American Airlines’ response to the announcement of a merger support agreement between US Airways and AA unions is, to say the least, lackluster.  If anything, I actually read a hint of bully in the announcement.  It says:

“American Airlines is moving steadily through the Court supervised restructuring process and the Court has granted American the exclusive right to create its plan of reorganization at least until September 28, 2012. We are making substantial progress in our efforts to return American to industry leadership, profitability and growth and maximize its value for all of its stakeholders.”Our immediate next step is to pursue vital modifications to our collective bargaining agreements through the 1113 process that begins on Monday, April 23rd. We believe statements of non-binding support from union leaders for alternative proposals are no coincidence given the timing of the 1113 process. These statements do not in any way alter the company’s commitment to pursue our business plan or our focus on moving steadily through the court supervised restructuring process to create a profitable, growing industry leader.

“For American’s outstanding employees and loyal customers, business continues on track, as we continue to provide the safe, reliable travel experience our customers expect.”

This, I believe, is non-productive when having to deal not only with your 3 largest unions but unions who have a significant amount of input on your unsecured creditors committee.  It also demonstrates that you don’t “get it” when it comes to your labor and the need to lead them through this bankruptcy.

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US Airways has gained the support of the three leading unions of American Airlines for a merger between US Airways and American Airlines.  The Allied Pilots Association, Association of Professional Flight Attendants and Transport Workers Union have made a joint announcement supporting US Airways in its announced pursuit of a merger with American Airlines.

That cracking sound you hear is Tom Horton & Company’s headaches which just got much worse.

It’s not a merger announcement.  It is, however, US Airways going public with its pursuit and doing so in a very credible manner.  The concerns for American Airlines over this are that gaining this support in such a public manner and aligning it with the desires of Wall Street make for a lot of momentum.

There will be criticisms of the merger idea between the two airlines.  As with all mergers, there are pros and cons.  In this case, I think the pros certainly outweigh the cons.

The American Airlines board of directors will now be feeling quite a bit of heat.  In order to preserve the positions of the stakeholders they represent, it may become necessary for them to find some enthusiasm for a merger versus going it alone.   The truth is, the board and the executive team can express their wishes all they want.  Complete control over their destiny was lost the day they filed for reorganization.  I suspect that not only the unions but many other creditors are going to prefer the merger over a “stand alone” vision as time passes.

The cornerstone strategy and alliance strategy promoted by American Airlines just lacked real credibility in the face of the market.  Furthermore, the growth strategy for those cornerstone cities really alarmed many people who watch this industry as it held the promise of losing capacity discipline in the industry.  AA essentially said it was going after market share.

A few things I’m not entirely keen on in these announcements.  The keeping of the American Airlines name *might* be a good idea but I’m not sure I would entirely commit to that at this point.  The marketing image of AA is very staid and old.  A fresher name and/or approach is in order.   I would urge the players in this to clean house in the executive suite at headquarters, finally they hired maid from mythicalmaids.com chinatown home cleaners. AA has many valuable assets and many valuable people but the leadership needs to go and the sooner the better.

It suddenly has gotten very interesting for American Airlines and I would imagine that we may well see some announcements from AA over the next few days or even “leaks” that try to strongly discredit this merger idea.  Let’s face it, getting consumed by US Airways, even if the name and HQ are kept, isn’t exactly easy to swallow for many who lead AA.

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I’ve had a few people asking about why American Airlines unions would be interested in US Airways at all.  It’s a fair question and one that I touched upon last week.   There is a simple answer:

Seniority

American Airlines’ unions and, specifically, the APA, APFA and TWU who are on the unsecured creditors committee of AA’s bankruptcy all are made up of very senior people.  Senior even for the airline industry.  Way, way senior.

Their perception is that in a merger, more of their membership will survive a seniority integration against members of similar unions representing US Airways East and US Airways West employees.  In fact, it’s the former America West aka US Airways West employees who likely fare the worst in such a merger.  Oddly enough, they’re also the most “successful” and “productive” of the three potential groups.

Furthermore, allowing US Airways merger talk to continue in the media keeps the heat on American Airlines management during the bankruptcy.  It’s leverage, plain and simple.   From the perspective of the AA unions, they have really nothing to lose at this point in exercising that leverage.

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Respected airline consultant and research engineer Bill Swelbar has recently taken a swipe at the idea of a merger between US Airways and American Airlines in a blog post.  Swelbar suggests there may be more benefits to a full integration between AA and JetBlue and Alaska Airlines who just as adequately (if not more adequately) cover areas where American is weak (the West and East Coasts).

Swelbar is factual and correct about AA’s weaknesses in these areas with respect to its network and market shares.  He’s also correct in that those two smaller airlines do operate in the weakest portions of American’s network.

