With the various mergers and consolidation that we’ve seen over the past 3 years, there is quite a bit of speculation as to who is next in the merger game in the United States.   The truth is, with the exception of some very small players, I see no opportunities.

Sun Country is actively looking for a purchaser and I think it will find one but it won’t be for Sun Country’s business nearly as much for Sun Country’s Minneapolis / St. Paul gate space and, perhaps, a few routes.  Two candidates as buyers come to mind in this area:  Southwest and Frontier.  Both should find the opportunities in MSP attractive and Southwest is liable to also be attracted to the staff and equipment Sun Country is flying.  Sun Country flies the 737-700 and -800 and getting their hands on the -800 of which there are 10 available could help SWA get a jump start on an aircraft it needs.

Frontier has a little bit less incentive for MSP.  The aircraft fleet doesn’t match and they already have hubs and/or focus cities bracketing MSP in Denver, Kansas City and Milwaukee.  But getting to compete against Delta in MSP where it is by far the dominant airline could be attractive to Frontier. 

As far as other airlines go, I just don’t see it for now.  Airtran will be going away this year.  JetBlue is doing OK and while I think it could stand to grow, nothing is available and an attractive fit in areas where it could grow.  There is the ever so slight chance that JetBlue could make a bid for Frontier but Frontier’s new management hasn’t had very long to make a go of it with that brand and it doesn’t seem like they would want to be consumed.

Alaska Airlines is very profitable and doing very well with its multiple relationships with various legacy and international airlines.  They could be attractive to purchase but I think they would seriously resist overtures unless the economics just made their shareholders rich. 

American Airlines has too many labor problems and is busy coordinating with its OneWorld partners at this time.  This is an airline whose house is not in order and whose leadership is not really interested in acquisitions and who is not very visionary to begin with.   Without new and radically different leadership, I presently see AA maintaining the status quo.

US Airways is pretty profitable and has their act together in many ways operationally speaking.  They, too, have labor problems but somehow management manages to sit back and let labor fight among themselves while earning profits.  This is another airline that could stand to grow and the most attractive place to grow would be internationally.  The bad news is that they don’t have any long haul aircraft on order except the A350 and that isn’t due for quite some time.  What’s worse, there is no internationally strong airline for them to target for another purchase.   Obtaining long haul aircraft isn’t financially easy to do presently due to constrained credit markets and the popularity of their choice in long haul equipment (the A330.) 

In addition, in light of the uncertainty that fuel prices and the economy present, I think that any growth that airlines choose to do will be slow, methodical and very cautious.  It will be organic and through upsizing aircraft rather than many new routes. 

The merger game of this decade is still undecided.  Certainly Delta appears to have done well although their profits still seem very dependent on fuel prices.  But United is far from complete and they’re already experiencing more problems than Delta ever did.  Southwest and Airtran are working hard to consummate their relationship but Southwest has stumbled as much as they have succeeded in the past 2 years.  There is nothing to say that SWA will execute their merger with Airtran smoothly so far.   We hope they will but we don’t know they will.

Look for it to be quiet in the merger and acquisition game for the next 12 to 24 months absent the possibility of a few small acquisitions.  I expect well see the alliances spark up a bit more in the near future, however.

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I become more and more impressed with US Airways as time goes by. This is an airline that has worked hard to change its performance in quite a few areas. There was a time not too long ago when US Airways (and America West) really resembled the Continental Airlines of the early 1990’s. You felt abused at every turn. Not anymore.

They are doing spectacularly well in baggage handling and that’s after being atrocious and particularly so in Philadelphia. But it’s not just baggage that shows great performance. This airline has managed itself very well through weather events as well. They are, by the very nature of their hubs, avoiding more problems than many airlines as well.

It’s the customer service that just kind of stuns me. Particularly with reservations agents on the phone. Over the past 12 months, I’ve had several occasions to call (instead of just making a booking online) for reasons that, in my opinion, confound most US airlines call center staff at this point.

Instead of being on the phone a long time and then fighting to make my desires understood, I keep getting agents who “get it”, get it done and manage to be polite and friendly throughout the experience.

No one is going to have a 100% positive experience with an airline. Fly one long enough and you’ll have a problem that annoys. US Airways is no different. You can count a lot of things as important when selecting an airline but I think the ability to fly more or less on time, receive your baggage at your destination and the opportunity to deal with service staff that acts alive and interested is tops. Power on board, wifi onboard and even fees (and US Airways is the king of fees) come second.

If you buy on price, reliability and service, you can do fantastically worse than US Airways and I think they’re even giving even LCC airlines a real run for their money.

