a problem that Southwest isn’t solving?

Speedier integrations into one system allow everyone to start marching to the same drummer faster.  Marching to the same drummer, even if you do it sloppily at first, is better than being in a disconnect.

An airline that takes several years to solve IT problems, merger problems and even labor problems is not an airline that is behaving “agile” and it isn’t setting itself up to succeed.

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Here are a few newsworthy items about US Airways, American Airlines and even their merger with comments:

US Airways earns record 2Q profit

US Airways has earned a pre-tax profit of $409 million excluding net special items to rack up its most profitable 2nd quarter result ever.  People can talk about how US Airways has done this on having low costs but that completely ignores something that stands out here in bold, bright letters:  These guys know how to drive revenue with an inferior network, aircraft, service model and they do it over and over and over again.

Yes, that’s who we want in charge of American Airlines Group.

The EU is going to clear the US Airways / American Airlines merger

The European Union is set to give its approval to the merger of the two airlines contingent on the Philadelphia and London route being handed over to someone else.  I continue to believe that this may not be enough for US regulators at this time.  This is a very small “give” for this merger and control of routes into London Heathrow from the United States between American Airlines Group and British Airways will be . . . stunning.

It’s time to wrap up voting in the AA Bankrtupcy

Creditors and other stakeholders cast their final votes on 7/29 and after a count is known, it must be submitted to bankruptcy judge Sean Lane in New York City who will hold a hearing on 8/15 to give approval to the merger.

Part of me expects that we will hear from US regulators about their approval of this merger on or before that date.

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US Airways and American Airlines have indicated a willingness to give up a London Heathrow – Philadelphia slot pair to a competitor to facilitate their merger approval by EU authorities.

This isn’t entirely unexpected but it also reflects on US/AA being very strategic in what they’re offering up.  Such a slot pair offers little in the way of competition for the combined airline no matter who gets the pair.  No other airline is as dominant at PHL as the combined unit.

The only US based airlines flying to Europe from Philadelphia today are US Airways and Delta.  (British Airways and Lufthansa also fly European routes).  Delta’s flight to Paris is seasonal.

I think that the EU and the US DoJ will want a London Heathrow slot pair to be given up but I think they’ll ask for it to be on a route such as New York – London.  Not only will they consider what the combined airline will have in routes to London Heathrow but they’ll consider the trans-Atlantic codeshare partners of American Airlines too.

British Airways flies to US Airways hubs from London quite a bit.

I think the deal will be made but I think that Philadelphia will be a non-starter.  I put my money on Delta taking up a route and using it in concert with Virgin Atlantic.

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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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United Airlines has reported a 1st quarter loss of $417 million which is almost 60% of United Airlines’ 2012 total year loss of $723 million.

Yes, in the first quarter of 2013, United Airlines has lost 57% of the total losses for 2012.  For those keeping score, we have still got 3 more quarters to go.

There is runway for United Airlines to make this up.  I don’t think they will.  Not this year.  United isn’t running on all cylinders, not yet anyway and I see nothing to signal a dramatic change in their approach to earning money.  CEO Jeff Smisek points to a slightly improved operational record and while it is true, it isn’t the answer.

United has lost a lot of high paying customers and it isn’t earning enough revenue and it needs a strategy that reverses that course.

I’m now in the position of wondering if Jeff Smisek was the right CEO for this integration.  One thing that stands out:  Smisek isn’t very prominent in leading this airline.  Other Continental leaders were far more prominent and stood out in front with their employees.  I get the sense that Smisek is more like United leaders who hide in a tall building hoping problems might go away.  It’s his perception to change.

Maybe they should interview Tom Horton.

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US airways has announced a $55 million profit (excluding special items, etc) vs American Airlines’ $8 million profit (excluding special items) and that’s coming from an inferior network and an airline that is roughly 1/3 the size of American Airlines.

This is great for US Airways, great affirmation for the team that will run the new American Airlines and I do wonder when these folks will get this merger done.  My best guess is October but they’ll suitably impress me if they get it consummated by September.

This merger integration will be fascinating to watch in comparison to the Delta/Northwest and Continental/United mergers.  US Airways CEO Doug Parker and his team all have merger integration experience but none have experience with the scale that the new airline will possess.  It will be hard for them to balance the pull of the AA insitutionalization with the attraction to adopting the US Airways Way.

What I most look forward to is seeing the new airline about 18 months after the merger deal is closed.  I want to see how the AA network is reorganized and made to work by the US Airways team and Robert Isom in particular.

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