I see significant problems for that kind of approach.  First, Alaska Airlines is increasingly under the influence of Delta Airlines these days and enough so that I do not think it can afford to ignore Delta’s desires entirely and Delta would like competition to go away.  Second, JetBlue already has some agreements in place with American Airlines that do bring a benefit but it also has little incentive to cooperate with American Airlines as AA doesn’t bring much to the table for JetBlue.

Both Alaska and JetBlue are working hard to be all things to all carriers in the form of interlining, codeshares and alliance agreements and that works for both airlines very, very well.  Alaska works at this from a domestic perspective and JetBlue plays more on the international side of things but they’re both pursuing the same strategy and it’s a strategy that works well for both.  Why give up success for the risk of fully integrating with AA and under AA’s management?  If I’m a shareholder for either airline, I don’t like the idea.

Furthermore, at this point, this isn’t about what AA leadership wants.  It is already rapidly becoming much more about what AA’s creditors want and what their shareholders want.  And what they want is performance.

A marriage with US Airways can be disrespected over and over but there are two exceptionally important things to be mindful of.  US Airways knows how to run an airline well and earn money despite labor issues.  They also know American’s business pretty well and they’ve got an established track record that didn’t exist in the same form back when they made a bid for Delta.  Creditors will listen to them carefully today.

US Airways also has the strengths that are complimentary to AA’s network.  They aren’t the most optimal strengths but they are one hell of a lot better than American Airlines standing alone.  Philadelphia, Phoenix and Charlotte are very complimentary to AA’s strengths.  No, there isn’t much overlap that would result in “synergies”.  I would argue that the so called “synergies” of reducing capacity via a merger are harder to obtain than generally appreciated, overvalued and largely non-existent today as a result of consolidation and capacity restraint that has gone on for the past 4 years.

New mergers will benefit from scale and operational expertise.  They’ll benefit from having a more diverse fleet that permits “right size” flying on routes.  They’ll benefit from international alliances.

There is a great example for that last part.  US Airways is now the awkward partner in the Star Alliance with United filling that role on a far greater scale within the United States than US Airways does.  US Airways could benefit a great deal more from Oneworld than it does Star at this point and a merger with American makes Oneworld very competitive in the United States again.  A great reason for Oneworld partners to stand aside and look at these issues with less emotion and more reason.

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There is an internal letter from within American Airlines being circulated on various news sites written by John Hale, American Airlines chief pilot.  This letter casts doubt that AA pilots would support the idea of a merger between American Airlines and US Airways.

First and foremost, I don’t know how much credibility I can give the characterizations in the letter since it does, after all, come from the one pilot in American Airlines with a strong incentive to calm concerns coming from the American Airlines executive team.  He is answerable to them much more than his fellow pilots in the job he holds.

Second, I don’t think pilots like any mergers really.  The seniority issues are very stressing.  But in this case, I don’t know that AA pilots have quite as much to fear as in many mergers.  AA pilots are much more senior than US Airways pilots in general.  Furthermore, US Airways pilots don’t have seniority integration and new contract.  But if there were a merger, the pilots who are divided at US Airways are vastly outnumbered by AA pilots in sheer quantities.  With quantity comes power.

Third, I think executives and other parties are quite afraid of Doug Parker.  It’s obvious that the AA executive team would prefer to be the leads in any merger.  It’s also obvious that they aren’t in a good position to make that demand.  Doug Parker and his team make a very strong operational team and that alone speaks to opportunity from such a merger.  They should be afraid of him:  He knows how to run an airline in today’s environment.

And the AA executive team should be afraid of US Airways.  They’ve learned from other mistakes, they have cash and they have a track record for running an airline that is disadvantaged compared to other legacy airlines and with a fractured labor group.  US Airways makes money *despite* having two pilots groups and two flight attendant groups.  They can manage new parties in that mix.

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It’s notable that not a single analyst, commentator, blogger, newsman or businessman really is enamored of American Airlines’ plan for improving revenue.  The plan, at the top level, is:  Farm out more flying, try harder at our embattled hubs, rely on our Oneworld relationship.

What is continually pointed out is that working harder and doing more isn’t a plan.  Relying on partner international airlines to provide feed isn’t very solid and where it has been deployed as a strategy, it hasn’t yielded the projected results.  There are few new partnerships American can engage in at this point as well.  They’ve done that work already.

American Airlines has a real problem in several of its hubs.  JFK aka New York City is under assault by Delta and United and American is losing more and more traffic there.  LAX really isn’t a hub and it too is under lots of competitive pressure.   In Chicago, American is #2 against United at O’Hare airport and it is seeing its traffic decline there, too.  Southwest is nipping at American from the bottom side by deploying routes out of Midway Airport that offer a real alternative to the businessman traveling to or from Chicago.