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In the latest financial results, most underperforming airlines attributed their lack of success to rising costs and specifically fuel costs.  Fuel costs did rise but let’s return to early fall when airlines were gleefully setting expectations for the winter season. 

Many airlines were so confident that they actually raised prices and talked confidently of record profits.  The problem is, the traffic didn’t materialize in many cases and I would attribute that to the fact that demand for the winter/holiday season is very dependent on price.  A few airlines did see that and held their prices or even had some sales.  Notably, Southwest Airlines kept a close eye on their demand and lowered prices were necessary. 

But the development that no one has talked about much but which is showing up is a rise in capacity.  That rise in capacity isn’t showing up in great numbers with new routes or increased frequency nearly as much.  Instead, it is coming from an increase in the size of aircraft on some routes.  Airlines are upsizing some routes and also increasing capacity through the aircraft they’re adding to the fleet to replace older aircraft.

Delta, for instance, has retired its smallest DC-9s in favor of Airbus A319 equipment.  American Airlines is replacing MD-80s with 737-800s.  Southwest is adding 737-800s to its fleet in about 1.5 years.  US Airways is adding A321s to replace 737-400s.  At first glance, these “replacements” are perceived to be a 1 to 1 exchange but in reality they’re often as much as a 10% increase in capacity per aircraft. 

The creeping rise in capacity shows that the industry isn’t necessarily in agreement on capacity restraint going forward and that could foretell a collapse in prices as these airlines chase customers to fill their aircraft.  I don’t think we’ll see huge losses in the next year but I do think we’ll see an erosion of profitability.   The airlines who possess fleet flexibility should fare better than those who are largely locked into large blocks of fleet types.  Think Delta vs American Airlines. 

Mergers didn’t solve an excess of capacity.  Not really.  They did bring some costs down but neither of the two big mergers had much overlap and capacity was therefore not really reduced much in that sense.  Since there are no merger candidates with much overlap in existence right now, I don’t think this problem is going to go away very soon.  The real solution is to actually let an airline go out of business.  The only candidate for that is American Airlines and they have lots of maneuvering room left presently. 

Look for capacity to be a bigger talking point among financial analysts over the next 3 months and particularly at the end of the next financial quarter.

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I wonder if I am the only one grossly underwhelmed by airline performance in the 4th quarter.  American’s performance is, at this point, embarrasing to the company’s leadership in my opinion and they hold on, in my opinion, only because of an ever thinning smokescreen.   Delta only managed to eke out $19 million and for an airline that had charged through most of 2010 with impressive profits, you have to ask “why” it was so dismal.  Even if you allow for weather disruptions, it still kind of stinks.

ContiUnited (I’ll stop using that moniker one day soon) managed to beat expectations but still posted a significant loss and let’s not forget that both of these airlines were performing exceptionally well prior to the consummation of their merger.   Even Southwest remained guarded abouts its prospects going forward despite a reasonably decent fourth quarter result.

Are rising fuel costs a problem?  Certainly but they aren’t a problem anyone was unaware of.   The same is true of labor productivity.  These are pretty well known variables and if you don’t know how to manage those effectively at this point, it is time to leave the business.

When US Airways manages to stand out among our airlines given the inherent weakenesses they have in the US marketplace, you have to ask who isn’t doing their job, no?  Alaska Airlines even shined and that is an airline who has all the costs one would associate with any of the legacy US airlines. 

It certainly points out that mergers aren’t the solution to everything and capacity management doesn’t necessarily ensure profits.  In fact, I wonder if this excess of restraint isn’t effecting demand in general and driving customers to other options secondarily.   There is a reason why Southwest keeps running up its revenue score. 

At some point, you have to go out there on the playing field and compete.  Competing isn’t just offering the best price, it’s earning that customer for more than one particular flight.  With all that the airlines have implemented to enhance their revenues, are we finally seeing the results of that behaviour towards consumers?  I certainly think its a important part of the equation.

It’s time to put on the pads and get out on the field ready to play rough and compete.

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American Airlines and Sabre have decided to enjoy a truce while negotiating a new contract until this summer.  Is this war between AA and the GDS systems over?  No, not yet. 

I think AA needed some of the heat to die down in the public given their most recent financial results and this was a way of moving one of 3 major problems off to the back burner and getting their revenue stream back online with the largest GDS system.   They can continue to play chicken with Expedia and Orbitz in the meantime and see if they can get any traction at all. 

