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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American Airlines has taken delivery of its first A320 series aircraft and this is the start of a new era at American Airlines.

The A319 is the first of 260 aircraft ordered and is a “current” engine option A319.  The A319 aircraft will seat 128 passengers (8 in first class, 18 in economy plus and 102 in economy) and actually presents the start of a second era at American Airlines too.

It’s been a very long time since American Airlines had aircraft that seated so few passengers.  The last aircraft with a passenger count below that of the MD-82 was the Fokker 100 (88 seats and retired in 2004).

The A319 is counted as an MD-80 replacement in the AA fleet but I think differently.  I think it augments the airline’s fleet and offers opportunities for “thin” routes that AA has been neglecting for a while now.  The A319 may replace some MD-80’s but it will also change the opportunity equation considerably.

I have just one request for the airline:  Will someone please kill that horrific airline livery already?

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American Airlines had the exceptionally rare privilege of announcing a $220 million net profit for the 2nd quarter (American is calling it a $357 million profit excluding bankrtupcy costs.)

This is exceptional and it reflects all of the cost savings achieved through bankruptcy to date.  This number should even improve incrementally from a cost perspective for several years to come as the airline’s fleet is renewed more and capacity is grown with additional seats.

Is there  a “but”?  Yes, there is.

This is all due to cost savings, not revenue growth.  In fact, year over year, revenues for Q2 dropped ever so slightly.  While costs can drive this airline to profit, it will be revenue growth that drives this airline to real success.

Revenue growth will take from 1 to 4 years to really be perceived and I don’t expect this focus to take place until Parker & Company are officially in charge.

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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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There are many fans in the airline world who freely speculate on what would have happened if someone or something were different when it comes to their favorite airline.  I see this a great deal in the Braniff International world.

There are schools who believe that Braniff’s CEO Harding L. Lawrence ran that company into the ground singlehandedly.  Some believe that deregulation did the company in, some think it was American Airlines who struck at Braniff and some think that if Braniff had continued to be managed by its CEO Chuck Beard, it would be here today.

The big “What If” isn’t just with Braniff.  It’s with virtually every beloved airline that has disappeared.  What if the unions at Eastern had not gone nuclear with Frank Borman?  What if Pan Am hadn’t suffered an image problem from the Lockerbie 747 crash?

I want to talk about deregulation.  What if deregulation hadn’t happened?

Well, the truth is that that was never an option.  We think it might have been but it really wasn’t.  Regulation of the airline industry was inhibiting economic growth.  If it was not deregulated, you would have seen the United States a highly regulated environment playing against a highly deregulated environment that would exist in the rest of the world.  Want to know how ugly that would get?

Alitalia, Air India, Aerolineas Argentinas are 3 great examples of what the US airline industry would look like as a protected, regulated industry operating against deregulated airlines.

This country nor its airlines are in control of the changes that occur naturally throughout the world.  There is no altering the dynamic forces of change to fit the needs of an airline.

The truth is that deregulation hurt all US airlines.  Not a single US airline was prepared for deregulation.  Most airlines were led by people who had no concept of how to cope with deregulation.

Successful airline industry titans either left as the writing showed up on the wall or were violently ripped from their companies as they held on too long.   In Braniff International, Harding Lawrence bet heavily on deregulation being reversed and lost badly.  Continental’s Bob Six lost his entire airline because his company was poorly equipped in leadership for deregulation.  American Airlines’ Albert Casey made an orderly departure but only because he did have a leader equipped to deal with deregulation:  Robert Crandall.

Lest you believe that only legacy airlines were affected by this, let’s take a look at airlines such as the original LCC carriers.  People Express died being started and run by people who still thought that marketshare was king.  Air Florida:  Same thing.

There is just one major airline who survived deregulation and thrived ever since:  Southwest Airlines

Arguably the best prepared airline for deregulation since it started in a threatening and competitive environment and had to fight for its existence for the first 20 years of its life.  It started in an deregulated, intra-state environment and learned how to fight before moving out of state.

What if the leaders of legacy airlines were right and deregulation didn’t happen?  It’s a question premised on the idea that deregulation might not have happened.  That’s a false premise.  It did happen, it would have happened no matter what and timing was the only issue at hand and even that was somewhat predetermined to happen within 10 years or so of when it did happen.

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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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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.

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In a recurring theme of celebrating what didn’t happen, American Airlines CEO Tom Horton has celebrated that, once again, American Airlines has not made a profit.

This time in April.