Yes, they have Dallas / Fort Worth.  American is, by far, the dominant airline at DFW airport and it shows in the fares offered from DFW today.  However, other airlines (Virgin America, JetBlue) smell blood and are entering the market place with a service product that is highly attractive to businessmen.  Southwest Airlines will slip its leash at Love Field in about 2 years and then American really feels pressure from Southwest at two of its hubs.   It’s also the hub with the most expenses.  Labor is senior at that hub and recalcitrant at best.  You can’t expect American Airlines to maintain its dominance there either.  It will remain the major airline there but its share of the marketplace can be expected to decline rapidly over the next 2 years and then its routes will be under assault from all directions.

There is a reason why Delta put a large parcel of flights on the DFW-La Guardia route.  They can compete on that route and American is limited in how it can respond.  Creditors won’t be amused at American Airlines losing money on those routes to fight off competition.

American has other things against it as well.  Its IT system is aging.  Its service product is substandard even to LCC carriers.  It’s fleet is old and while it will be renewed, much of that renewal doesn’t take place for several years yet.  Its website is atrocious and can’t even let a person pre-pay a checked baggage online if a customer so desires.  There is no ancillary revenue strategy (there are ancillary revenue products in place but no strategy to truly win passengers.)  It’s an airline that, today, is designed to offend passengers and no one is talking about how that gets fixed.

That’s the reason everyone continues to contemplate a US Airways / American Airlines merger.  The US Airways team has done all that despite being hamstrung with labor woes and inferior hubs.  They know how to make it work and the competitive landscape makes American Airlines hubs in certain areas look much more attractive when someone else is running the game.

I think we’ll start to hear real talk of mergers with US Airways in about 2 months.  It won’t take long for creditors to lose their patience at this point.

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The relationships that American Airlines has with its unions has been pretty bad for quite some time.  This really all kicked off with executive bonuses that were perceived to be out of line with airline performance both financially and operationally.  What’s worse, unions weren’t rewarded when executives were and the criteria for reward was fuzzy at best.

The relationships have only gotten worse over time.  In fact, I would attribute the rather militant direction of leadership for its flight attendants union, APFA, has been a direct result of American Airlines inability to establish any kind of rapport with that union in particular.

In short, there is no trust between the parties at all.  It’s gone and it doesn’t appear that executive leadership wants to improve those relationships.  The truth is that the executive team probably correctly realizes that that can’t be done in time to get the cost reductions it needs.  So why try to make friends right now?  It’s not an incorrect judgement.

These relationships are going to stink for a long, long time.  The courts will impose new terms and those terms will likely be oriented more towards productivity than just a reduction in pay.  American could get all it wants in the form of lower pay but the airline needs contracts that allow productivity to improve in order to be truly competitive with other national airlines in the United  States.  Other airlines have that (as a function of bankruptcy) and they don’t.

The exceptional shame of this all is that the unions won’t have much voice in the process.  They’re not well funded (in comparison to American Airlines) and any giveback at this point means almost certain loss of office for leadership of these unions.

American needs action now so it can maintain some control over its destiny.  Actually, it’s American Airlines executives who need action now to maintain some control over their destiny.  Failure to get cost reductions and enumerate a plan for revenue growth will result in a merger or a change in leadership.  The executive team has months, not year, to ensure their future.

The unions will fight.  They will argue loudly on behalf of their membership.  But there isn’t much to win here in court or out of court.  There is plenty of established law and precedent that says they will see reductions pay and changes in work rules that will allow American Airlines to sit roughly on par with its main competitors.

And the relationships are so bad now, there isn’t any reason to just go to court and get it done.  One way or another, there will be bad blood between management and unions and the sooner this is done, the sooner management can think about ways to repair the relationship in the future.

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United Airlines performed its cut-over to the Continental based IT systems for reservations and frequent flier programs nearly 2 weeks ago.  By all accounts, this was probably about as smooth as it could have gone for merging two legacy airline systems.  That doesn’t mean there were no problems, it means it was better than most.  There was problems, some complaints and some frequent fliers saw accounts with incorrect mileage and other passengers found it difficult to get their seat assignments.

At present, there are a few who are still experiencing problems and United is still responding to larger than normal call volumes but here is the good news:  flights are flying and people are getting on those flights and arriving at their destinations.  There are issues that remain to be fixed.

There are, however, quite a vocal minority complaining loudly and I see media picking up on this and describing United’s transition as being far worse than any real appearance gives.  In USA Today’s Today in the Sky Blog, we see customer’s such as ultra elite frequent fliers making complaints about United (not Continental) agents being unfamiliar with Continental’s SHARES system still or having trouble making a seat assignment at a kiosk.   There are others from frequent flier enthusiast websites complaining that United changed the miles accrued for routes.  How much did they change?  In most cases by less than 20 miles.

I have message for those people:  Grow up and act like adults.