But it begs the question as to why AA is choosing to fight this right now when it so obviously has a large pile of other problems to solve first.   They are the only legacy/SuperLegacy airline to lose money for 2010 and while they have some promising developments in their favor, they continue to fall further behind other airlines when it comes to earning a profit. 

If you compare the problem of fees with respect to GDS systems vs the problem of labor unrest and productivity, I know which one I would want to get solved first.  I wonder when AA’s board of directors and shareholders begin to be unsatisfied with AA’s financial performance relative to the rest of the industry.

In another development, Virgin America has inked a deal with Sabre to provide reservations systems and to continue its GDS relationship going forward in a multi-year contract.  Several airlines have reaffirmed the GDS model (US Airways as well) and American continues to stand alone in this conflict although I do think Delta is paying close attention. 

One good thing that may come from this is the GDS providers doing a better job of accomodating the a la carte fee structures and upselling.  That would not be a bad thing.  In addition, it may well spur the GDS systems to invest in new technology that not only will accomodate future needs as well as lower fees.  That, too, would not be a bad thing. 

Right now, I would say the GDS systems have a slight upper hand in this fight.

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At the beginning of each new year, I like to review what I thought would happen over the previous year and where I think things might go in the next year.  Let’s take a look.

North America:

I thought that not much would happen with AA labor in the past year and that pretty much was the case.  We’ve now seen several years of virtually no movement on solving these issues and I suspect that 2012 is the year that we see some kind of movement.  Look for the flight attendants to be the aggressive parties but the pilots to be the leaders.  All they need is a management group that wants to get something done.  This might end up being a make or break year for AA CEO Gerard Arpey and it could well be based on coming to an agreement with their labor groups.

United Airlines (and Continental) really didn’t go where I thought which was the status quo.  Instead, they merged and got going on getting somewhere and I like that.  I didn’t think they would merge and said so at the beginning of last year.  They proved me wrong.  However, I think CEO Jeff Smisek hasn’t considered carefully what he needs to get agreement on to move forward with each phase of the merger.  Look for this year to be good for United financially but bad on getting labor groups to agree on something.  I don’t think they are headed in the same direction as US Airways . . . yet.

This is a year for Delta Airlines to continue rationalizing its routes and aircraft.  They spent much of last year doing so and saw great financial results.  However, their goal of a sustained 10%+ profit margin makes me think we’re going to see some weird stuff out of them somewhere around the beginning of spring.  Probably in the form of new and innovative fees.

US Airways pretty much performed as predicted and I like how they are earning a profit but I hate how they still have no agreement with their flight crews that will permit them to quit operating two airlines in one.  If Doug Parker were to have a New Year’s Resolution, it should be to hire someone who’ll get that taken care of this year.

LCC(s) and Regionals:

I didn’t see a merger partner for Southwest except, perhaps, Sun Country.  Southwest proved me very wrong on that but I like the results.  One concern I have is the somewhat “plodding” progress towards consummating this merger into one company.  Does it indicate a plodding approach to actually consolidating operations?  One good thing is this brings the potential for greater international flights and, hey, Southwest, consider just keeping that Airtran reservations system and then spending some real time to pick or develop a new one that will last another 30 years.  You could do a lot worse.

Frontier/Republic is holding its own and I thought they would hold their own.  I think they’ll hold their own this year but I don’t see them merging with anyone and I don’t see them growing subtantially either.  Brian Bedford could prove me wrong and I hope he does.

Airtran made the Milwaukee market.  They deserve the credit for the huge growth that city has seen in air travel.  Southwest needs to commit to doing the same when they lead the game.

I slammed Virgin America a few times last year for appearing to be afraid to compete.  In particular, with American Airlines.  Finally, Virgin America made the plunge and came to DFW with flights from both San Francisco and Los Angeles.  I liked the move and I think there is room for them to grow here.  Time will tell.  One thing I’ve noticed so far:  AA doesn’t seem to be attacking them quite as badly as one would have expected from AA just 5 years ago.   Mr. Cush, let me suggest that you could really do well with some flights from DFW to the NYC area.  In particular, to Newark. 

Alaska Airlines has moved closer to Delta in the past year and that worries me a bit for Alaska.  They’ve generally been an airline willing to do a deal with anyone that made sense.  Now, they appear to be more and more the Delta lackey and that could harm them in the long run.  Another thing:  Alaska doesn’t have any more logicical merger partners that make sense.  American Airlines may have missed an opportunity here by not getting closer to Alaska instead of withdrawing more and more. 

