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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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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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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Congressmen have a well known fondness for Reagan National Airport in Washington, D.C.   They can work their 5 or 6 day week and catch a flight from this airport to home in short time.  The drive to Dulles can be very painful and particularly so towards the end of a week.

So Congress doesn’t want the merged airline of US Airways and American Airlines (aka American Airlines Group) to lose slots because of their merger.  The fear is that lost slots will result in lost routes to home states for Congressmen.

They aren’t wrong to fear this.  A divestiture of slots at Reagan National would almost certainly see them fall into the hand(s) of low cost carriers, at least in part. Low cost carriers won’t use those slots to fly to Albany, NY non-stop.

They will be used by a Southwest Airlines to fly to someplace like Austin, TX.  Or, perhaps, JetBlue to fly to Denver.

Should the new carrier be allowed to keep all its slots at Reagan National?  I’m sure everyone in the airline industry would shout out “Yes!”.  Personally, I think that certain airports with Reagan National being a perfect example should not be dominated by one airline.  Greater access by other airlines at that airport would be more appropriate.

Why?  Because it isn’t all about the people who live in Washington D.C.  It’s also about the people who live in other cities who have that need to travel to Washington D.C.  A little more competition and a little less domination at airports would be preferable.

Filed under: Airline Seating, Mergers and Bankruptcy by ajax
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The Teamsters are trying to gain the right to represent mechanics at both American Airlines and US Airways in separate campaigns. Today, they’ve presented signatures of, supposedly, more than 50% of the mechanics at American Airlines.

Meanwhile, the TWU and the IAM are agreeging to jointly love each other and represent groundworkers at the new merged airlines. But they’re both denouncing the Teamsters move to represent the mechanics.

American Airlines’ mechanics are currently represented by the TWU who are, according to some, perceived as not having done enough to preserve jobs.

It’s also notable that the Teamsters have taken some heavy losses in union elections of late.

What’s it all mean? It means that unions cannot actually get together and do a good job of both representing their membership, preserving jobs and working with an airline.

The impact will not be to American Airlines. It will come at the expense of union members. What union members are failing to realize is that they have limited amount of power and they are completely replaceable.

I would refer the mechanics to the mechanics of Northwest Airlines and their strike in 2005/2006.  Northwest Airlines was able to fly through the strike and while it was somewhat impacted, the airline survived nicely and got a settlement with the strikers that worked to their advantage.  At no time did the striking mechanics affect the airline in such a way that it became critical.

Some might dispute that.  I would point out that that strike lasted 15 months.  American Airlines (and US Airways) can find plenty of people to service their aircraft should the need arise.

The best thing that the TWU did for mechanics and others at American Airlines was that they did preserve jobs.  Far more than I would imagine possible.  They got their members a stake in the new company which will bring significant value to the table and they struck a deal that could be re-negotiated for better terms (and was) if someone else got a better deal.

If you can’t celebrate that and prefer shooting yourself in the foot, you deserve to be out of a job.

Filed under: Airline News, Mergers and Bankruptcy by ajax
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American Airlines and US Airways are working together on an integration plan presently under the direction of US Airways’ Robert Isom and American Airlines’ Beverly Goulet.  The timeline for consummating the deal is still some time in the 3rd quarter and that appears on track as the US Bankrtupcy Judge (Sean Lane) has now signed the papers approving the merger.

The next big leap will be governmental approval of the merger which almost all expect to be pro forma at this point.

Will the airline sing with one voice upon the merger completion?  No, that will take a while.  After the deal closing, the next big milestone will be a single operating certificate and that will take a while to get.  The two airlines have a pretty divergent fleet and harmonizing procedures and ensuring pilots from what are essentially 3 different groups are able to move forward as a single airline will take some time.

This merger integration will take a while and measuring it on speediness would be a mistake.  It’s important to get things done in a timely manner, it’s even more important to get the decisions made correctly.

Many of the decisions that must be made are the kind that could impact an airline for a decade or more.  Reservations systems stick with airlines for multiple decades, airplanes are a 20+ year asset and employees with institutional knowledge shouldn’t be driven away.

It will take time.

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It would appear that Rainn Wilson and several cast members of the TV show The Office (which I did know existed) got huffy when they arrived *late* to their flight from Philadelphia to Scranton.   Rainn Wilson decided to pitch a fit via Twitter, as actors are prone to do, and here is what he said:

• ‘So @USAirways just screwed me & half the cast of The Office. Conctng flight left BEFORE departure time. Sorry Scranton won’t see u til tom,’ 
• ‘The plane was a 20 seater, missing 7 people who had obviously just landed & it leaves 10 minutes EARLY!’
• ‘REALLY going to enjoy trying to cnvice’ his 3.5million followers ‘not to fly USAirWays to fly @USAirways b/c of their s****y service.’
• ‘Does the CEO of @USAirways want to join us? I will fondle him angrily,’
• ‘I’m going to take a dump on a @USAirways plane’s windshield. In the shape of the @Delta logo’

So, I am so relieved that Mr. Wilson was re-booked on another flight on US Airways because that massive delay and inconvenience due to he and his crew missing a flight scheduled for them by some nameless person who ought to have known better than to schedule a 40 minute connection in Philadelphia on a Friday night.

But, hey, how many times does Doug Parker get an offer to be fondled angrily?

• ‘Get out while you can. Go work at American,’

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US Airways has announced it will match United Airlines’ increase of $50 on ticket change fees. I find this unsurprising since US Airways tends to be very opportunistic with fees.  In fact, I would regard US Airways as the leader in developing fees and arguably one of the most successful airlines in implementing them.