So, what are they celebrating?  A fairly mild closure of the gap of losses year over year.  April 2012’s loss was $142 million ($67 million if reorg costs weren’t counted, but we do count them.)  This year, it’s down to $105 million ($39 million if you exclude reorganization charges and I don’t.)

Why do I count reorg charges?  Because in the airline world, something always happens.  In each financial reporting, an airline will mention that it had “one time” expenses.  The problem is that these one time expenses always happen, they are just different each time.

So, is this improvement?  Sure but we knew that was coming.  Remember the last 18 months?  AA has been massively reducing costs?  This is the natural outcome of reducing those costs.

The real nugget is in the revenue picture and I’ll point out that AA mentions that it’s revenues are down by $48 million compared to last year.  That is a problem.  And it’s a problem that many have pointed out over and over again.

No airline gets “fixed” by merely reducing costs and that is especially  true of American Airlines.

The time to celebrate is when costs are down, the fleet is renewed and revenues are up.

When will that happen?  I’d say about 2 to 3 years after Doug Parker and his team have taken over completely.

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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.

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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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American Airlines has started its first ever flight from Dallas / Fort Worth to Seoul, Korea and this is a bit of a big deal for the airline as it represents a completely new destination for the airline as opposed to a return to service.

Curiously, Dallas airline Braniff International offered service from Los Angeles to Seoul using its new 747-SP aircraft in the late 1970’s.  It was not possible to fly from DFW to Seoul non-stop at that time as even the long range 747 didn’t have quite the range necessary for such a flight.  It’s even more notable that Braniff failed on that route in a very bad way.

Load factors on those flights served to quicken the airline’s problems leading to bankruptcy.  At that time, South Korea was still governed primarily by the military and it was highly nationalistic in protecting its own airline, Korean Air Lines.  So the route award to Braniff was made to be very problematic for Braniff to operate an attractive flight to Seoul.

Had that flight been introduced 10 years later or 10 years and from DFW, it likely would have succeeded.  The ties between Korea and Dallas are signicant both in terms of residents of the DFW Area as well as in the telecom/electronics industries.

American Airlines should have every opportunity to succeed with this route and we applaud its development as it signals a desire to improve revenues and expand on opportunities to Asia from non-West Coast cities.

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Alaska Airlines is adding flights to hubs of its major partners from Portland, Oregon and I think this is long overdue.

Seattle has been Alaska Airlines’ “hub” but Portland, Oregon has always contributed a major portion of traffic to Alaska.

Since Delta’s pull back from Dallas / Fort Worth, there have been no non-stop flights between Portland and Dallas / Fort Worth.  That is American Airlines’ domain.

In addition, Delta “owns” all the flights between Portland and Atlanta.

Alaska Airlines will be able to provide the Alaska Airlines experience both to its own passengers as well as both AA and DL who codeshare with Alaska Airlines.  It’s a good fit all around and Portland has missed having such flights for a long time.

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Delta and American Airlines have matched US Airways and United Airlines with $200 domestic change fees for those who want to change their tickets.

We think this is a mistake on the part of all these airlines and an opportunity for non-traditional, non-network carriers.  What’s the opportunity?  The chance to court some business travelers.

We tend to think of the business traveler as this road warrior who is traveling by airline 4 days per week and . . . not so much.  The real business traveler travels barely enough to get real status in a frequent flier program and usually their status is so long that they do not get the upgrades they hope and pray for.

In fact, for most of those business travelers, it’s a back of the bus experience over and over again.

Southwest and JetBlue and others such as Alaska Airlines now have a greater opportunity to court businesses and their traveling employees by pointing out a lower “all in” cost to get where they need to go.

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There is quite a bit of talk about United’s sudden increase in change fees which see a rise from $150 to $200 for domestic flights.  Most see this as overreaching and they’re not wrong.

If we accept that we’ve entered the Era of the Fee in the airline industry (and I do), then we have to accept that fees will be charged for a variety of things.  To a degree, I see fees as being something that can be OK but which the airline industry does very poorly.

Watching airlines implement fees for services is one of the most painful things I can do as an observer to this industry.

Change fees, like baggage fees, are inconsistently implemented and the rationale behind those implementations seems . . . without real reason.  United is now charging $200 to change a ticket.  Let’s be clear, if you have a $300 ticket, you can change it for $200 plus the difference in fares.  This essentially renders your ticket useless in all but extreme cases.