I don’t think we’re going to see any big mergers in the US this year.  We might see one minor merger and that’s OK with us.  I think this year we’ll see legacy and SuperLegacy airlines attempt to earn as much money as they can to retire as much debt as they can and to bank as much war chest as they’re able.  However, I see competition heating up this summer and I think the LCC and new entrant carriers are going to put pressure on the legacy and SuperLegacy airlines in the form of adding capacity *and* routes.  The question is, will the industry discipline we’ve seen hold strong or will someone crack?

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The Dallas Morning News Airline Biz Blog has this comment from US Airways President Scott Kirby where he asserts that a la carte fees will represent 100% of their profit for their fiscal year.  He cites those fees as making a huge difference in US Airways and the airline industry as a whole.

The part I object to is characterizing those fees as “new” revenue”.  Those services have always been provided and they’ve always had a cost and that cost has always been a part of pricing.  The difference is in the unbundling and that doesn’t make it “new revenue.  It makes it more identifiable but I question whether airline profits we are seeing now are truly a result of a la carte fees. 

You see, I keep looking at the airlines who essentially have no fees or minimal fees and those airlines continue to be rated best for service and enjoy some of the highest profits in the business. 

More likely, airline profits are coming much more from capacity restraint and let’s not kid ourselves, there was a huge amount of capacity removed from the market(s) at the start of this crisis and it continues to be closely managed by airlines so far.  So much so that most airlines are seeing historically high load factors on their flights.  Load factors that arguably cannot be sustained forever. 

Why?  Because an 85% load factor indicates that you’re actually leaving money on the table in the form of passengers who are not flying because A) the prices are too high or B) they cannot get on the flights they need to be on.  Airlines know this and while they’re enjoying the profits, someone will blink eventually. 

Most likely, airlines such as Southwest or jetBlue will start to add capacity and growth to their systems to take advantage of those deferring travel presently and that will force legacy and SuperLegacy airlines to reconsider their capacity management. 

Consolidation has made that capacity restraint easier for now but that won’t last and I still see one airline who arguably could either be removed from the market or who will go through bankruptcy organization and then the game changes again.  That’s American Airlines, by the way. 

This business is highly cyclical and we’re just seeing the beginning of the top end of a cycle.  Don’t kid yourself into believing that airlines have finally figured out how to manage themselves in this market.

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With the Southwest/Airtran merger announcement, there has been a lot of rampant speculation on what US Airways or American Airlines should do in the face of this industry consolidation.  Many see them about to come under pressure from financial markets and shareholders to find a pathway to play in this consolidation game. 

While you could argue that US Airways is at a disadvantage to any of the SuperLegacy airlines now, I don’t think that AA is so much at a disadvantage that they *must* do something.  In fact, their problem is that a merger doesn’t bring much to the table for them since they would be the surviving entity and they already have high costs.  US Airways is doing just fine for now and I think they can afford to be cagey for a while at the least.

The truth is, I think jetBlue will be under more pressure than any other airline.  Their growth is largely stalled right now and then continue to re-trench in existing markets.  They’re busy defending NYC, Boston and, to a lesser extent, the Northeast.   While I admire how jetBlue got its foothold by operating out of JFK airport, I also think that they’ve begun to forget just how much the Atlantic seaboard chews up airlines. 

Yes, they’ve got their nifty trans-continental routes to the west coast and they appear to do pretty good with those on some level.  What jetBlue doesn’t have is a clearly defined pathway forward.  What’s their stategy?  The status quo?  More and more trans-continental routes that don’t offer all that great aircraft utility?  More flights from the Northeast to Florida?  More flights from Florida to Caribbean leisure destinations?  None of that sounds very attractive.

Lest you think I’m speculating, read this story quoting CEO Dave Barger.   He states they’ll continue to focus on their “growth plan” for Boston and the Caribbean.  I’ll point out that Southwest Airlines is already a national airline with a hole in their network.  That changes with the addition of Airtran and they become *much* more competitive with jetBlue upon completion of the merger.  Yes, I think SWA will stumble some during integration but I do not think that will inhibit their ultimate success. 

Contrary to popular belief, there is some low hanging fruit out there for the right airline.  jetBlue has the right service product, labor costs and, frankly, network to go take advantage of that.  But there is no vision for that kind of growth.

I suspect one thing that is inhibiting such growth is aircraft financing.  It’s a tight credit market out there and good terms on aircraft aren’t nearly as easy to acquire as they once were.  However, there are airlines out there with plenty of the right equipment and who could possibly be bought for the right price. 