Will this mean that American Airlines will adopt such a thing?  No, not necessarily.  Once the two airlines blend together, the analysis will ultimately be based on what’s best given the combined customers the new airline has.

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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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US Airways is, supposedly, being sued by two people who were flying as non-revenue passengers in first class for being asked to remove their hoodies and dress according to a dress code.

Why?  Because paying first class passengers were allowed to fly in hoodies.

It has long been common practice for airlines to enforce a dress code for those flying as non-revenue passengers.  Those dress codes are no longer nearly as strict as they used to be.  Today, “nice casual” or “business casual” is generally accepted even in First Class.

When I flew as non-revenue First Class passenger in the 1970’s, you wore a suit.  Period.  End of story.

The idea behind the dress code is not hard to understand.  You are expected to dress well to represent the company among paying passengers and so that you do not run the risk of drawing attention to yourself as a non-revenue passenger.  Paying passengers tend to resent people getting for free what they paid for.

Airlines vary some on what they’ll allow but I do not believe any US airline would permit hoodies and bluejeans in First Class by a non-revenue passenger.  (And if any airline would permit it, I would suggest they shouldn’t.)

Are dress codes wrong or class driven?

No, they’re not.  If you are flying as a non-revenue passenger, you are doing so on the courtesy of the airline.  They airline makes this privilege available to certain people as a benefit and a courtesy.  It is not a mandatory thing for them to supply and it really is a privilege.

So in return for not paying hundreds of dollars for your ticket, the airlines want you to dress appropriate, blend in well and represent the company appropriately.

They also want you to shut up about flying as a non-revenue passenger.  That is not for public consumption . . . ever.

And since these two jokers were on “buddy passes” which are tickets supplied by an employee of the airline, I can assure you that the employee who supplied them is mortified and no doubt started distancing themselves from these two creeps as soon as possible.  This is the kind of thing that gets one’s flight privileges lifted or suspended.

I feel bad for the US Airways employee who did these two jerks a favor and I hope this person is able to make it right with the company and their managers and retain their good name within the company.

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Keeping the new American Airlines re-branding should make sense at this point, right?  It is a fait accompli in the airline world.  There are a number of airplanes now painted in the new American Airlines livery and repainting aircraft costs a lot of money, right?

Well, maybe.

Doug Parker is responding to questions about the rebranding with a fairly non-committal answer that indicates that nothing is decided.  I would wager that Parker was annoyed, at the least, with the rebranding roll-out in January and especially so given how close the merger really was at that point.

Anything can happen and nothing likely will until Parker is in charge.  This is an example of exactly why I don’t think it’s a good idea that Tom Horton remain in place.  He rolled out that rebranding despite all he knew about the near certainty of a merger and that was disrespect for the merger and Parker.  That rollout could have waited.  Even if you needed to paint 777s, you could have waited.

Will it remain?  I kind of doubt it.  I think there will be a revision of it at the least and I think it will embody a replacement of the airline livery on the tail.  The billboard titles for American Airlines will remain and I think even the logo will remain but I think those tails will be changed and I think whatever replaces them will show a certain continuity for American Airlines history with a nod to US Airways.

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American Airlines lost $192 million in February and there is virtually nothing there to blame on the bankruptcy.  You can even see significant cost reductions where you would expect to see them.

And that’s the rub.  Costs are the 1st half of the equation.  If you don’t solve for the second half, you’re done.

That second half is revenues which do not reflect any work done in the last year to improve them.  To the contrary.

Once more, this is why I strongly believe that Doug Parker & Company are the right choice for leading the merged US Airways / American Airlines.  It’s also why I strongly believe that Tom Horton should be leaving when this merger deal closes.  This bankruptcy reorganization reflects emphasis on cost cutting only.

Anyone who believes the rebranding effort that was rolled out in January was an effort to improve revenues has got to look at the bigger picture.

A new aircraft livery and logo doesn’t attract customers.  And it’s the fallacy many “finance” people make.  Customers come to your business because you have a good or great service offering at a value oriented price.  Period.

And the US Airways team understands that.

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The bankruptcy court has approved the US Airways / American Airlines merger as of yesterday without approving the controversial Tom Horton Grand Compensation Plan.  This approval means that the two companies can continue progress towards putting together a complete reorganization plan that defines the merger in the exit from bankruptcy.

It’s well known that I disagree with a $20 million compensation plan for Tom Horton.  In fact, I think that Tom Horton remaining onboard as non-executive chairman is an equally bad idea.  It’s notable that despite Jeff Smisek’s strong personality, the United merger really didn’t get traction and coalesce until Glenn Tilton left the company as non-executive chairman.

Tom Horton has worked too hard to stay out front of this and claim it as his own success.  The news story he gave the Dallas Morning News as an execlusive was, in my opinion, offensive towards anyone else who had a hand in the merger and who came to the table with clean hands.

I think $20 million to lead a company for effectively 2 years (and let’s not forget that Mr. Horton has been receiving an exceptional base salary as CEO already) in which its successful exit from bankruptcy is facilitated by US Airways is way too excessive.

Pay the man $10 million, cash money, to leave upon the deal closing.  Even that is kind of blood money as it  amounts to $5 million / year cash money for 2 years of Chairman/CEO service.  That’s a great paycheck by any standard and certainly so for someone leading an enterprise that had fundamentally failled while under his CFO leadership.

Whether or not the $20 million package is legal or not doesn’t really concern me at this point.  If we’re upset about a $27 million house in London at the beginning of this bankruptcy, we should be pretty upset about a $20 million compensation package given to this CEO.

At least AA will realize a profit on the house.

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