My question would be is a $200 change fee a revenue driver or a behavior driver?  I suspect the latter.  It’s there to drive people to not change and not create chaos.  Sometimes I wonder if airlines wouldn’t be happiest in taking people’s money and just not having them travel.  Often it seems as if the objective isn’t to deliver a service but, rather, part people from their money without delivering  value.

If we’re going to go to fee based systems, I’ll buy in on a change fee.  But why not simply have that fee cover the cost of the transaction plus some small penalty?  $50 for a domestic ticket change seesms both reasonable and appropriate.  $100 for international trips.  Make that change easy, not hard.  Let’s these changes happen fluidly and everything will work out in the end.

These change fees are, in my opinion, drive by overly complex fare structures among airlines.  Airline fares are so complex and so diverse that they make the airline believe that the opportunity costs of a seat are hundreds of dollars more than they really are.

People say that those change fees help defer the money that the airline lost in not being able to sell that seat in advance to someone else.  Well, did they lost that opportunity?  Part of that opportunity presupposes that all airplanes are full when they depart.  They are not.  They are nearly full and I’ll grant that it can be hard to fit standby people on but as for paying passengers who want to buy a ticket, you can almost buy that seat if you want it.  It just might cost you a small fortune when you buy it at the last minute.

The airline also doesn’t notice that the person who buys a ticket 2 months in advance has given money to the airline that it can benefit from economically for 2 months before it incurs the bulk of the costs associated with that purchase.

Why do airlines want to drive behavior with fees?  Because they hate saying no to a customer.  With an exorbitant fee, they can say yes but charge a fee.  The problem with that is it is assumed that the customer loves this and they don’t.

In fact, I believe its fees like change fees and baggage fees that breed some of the biggest contempt felt towards airlines.  Customers aren’t stupid and they do know when they’re being gouged.  They may not have a choice on that flight but they know they can exercise choice the next time and they will.  Think I’m wrong?  Just look at how things have gone for United Airlines when they inconvenienced their customers and abused their good will.  Bookings went down, revenues evaporated and everyone noticed real quick.

United’s fee is exorbitant and insulting.  Unfortunately, United also cannot measure the ill will generated by this and compared it to the revenue it gains.

If you don’t like it, then vote with your money.  And for what it is worth, more and more I think that American Airlines’ decision to allow a customer to “insure” themselves against change fees with . . . a fee is pretty smart.  I don’t hand out compliments to them very often but I think they are trying to package real value for the customer on that front and that is better than most airlines right now on the subject of change fees.

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Bankruptcy Judge Sean Lane has disallowed the $20 million kiss for American Airlines CEO Tom Horton.  Horton was to receive roughly half in cash, half in stock as severance upon his departure from the new company (to be called American Airlines Group) formed after the merger.  His departure was scheduled for the first annual meeting to be held after the merger which most believed would be in May as has been tradition for American Airlines.

I vociferously disagreed with this severance payment.  So did a US bankruptcy trustee who argued that it violated federal governing such things in bankruptcies.  After review, Judge Lane offered that the idea that this was taking place post bankruptcy and therefore not entirely within purview of the court was a legal fiction.  I couldn’t agree more.

When you get a severance of that size, it should be for accomplishing something.  Based upon all that has come to light so far on the journey of both US Airways and American Airlines, Tom Horton didn’t have much to do with the success of this agreement.  In fact, if anyone really had much to do with getting the company into alignment with markets, it was Beverly Goulet, AA’s Chief Restructuring Officer.

Horton sought to delay, obfuscate and sabotage the merger at most every point.  He has made public arguments that he’s the superior CEO to Doug Parker in semi-veiled statements made to the press.  The problem with that is there is actually no evidence of what value Tom Horton has brought to the process in approximately 16 months.

Is it the atrocious livery that has been perpetrated on those aircraft?

Judge Lane has pointed out that when the new company is formed and has exited from bankruptcy, the new Board of Directors can vote on this severance.

I have long felt the current American Airlines Board of Directors has not governed the airline well for many years.  Like so many boards recently, it has seemingly given blanket endorsements to the CEOs without regard to assessing what leadership of the company has achieved and without determining if the course set by the leadership is a sound one.

But, man, they sure can vote bonuses well.

$20 million is too much for Tom Horton and what he brought to the table.  But if everyone truly thinks it is necessary, then I would suggest that the new Board vote on it and give it to him.

I would point out that Horton not only isn’t needed to make this new airline work, he’s not wanted.  This deal doesn’t need him.

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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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