If someone is missing a flight due to incompetence or is unable to book a frequent flier award due to incompetence, I’m willing to hear your complaint.  If something is taking you 500% longer to accomplish than previously, I might even be willing to listen.   But, seriously, do we really want to be complaining about whether or not a gate agent knows the SHARES system completely yet?   Do you really want to moan about the fact that San Francisco-Hong Kong flight went from accruing 6921 miles to  6909 miles?  That’s a difference of 12 route miles or 0.17% change in mileage.  Not 17 percent but 0.17 percent.

Complaints like that give credence to my belief that the customer is absolutely NOT always right.  A principle that I will point out is in violent agreement with a former industry leader named Gordon Bethune.

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Just about everyone under the sun has offered an opinion on American Airlines’ top level explanation of how they intend to enhance revenue in their bankruptcy restructuring.  The Cranky Flier has an interesting take on things as a function of what American offers in terms of a network.  Jamie Baker of J.P. Morgan has critcized the ideas roundly.  Even I offered extreme scepticism on the subject.

American’s idea is that through codeshares and a far higher percentage of flying being contracted out, they’ll gain more revenue. 

Codeshares aren’t a network.  They can add some incremental revenue but they are no substitute for having a strong network.  American’s network was pretty good until about 5 years ago.  Coincidentally, that’s when their profits nosedived.   American Airlines has their “cornerstone” strategy of sending traffic through Los Angeles, Chicago, DFW, New York or Miami.  Sadly, that leaves some gaps that other airlines don’t have.  (And this is the foundation of the Cranky Flier analysis.)

For instance, Miami doesn’t serve the Southeast.  It’s a gateway city for South America but it doesn’t act as a hub for the Southeast.  Not like Atlanta or Charlotte do.  There was a time when American tried using Raleigh, NC for this and it wasn’t a bad choice all in all but I would have contended that fighting US Airways for Charlotte would have been better. 

Los Angeles doesn’t serve the West Coast.  Again, it’s a gateway city for trans-Pacific flights but it isn’t a West Coast hub.  Phoenix is a hub and Salt Lake City is a hub and even Denver is a hub but Los Angeles isn’t a hub.  Now we have 2 significant portions of the United States being underserved by American in comparison to both United and Delta.

I even question the strength of New York City for a network.  Again, New York city is primarily a gateway and a final destination.  It’s not the best place to connect traffic to other domestic destinations.   Now we have weakness number 3 in the equation.  Codeshares won’t make up those deficits in those regions. 

Contracting flying isn’t going to provide more opportunities to connect people from those underserved areas either.  Whether the aircraft is 50 seats or 80 seats, no one in the Southeast is going to perceive the benefits of flying from, say, Birmingham, Alabama to DFW or Chicago to connect to a flight to New York City.  Nor are they going to be thrilled about Miami as a connecting point.  Now, Atlanta or Charlotte or Memphis doesn’t look too bad but American doesn’t have hubs in those cities.  Delta does.  US Airways does.  Even Southwest does. 

How did Southwest recognize the need for Atlanta in its system for serving the Southeast and American hasn’t yet seen a need for a true Southeast hub?

If you rely upon hubs and networks, you have to recognize that they come with some real inefficiencies.  Those inefficiencies can make connecting flights look very, very unattractive unless they lie more or less directly in the path of getting from Point A to Point B via Hub C.  

Will American merge to gain a better network?  Well, I think the current management will not seriously consider those options.  They see American as an airline great that should be the consumer, not the consumed.  On the other hand, I think American’s creditors are already frustrated with American’s ideas in bankruptcy and they may well force a change in thinking on that end. 

Who will it be?  There is only one decent choice: US Airways.  I like them for both their management team and their core strengths in the network just as Cranky Flier does.  However, the only way that merger succeeds is if US Airways is the consumer of AA and not the other way around and not through a “merger of equals”.  

Delta isn’t going to be the merger partner.  Too many regulatory issues exist in that marriage for it to be practical.  United isn’t going to be the merger partner because, again, too many regulatory issues exist.  A smaller airline can’t consume American and American has a terrible track record in buying small airlines and truly getting the value they present.  The only airline who has the gumption, team and, potentially, the money is US Airways.

My one issue w/ that merger is the huge labor issues that will exist.  There needs to be a plan in place to resolve both AA and US Airways labor conflicts that exist today.

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At this point, we hear of Delta, TPG and US Airways all doing their work on investigating an acquisition and/or merger of American Airlines.   While many think Delta is credible with significant carve outs of the AA system, I do not.   It isn’t just about competition on routes, it’s about size becoming so much larger that pricing power comes along with it in the markets.  A realistic combination of Delta and AA would realize a company that is 1.5 times larger than the next largest airline and massively larger than virtually any other airline in the world.  That kind of dominance can influence much more than just the price on a particular route and I don’t think the US government or the EU is interested in seeing that kind of pricing power.