I think it’s jetBlue that finds itself under pressure for an acquisition and/or merger.  It can’t continue to grow in its existing markets.  There isn’t any room to grow without a bruising and expensive battle.  I think it is going to take new leadership at jetBlue.  Dave Barger does a great job of keeping operations going and maintaining the status quo but he has done a poor job of setting a vision for growth into new markets.  There is plenty of opportunity out there and many airlines are seeing it and executing a strategy for it.  That is going to put a lot of pressure on jetBlue in the next year or two to find a way to articulate what their next plan is.

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About 24 hours after the Southwest Airlines / Airtran announcement, rampant speculation on who American Airlines should partner with started up.  The truth is, while I can make an argument for them to merge/acquire US Airways, I think they’ll shy away from a merger.  If they do go shopping for an acquisition, I don’t think it will be oriented towards a real “merger” a la Delta/Northwest or ContiUnited. 

There are a couple of targets left.  Alaska Airlines strikes me as one that should interest Southwest, American Airlines and Delta.  I think it’s pretty hard to get a deal done with Delta because of regulatory issues particularly in the Seattle area.  I think it’s pretty hard to for AA to get a deal done with Alaska because both parties have high labor costs and AA just won’t know what to do with the rather unusual operations Alaska performs in Alaska. 

I don’t think anyone is going to buy jetBlue at present and jetBlue’s CEO says they’re going to grow organically.  I would be happy to see jetBlue just get outside of its NY/Florida comfort zone and stop treating the midwest like it has the plague.

Frontier could be an interesting proposition for jetBlue, I think.  Sadly, I also think that Republic Airways is going to hold on to Frontier for dear life given what’s going on in the regional airline world.  Nevertheless, I do think that jetBlue could harmonize Frontier’s service and routes to the jetBlue way and make something of that airline. 

US Airways?  Well, they are the somewhat pretty girl who never gets asked out anywhere except to make some other guy jealous.  Until they get their labor house in order, I think it’s going to stay that way.  Their executive corps, however, ought to be attractive to someone.  Despite all of US Airways weakenesses and their “East/West” style of ops, those guys make money.  There is a lot to be said for that. 

I think they are more attractive for bringing into a new alliance.  Currently, US Airways belongs to Star Alliance but ContiUnited kind of makes them look superfluous.  SkyTeam just doesn’t need them either.  Oneworld aka American Airlines/British Airways,  on the other hand, could perhaps take advantage of them.  The deal would have to be a bit sweet because US Airways, if nothing else, is enjoying a nice “under the radar” ride on Star Alliance right now. 

I can’t think of anyone who could find a use for Virgin America at this point except, well, the Virgin Group.  Even the Virgin Group seems to have a hard time seeing a real value for working with Virgin America.  If they had any money, I would point them to Frontier but I think Republic Airways would just laugh out loud.

The truth is, I think there is suddenly some opportunity out there to start a new airline.  I would look for weak airlines who have major hubs and very little competition.  Some place where business customers and leisure travelers alike are dissatisfied with their current offerings and restrictions.  Some place that has a history of embracing the airline industry and where you can hire experienced people to kick that venture off.  That would be a great place to start something new.  I wonder where such a place might be?

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Continental Airlines and US Airways have gone from red to black in their latest 2nd quarter earnings reports and it’s a remarkable performance for both airlines.  Continental wobbled a bit in the 1st quarter but came back with a strong report of $233 million report and when you combine that with United Airlines earnings, you see a potential competitor to Delta that is the equal if not superior. 

Delta Airlines, American Airlines and the proposed ContiUnited merger all will result in airlines with revenues between $23 billion and $28 billion and it just strikese a yellow highlighter across American that it had a gap of over $400 million in profit this past quarter.

US Airways’ result, however, is even more impressive.  In fact, US Airways in general is becoming more and more impressive.  Operationally, they’re hitting high numbers on completing flights on time, losing baggage and just generally making people feel good about their choice.  This is not the airline you saw even 2 years ago and if I were asked about flying them today, I would highly recommend them at this point. 

US Airways came in with a net profit of $257 million this quarter and they did this with the least relevant hubs in the industry.  They did it despite the fact that after nearly 5 years their pilots still haven’t decided upon a union and negotiated a contract.  They did it despite becoming the third wheel among the Star Alliance’s US based partners.  They did it despite making Las Vegas, at best, a focus city instead of a hub. 

I would love to see some of that DNA move over to American and get things sorted for once.