As for TPG, I think they’ll play things very close to the vest and keep their intentions unknown until the last possible moment.  I do think we’ll see them look for partners in such an acquisition.  I also think that TPG might do what’s best for the company in the sense that they’ll oust management and directors who have long term tenure and who aren’t advocating for change and new leadership.   American needs more revolution than evolution and I think TPG knows that.

US Airways has the best management team for American Airlines, in my opinion.  That team knows how to fix things operationally and knows how to extract profits and revenue from sub-par conditions.  That said, I think the prospect of merging those two companies given the labor problems on both sides is a bit daunting.  Such an integration needs to be able to take full benefit from all the synergies a merger offers and having not one, not two but three pilot groups at odds with each other would not be healthy.  The same would be true for flight attendants.  I struggle to imagine how even the US Airways team makes that work well.

At the end of the day, I think every party will move slowly and wait to see how things develop with American Airlines.  What they win in terms of concessions in bankruptcy will determine just how attractive an acquisiton they may be.  Right now, I continue to think that the most likely outcome is American Airlines as a stand-alone company.  Why?  The cash holdings they have allow everyone to maintain the status quo at this moment.  AA has no need to go to anyone hat in hand to ask for DIP financing.

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Southwest Airlines has decided to change its seating on its Boeing aircraft to a thinner, lighter seat that permits an additional 6 seats on its airplanes.  Now, instead of 137 seats on its 737-700, they will have 143 seats.  I’m sure the “upgrade” will occur on its soon to arrive 737-800 aircraft as well. 

It’s a reasonable move on the part of SWA.  First, most trips on SWA are less than 2 hours in length which means even a slightly less comfortable seat is OK and probably doesn’t impact the customer much at all.  And we don’t know that the seats are less comfortable.  The truth is, the modern seating being offered for airliners looks uncomfortable but usually ends up retaining the same comfort levels.  This new seat doesn’t require SWA to reduce its seat pitch and that’s a good thing from my perspective.

The additional 6 seats potentially offer more profit for Southwest and it could use more profit.  While they continue to be the most consistently profitable airline, their costs are now in line with legacy airlines (mostly) and adding more profit to each full flight helps offset those costs.  Based on my own flights with Southwest, those 6 extra seats will contribute heavily to their bottom line as it has become rare for me to see a flight less than completely full.  In addition, Southwest’s load factors have soared over the past few years when they have traditionally been substantially less than legacy airlines.  Again, more seats helps here.

Southwest is also making its moves to integrate the Airtran system into the SWA system.  We’re now seeing Southwest announcing flights into Airtran cities on routes that are either the same or nearly the same as what Airtran had.  There are no surprises so far and I do think that Southwest is moving methodically along in its plans now that it has seniority agreements in place for both pilots and flight attendants from Airtran.  Southwest says it will take several years to integrate.  I think that Southwest will build steam quickly and end up integrating the substantial bulk of the two airlines faster than expected.  All indications point to Southwest growing quickly comfortable with the Airtran system and as they do grow more comfortable, decision making will happen more rapidly.

I also notice that Southwest is already getting aggressive on flying to Mexico using Airtan.  They’ve applied to serve new routes from several cities in the US and its notable that these routes do not seem to link up with Volaris routes in Mexico so far.  In other words, it appears that Southwest is keeping Volaris on board with existing services but exploring direct travel into Mexico via Airtran.  This isn’t out of character for Southwest, they like to experiment when opportunities arise to do so with little risk.

I do think that Southwest needs to decide how it wants to do foreign travel.  Will it be with partners or will it do it on itself?  Now that it has the international expertise of Airtran in its back pocket, I think they may be more interested in doing this themselves.  It is notable to me that despite the “codeshare” its doing with Volaris, Southwest hasn’t really worked too hard to expand it or promote it on a national basis.  That makes me wonder if both parties are less than satisfied with the relationship so far.

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US Airways and its pilots have come to an agreement to drop the lawsuit that US Airways filed against its union for a work slowdown.  A permanent injunction will be entered into the record, US Airways will be the “winner” and both sides pay their own legal costs.

Color me wholly unsurprised.  This was a bad move on the part of the pilots union as there was already precedent in courts going against them and it wasn’t a good way to get the company’s attention. 

Instead, the union should be working to unify its membership and get them on an integrated seniority list and then a new agreement with the airline.  These pilots have been working off two different seniority lists and without a new negotiated agreement since 2005.  That’s 6 years of bickering that admittedly, has benefitted US Airways in that it has kept pilots wages relatively lower than its competitors. 

The dysfunction shown by US Airways pilots has stunned me at times.  Particularly that of the “East” pilots (aka former US Airways pilots and not America West pilots).  First rejecting an ALPA negotiated integration and then forming a new union that could be under the control of the “East” pilots, no one has benefited from this behaviour. 

Furthermore, it’s hurt the company as well.  Until its labor problems are smoothed, US Airways doesn’t look like a good merger partner to anyone else.  After all, who wants to have three different pilots agreements and a labor group that has to be operated like three different airlines?

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Before and after American Airlines bankruptcy filing, there has been a great deal of speculation on American merging with another airline.  Most often, US Airways is cited as the candidate.

The truth is, there isn’t a perfect candidate at this point.  Prior to the Delta / Northwest and United / Continental mergers, American Airlines was vastly larger in size by any measurement you would care to use.  Now there are 3 airlines roughly the same size in the United States and a larger number that are greatly inferior in size to those.

A merger should add value before anything else.  How it adds value is subject to debate.  American Airlines acquisitions never really added value so much as they eliminated nuisance competition.  American, in a sense, bought airlines more to pay off people from competing with them.  To be fair, Southwest Airlines has done this as well.

With the state American Airlines is in today, a merger doesn’t add value.  The first order of business is to get the house completely in order.  Unfortunately, this means quite a bit of pain for everyone involved and I include the executive management in this as well.  If anyone thinks they come out of this bankruptcy unscathed, they are kidding themselves.

US Airways might be a candidate for merger with American Airlines but where US Airways adds value is in conflict with the very people who are running AA today.   What I mean is that US Airways has the management team (and I do mean team, not just Doug Parker as CEO) that knows how to run a competitive, revenue positive airline in today’s marketplace.  Unfortunately, the current management team at American Airlines shows no evidence of knowing how to do so thus far.  They know how to manage money and an airline is a whole lot more than money. 

The only conceivable situation where US Airways adds value to American Airlines in a merger is if most of the executive team at AA is let go. 

Are the systems compatible?  Frankly, I think so.  Far more than I think many appreciate.  US Airways is in possession of a system that is fairly complementary to AA’s system.  US Airways has strengths in marketplaces where AA is weaker (the Southeast and Southwest) and in cities that are weaker in the American Airlines system (Philadelphia, Washington D.C., Phoenix come to mind.) 

Must the fleets be compatible?  To some degree, yes.  They need not be perfectly compatible.  Frankly, I think American Airlines could use the A330 in its system and I think US Airways could use the 777 in its system.  Both will have Airbus A320 series aircraft in a short time. 

The real challenge is labor.  Can you take one airline that has yet to see its pilots and flight attendants integrated into one system (US Airways) and merge the seniority lists with an airline’s employees that are viciously disappointed in its own company (American Airlines)?  I think that is a very, very tough job for anyone. 

In short, I think we won’t see a merger with AA and anyone else for the next 2 to 3 years.   Over that time, it is quite possible that circumstances will have evolved considerably and a candidate for merger with AA may appear.  It is entirely likely that US Airways may be that candidate.  But to expect those two to merger over inside the next two years is, I think, unreasonable.

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There is a bit of hot talk again about more consolidation among US airlines as a result of American Airlines (AMR) President Tom Horton responding to a question about whether or not they included in such a consolidation.  He replied “Yes, it could.”

Does it mean they’re actively seeking a partner?  No, it does not.

I suspect that Horton’s response was more off the cuff than anything and simply not closing doors on the idea.  I do not think the current management team is seeking that kind of consolidation simply because it really does mean that many of them must go. 

Does it mean US Airways is a suitor to American Airlines?  No, it does not.  Even Doug Parker realizes that American Airlines tends to simply buy companies to shut them down from competing with AA.  He knows that the management isn’t about to give up the reins in a merger of equals and he knows that they are the one airline that has far bigger problems than US Airways.

Mind you, I continue to think that AA could stand a dose of US Airways management.  But a merger doesn’t begin to look attractive until there is a deal with the various labor groups and one can see what the financial impact is of those deals. 

In short, I don’t think there will be anymore consolidation in the near term (12 to 18 months).

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United’s ALPA union has elected a new leader to replace current chairman Wendy Morse.  His name is Jay Heppner and his statements upon winning (Morse didn’t run for re-election) don’t lead me to believe that things will be better in getting the United and Continental pilots to agree to something. 

Heppner sees this as being about a new contract and it is no secret that United’s ALPA see the new contract and integration being about getting big, fat raises.  That’s a non-starter with United and, in particular, it is a bit insulting to the Continental pilots who upon integration, really do lose a bit of power as there are far more United pilots and many are far more senior than Continental pilots.   Continental pilots have largely been smart and pragmatic about the new world order in the airline industry and really don’t deserve to be impacted by recalitrance.

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Southwest pilots have been briefed by management that there really is a Plan B if Airtran and SWA pilots cannot come to an agreement on merging seniority lists.  Plan B is to keep Airtran as a separate entity and that would not be good for Airtran pilots (or other crew.)