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The Chicago Tribune has THIS story on American Airlines and their desire to lower the amount of fuel being carried as reserve on an average flight.  In short, AA has discovered that it is carrying an excessive amount of reserve fuel on the average flight.  What’s excessive?  Some aircraft are landing with almost twice the amount mandated by the FAA and let me point out that the FAA is a pretty conservative organization.

Predictably, American pilots see this as an instrusion on their authority and a dangerous path.   But is it?  Currently, the FAA mandates that you have 45 minutes of fuel reserves and that’s worked very,  very well over the years.  Interestingly enough, American itself requires 65 minutes of fuel reserves but the aircraft are landing with an average of 92 minutes of fuel reserves and that’s a problem. 

Why?  Because when you carry more fuel, you burn more fuel to carry that extra weight.  All American wants to do is get their average down much more closely to their mandated reserve number of 65 minutes.  Doing so would save them the cost of carry 30 extra minutes of fuel, which over the course of a year in a fleet of over 600 aircraft will translate into millions of dollars of savings. 

Captains, traditionially with final say on what fuel they’ll require for a flight, say that this is an intrustion on their authority and potentially puts them into the position of being reprimanded or fired if they do it too often because the airline wants pilots to justify extra fuel by filling out a form.   I think the pilots union would love for this to be another bone of contention between pilots and the company. 

However, every airline should be doing this for a variety of reasons.  First, we really do know how much fuel a typical flight should carry and we know that by route and model of aircraft and the process for figuring this out is genuine science and genuinely accurate.   Airlines do *not* want their flights to routinely lack enough of fuel that causes diversions, trust me.  Every flight that has to stop and refuel represents a flight that just lost a spectacular amount of money.

Does AA’s form make the process potentially punitive?  Yes, I think it does and I think it should.   American’s pilots are, quite literally, the best, most experienced pilot corps in the world.  The fact that AA’s average has gone up to 92 minutes of fuel left upon landing is shameful for those pilots.  They should be nailing the company average 10 months out of 12 and they’re not getting close.  So, yes, I think pilots should justify loading more fuel and if they’re inappropriately loading too much fuel, yes, I think they should be counseled on that too. 

Just like any other employee today in America’s workplaces who is wasteful and inefficient.

There are legitimate reasons to add additional fuel before leaving.  If an airport is particularly congested or experiencing long delays, a pilot will add extra fuel for taxi purposes.  If a flight route suddenly has developing weather crossing it, a pilot may add some additional fuel to fly around the weather.  There are other legitimate reasons as well and there is no reason why pilots can’t simply document their reasons for increasing their fuel reserves on a particular flight.

US Airways did this a couple of years ago and, yes, a few pilots were sent for extra training and counseling after repeatedly adding more fuel than necessary for flights.  Ultimately, US Airways and the pilots came to an agreement on how to work out those conflicts and the airline now saves money by meeting its reserve goals (also in excess of FAA minimums). 

This conflict is a union conflict, not a safety conflict.  More than a decade ago when fuel prices suddenly rose significantly, all Southwest Airlines had to do was communicate to their flight dispatchers and pilots that they needed to save more fuel and suddenly better, more fuel efficient altitudes were being planned and pilots were being exceptionally aggressive in requesting higher altitudes and more direct approaches to airports to save that money.  Safety wasn’t compromised and millions of dollars were saved.  If American has the most experienced crew of pilots, Southwest probably has the second most experienced crew.

At the end of the day, saving this money is essential for success in the airline world.  Pilots not only shouldn’t be pushing back on this idea, they should be embracing it and working even harder to find places for their airline to remain competitive.

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AA CEO Gerard Arpey has been getting somewhat loud in his refusal to acknowledge that there may be value in a merger between AA and US Airways.   His argument is that once you have scale, adding scale doesn’t bring much to the table.  Further, he doesn’t think that US Airways brings AA much considering the hubs that AA is focusing on (Dallas, Chicago, NYC, Los Angeles).  You can read more HERE.

Arpey was responding to analysts who pointed out that AA bought TWA to maintain its dominance when United was going to merge with US Airways and why wouldn’t AA want that now. 

The thing is, no, it doesn’t fit within their current 4 hub/cornerstone strategy.  However, that strategy isn’t showing much potential in returning AA to profit either.  AA is the only legacy airline not projected to earn a profit for this year.  I’ve said it in previous posts and I’ll say it once more.  AA and its executive team doesn’t know how to do merger and doesn’t know how to integrate another airline and, more importantly, doesn’t want a merger because it will, most likely spell the end of some of their careers at AA. 