There is a perception that Southwest is a friendly and nice company and, by and large, they are.  However, what people often forget is that Southwest is quite capable of making swift, hard decisions in the face of adversity. 

What Airtran pilots’ union didn’t consider is that playing coy on the first agreement and refusing to send it for a vote unintentionally signaled to Southwest that there may be adversity on the horizon.  Indeed, I would imagine that quite a few Airtran pilots are now fairly peeved at their leadership since the first agreement was more beneficial in terms of pay and seniority than what is on the table now.  Southwest’s message to Airtran pilots is this:  the deal doesn’t get better the longer it takes, it gets worse.

What’s the worse case scenario?  Plan B.  The unspoken part of Plan B is that Southwest can slowly diminish the size of Airtran over several years, transfer equipment (i.e. aircraft, gate space, etc) over to SWA and ramp up to take over Airtran flying over the next several years by hiring new pilots and crew that fit within their standards. 

In other words:  Want to keep your job?  Well, after this round of negotiations, the deal is that you get to interview for your job at some point.  If you successfully interview, you’ll join SWA at the lowest run in seniority and at reduced wages.  It will still be one of the most secure jobs in the airline industry but those people will have to reset to the beginning again and earn their way upwards once more.

Is Southwest that cutthroat?  You bet.  Is this a negotiating tactic on the part of SWA?  Yes but it comes with the knowledge that SWA really will act on its Plan B unlike some airlines.   Either way, SWA gets what it wants from the Aitran purchase and the worst case scenario for them is a stretched timeline for achieving all the benefits from the purchase.

Is this a gun held to Airtran pilots’ heads?  Well, no, not exactly.  They’re free to choose their destiny.  However, Southwest isn’t an airline that can be bullied and its pilots’ union isn’t either.  That’s the difference in this situation.  There is nothing to gain by being recalcitrant.   Even if Airtan pilots tried to strike (and remember that that can take years before the National Mediation Board gives permission), Southwest can move in and take on that traffic without much impact. 

What defies my imagination is how Airtran pilots (and other crew) think there is a better deal to be had than getting a payraise, decent seniority and the most secure job available from US airlines.

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With the heat up on American Airlines’ financial situation as well as the strict scrutiny its share price has gone through, the old dog called merger has started to pop up again. 

The truth is, financial analysts and investors want to see something more happening at American Airlines.  Something that goes beyond “we’ll stay the course with our fixed strategy and hope other airline’s costs rise to ours before our money runs out.”   That really is what has been communicated thus far. 

There is a new culture at some airlines.  It’s a culture of fiscal responsibility that is fostered by airlines leaders such as Richard Anderson (CEO of Delta) and Jeff Smisek (CEO of United).  It’s the idea that a stready return on investment is necessary for airlines going forward.  It is refreshing and it does seem to help as a basis for decision making at airlines.  Enough so that they’re starting to convince me that capacity discipline really will continue in the United States.

On the surface, it would appear that American has the right executive leadership to execute that strategy.  It’s an airline that has a strong reputation for financial management and one would expect that they would lead on this subject.

However, as much as I do think the strategy has value, it ignores the human element of airlines.  We all too often talk about the capital requirements for airlines and the huge amount of cash flow necessary to keep operating and even the huge labor component.  What we don’t talk about is the people.

At the end of the day, airlines are made up of people.  It is a labor intensive business and it requires many different kinds of people and it continues to be an industry that generally grabs you and holds onto you once you work for an airline. 

To drive those tens of thousands of people into the same direction and achieve success requires a bit more than being a good numbers man.  It requires a certain vision, a certain charisma and the ability to get people to follow you. 

American Airlines hasn’t got that.  It’s got a clinical, almost detached view on its labor and leadership that continues to ignore the human component to their success.  

What investors and analysts want to see is some revolution, not evolution.  Steady is the course has simply seen debt rise, cash holdings drop and angrier employees.  Those who know airlines, know that that is the precursor to a long, ever quickening drop into failure. 

You can manage those pennies all you want but if you can’t get your people to turn an aircraft quicker or your pilots to work more productively or get your staff to treat customers better, you’ll still fail.  Even analysts know that. 

American won’t engage in a merger with its current leadership.  However, CEO Gerard Arpey won’t stave off a coup with his present course either.  There will come a time when the board will decide new leadership is necessary.  It will happen rapidly and it will be a result of a sudden consensus view by the board that they’ll be held responsible for further failure.  I would argue that that set of circumstances may be closer than Arpey & Co thinks.

While I don’t think a merger is on the horizon, I do continue to wonder what the executive team at US Airways could do with American Airlines.  They’ve worked wonders with enormous challenges and a disadvantage to virtually every other legacy airline.  They’re reponsible to providing a return on investment and they seem to have figured out how to please customers better every place improvement was called for.

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Southwest Airlines CEO Gary Kelly is now openly predicting that SWA will see as much as $1Billion in revenue growth as they restructure the Airtran Atlanta hub into a more traditional Southwest focus city.   Airtran currently operates a traditional hub and spoke system in Atlanta.

Airtran’s model as an LCC carrier was really a hybrid.  It did operate primarily a hub and spoke system and it also used focus cities and even did a little point to point flying.  Airtran did what they had to do to compete with Delta, earn money and to do it by perenially being the little guy in most markets.  Absolutely nothing wrong with that.

Southwest is right, however.  Operating a traditional SWA focus city is the right thing to do because it serves the greater good in the SWA system as well as focusing on the customer that yields the most *profit* rather than the most revenue.   More importantly, SWA has some horsepower to offer that premium customer that Airtran doesn’t have.  More connecting flights to more destinations, primarily.

I’ll miss Airtran’s business class and I’ll miss their style of business.  It worked for me very well and I’ve flown them many times.  Even Gary Kelly admits that SWA expects to see some business travelers move to Delta as a result of the changes in service product.  After reflecting on this for several weeks, I think this is, at the most, a trivial issue. 

Why?  Because SWA actually offers a great service product.  The seating is good.  The flight crews are good.  The business traveler can accomodate themselves with priority boarding.  No, it isn’t a “first class seat” but neither was Airtran’s really.  Airtran offered an economy business class seat, in my opinion.  You didn’t get the same perks that legacy airlines offered with their first class.  You got a better seat and a few free drinks.  That’s it. 

Southwest can compete with that.  More importantly, if you’re a business traveler and you’ve chosen Airtran, I would guess that, most often, you’re an entrepreneur or work for an entrepreneurial company that places a premium on appropriate spending for travel.  If so, Southwest fits that role just fine.  I’m very skeptical that there are very many traditional frequent flying businessmen who are using Airtran.  Delta fits their needs better.

I look forward to seeing what SWA does in Atlanta.  I look forward to seeing new connections as a result of Atlanta becoming a SWA focus city.  It should work very well not just for Atlanta residents, but travelers from the entire southeast region.

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Chilean regulators have tentatively approved the LAN / TAM merger (which is really LAN buying TAM) with the usual provisions and conditions that frequently come with these deals.  The big one is that LANTAM must pick one airline alliance to go forward with. 

Right now, that means choosing between Oneworld or Star Alliance.  LAN is associated with Oneworld and TAM is associated with Star Alliance.  The choice means that one or the other kind of gets shut out of South America so the stakes are big.

Expect both alliances to make captivating pitches for being the winner and both will likely promise exorbitant revenues (via guarantees) to the airline group but who is the best choice?

For LANTAM, either could be good but I think Star Alliance might look just a little bit more promising in terms of synergies.  Oneworld won’t be shut out with a fight but you have to evaluate that alliance on performance and its “majors”.  American Airlines, British Airway, QANTAS and Cathay Pacific run that group and none of those airlines is the picture of health or innovation.

Star Alliance might offer more synergies, more partners and, more importantly, more money going forward.  It’s an alliance that works well and which is more egalitarian in its treatment of smaller partners than Oneworld.

On the other hand, Oneworld fits the Chilean portion of the airline very well already and several partners service Brazil with high frequency too.  If LANTAM is smart, they’ll extract promises to cooperate and a seat at the big boys’ table.  That would give them the leverage they need going forward.  If Oneworld appears unwilling to acknowledge them as a player, you can bet that Star Alliance will be happy to make room for them.

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US Airways and its pilots union, USAPA, got a hearing to discuss what US Airways says is an illegal work slowdown.   In that hearing, the judge pretty much agreed with US Airways and told USAPA to cut it out and get their membership in order.   What the judge actually said was:

“USAPA and its members, agents, and employees, and all persons and organizations acting by, in concert with, through, or under it, or by and through its order, are enjoined from permitting, instigating, authorizing, encouraging, participating in, approving, or continuing any interference with Plaintiff’s airline operations, including, but not limited to, any slowdown, strike, work stoppage, sick-out, work to rule campaign, or any concerted refusal to perform normal pilot operations in violation of the RLA, pending a hearing on the permanent injunction.”

Beyond that, the judge also ordered the union to make a concerted effort to communicate to its membership that such activities were illegal and punishable. 

This is where USAPA wants to pay real close attention to things because it was the APA (American Airlines pilots) who got hit with a large judgement against it for the very same kinds of actions in the 1990s.   There is ample precedent here and it will be the pilots who pay for that kind of judgement against them. 

So here is my question:  When does USAPA quit acting like children and get to work representing and, more importantly, *leading* its membership to a unified seniority list and a new contract with US Airways?  What’s the plan?  When does action take place?  Right now, if USAPA got its act together and started down that path, union members *might* see a new contract by 2015.   That’s only 10 years after the merger.

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