I don’t think Doug Parker would lead such a merger but suddenly he looks like a decent successor to Arpey, doesn’t he?  Particularly if Arpey wasn’t leading a merger very well.  Consider that US Airways, by far the weakest of legacy airlines, is going to earn a profit this year and they’re doing it despite labor issues and their 2nd tier hub system.  That’s remarkable.  American’s team could learn a few things from US Airways, I suspect. 

There is a message here from analysts.  That message is: “Do something.  Perform.  Show us the money.  You don’t have an unlimited amount of time to perform.”  

It is significant that analysts are now putting the heat on and show no inclination to let up on American.  To the contrary, they’re now openly questioning the potential for success in Arpey’s strategy for the airline going forward.

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The Dallas Morning News Aviation Blog has this post HERE about analysts beginning to like the idea of a merger between American  Airlines and US Airways.   This marriage occurred to me back in April and you can read my post HERE.  Eric Torbensen at the Dallas Morning News thinks it is a terrible idea and I disagree.

The real reason to perhaps not do a merger between these two airlines is that American Airlines is terrible at mergers.  Their employees don’t embrace them and their executive corps approaches them like predators.  As a result, mergers at AA tend to be plain “consumption” rather than growth or partnership.

Now, if they could embrace a merger, I believe one such as this could be good for them.  First, a merger like this wouldn’t definitely not be sexy.  The sexy merger partners are now fully occupied and, frankly, there was perhaps just one that really would have qualified as sexy and doable for AA and that was Northwest Airlines.  They’re gone. But just because an AA / US Airways marriage isn’t the sexiest thing on the planet and just because it doesn’t necessarily bring the gains that another partner would have provided doesn’t mean that it doesn’t make financial sense. 

This one could.  Look at the route maps first.  US Airways offers a hub presence in two areas of the United States where AA is actually a bit weak.  Phoenix is a nice hub in the web and while it isn’t the strongest hub in the country, it does pretty well.  Yes, Southwest is there but guess what?  AA knows how to compete with Southwest. 

Charlotte is a nice Southeastern US hub that pvovides coverage in area that AA hasn’t gotten much traction.  AA tried having a hub in Raleigh (didn’t work) and has, from time to time, tried to expand Nashville.  It has Miami but that really is more of an international gateway city than it is a domestic hub.   So AA has presence in some weak(ish) focus cities for the SE that the Charlotte hub could change for them. 

So, in terms of a domestic network, it works.  It really is quite complementary to AA’s existing system.

There is some compatibility between the executive leadership of the two companies.  Doug Parker is a former AA manager, for example (and his wife still is an AA flight attendant) and some of the other executive staff has roots in AA as well.  Some that don’t are from Northwest and the cultures between Northwest and American Airlines aren’t dissimilar either. 

But let’s talk about the romantic international part of this.  No, US Airways doesn’t offer much to AA that it doesn’t already have.  It’s US Airways weakest area.  But it isn’t a money loser and there are some hidden benefits.  American can probably either A) redirect feed for those flights to one of their existing gateway cities or B) bolster the US Airways international product and make the US Airways international flights a bit more of a competitor.    The smart team would do both.

There is another benefit:  A more diversified fleet.  There is some overlap between the two companies (737, 757 and 767 equipment but the US Airways mainstay aircraft are Airbus aircraft now.  The A320 series aircraft could be useful to redeploy onto AA routes currently being served by the MD-80 fleet.  The Airbus A330 equipment could be redeployed to AA routes requiring a little more capacity than a 767 but which aren’t in need of a 777’s size or range.

Finally, such a merger would offer Oneworld domestic coverage in areas of the US where it is definitely weak.  The Oneworld alliance leans on AA only in the US and the other two alliances were bolstered by at least 2 airlines domestically.  This is a great opportunity to improve the Oneworld alliance. 

There is value in such a marriage.  The problem is, the people who know how to do this kind of marriage and make it work are at US Airways, not AA.  Doug Parker and Company understand the value of a union like this and know that you embrace the partners strength and use it.  Gerard Arpey and Company come from a school that is more about being a predator and consuming your competition without really embracing them as partners.  Since AA is so much larger than US Airways, it’s Arpey who would lead such a merger and I don’t think he’s the right one. 

Actually, I think Doug Parker could do fantastic things for AA.  If he can succeed with US Airway’s assets and weaknesses, he very likely could do wonders for an airline like AA with its resources.  But the AA board would have to want him and despite the recent flare ups against Arpey from analysts, Gerard Arpey still holds the full confidence of AA’s board of directos.  He isn’t going anywhere anytime soon.

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A federal appeals court overturned a federal district court ruling granting an injunction to the America West pilots who were dis-enfranchised when former US Airways pilots balked at an abritration ruling during the America West / US Airways merger that integrated seniority in a manner that more “blended” the seniority lists. 

US Airways pilots wanted a “date of hire” integration whereas the America West pilots favored a “blending” of the two lists.  Since seniority is everything at an airline, the US Airways pilots felt they had a lot to lose.

This has been going on now for 4 years and, frankly, I believe the US Airways pilots have not only done the America West pilots a disservice, they’ve hurt themselves as well. 

The original arbitration was done “in house” by ALPA between the two unions for each airline.  It was to be binding and while it didn’t settle everything to everyone’s satisfaction, it was as about as fair as one could get in such a situation. 

America West pilots shouldn’t be materially harmed by a merger when it was, after all, their company taking over US Airways.  Likewise, US Airways pilots shouldn’t be “stapled” to the bottom of the list at America West.  The original ruling did neither.  America West pilots weren’t significantly harmed by the initial ruling and, hey, US Airways pilots got to keep their jobs.

It is arguable that without the merger, US Airways would have likely gone into their third bankruptcy and they would not have survived.  Further, America West management corps has done quite a credible job of managing an airline that, among legacy airlines, is probably at a material disadvantage. 

US Airways pilots didn’t like the initial ruling and decided to form a new union for all pilots.  Since they had a  slightly larger number of pilots between the two groups, they got a new union (US Allied Pilots Association) certified and America West pilots rightfully didn’t like that and sued.  Using larger numbers like that was dirty pool.

This new ruling basically says that USAPA hasn’t materially harmed the America West pilots yet and, therefore, should be allowed to negotiate on behalf of all pilots until there is harm.  In essence, they (the court) said “Hey, this is a bit premature.”

I couldn’t disagree more.  Intent on the part of USAPA has been clear from the beginning.  They want a date of hire seniority list and now they have the ability to go negotiate such a deal.  Those negotiations with US Airways are liable to take 2 to 4 years before an agreement is in place.  In other words, it could be 2 to 4 years before these America West pilots can “prove” harm.

The rationale being used is, in my mind, flawed with respect to timeline, etc.  There was already a union (the same union for both airlines) certified at the time.  There was binding arbitration.  If arbitration isn’t binding, then what is it?  Allowing the original agreement to be nullified by establishing a new union with a slight majority of votes is just plain wrong.  

Who wins?  US Airways, of course.  They get to continue to pay pilots according to agreements that have been amendable for a long time at lower pay rates than much of the industry and a dollar saved today is worth 2 dollars tomorrow. 

Who loses?  Both parties to this disagreement.  They are looking at another 2 to 4 years before an agreement is in place and if that new agreement is based on date of hire, there will be another court battle that is likely to overturn that agreement.  Then you can tack on another 3 to 4 years to resolve that dispute. 

When everything is done, these pilots are looking at as much as 12+ years to settle this.

The fair settlement is a blending and everyone gets together and negotiates a new contract and gets that done in 2 or 3 years.  Then everyone earns more. 

A 12 year timeline potentially devestates senior pilots at both airlines who will retire before that conclusion. 

The best conclusion would be for pilots on both sides to get together, toss out the existing leadership in favor of a blending and then get to work on getting that new agreement asap.  Sadly, I don’t think that will happen.  The intransigence on the part of US Airways pilots is just to fixed for them to be moved into a real compromise.

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Last week, someone I know was scheduled to fly to Las Vegas from DFW on US Airways.  Their teenage child had gone into the hospital at the first of the week due to a severe and hard to cure infection.  She couldn’t take the trip because of this and asked me what to do.  I gave her the phone number to US Airways and told her to call and describe why she couldn’t make the trip.  I also warned not to expect much, if anything, because it was the most Economy of Economy fares.

 US Airways heard the reason, called the hospital to verify the hospitalization and then called back to waive the change fee ($150) and give a credit for the value of the flight ($260) usable for the next 12 months.  I advised my friend to call US Airways an hour later and just confirm that the credit and conditions were in fact on the record locater and they were. 

 Not only was it a satisfying experience but it was handled expeditiously and with sensitivity.  I have to give US Airways a lot of credit for how this was handled and its proof that not everything goes wrong in the airline world.

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One very noticeable development with the announced United Airlines / Continental Airlines merger is that 2 of the 3 major airline alliances (SkyTeam, Star Alliance and Oneworld) now have Super-Legacy airlines participating in it.  SkyTeam has Air France/KLM and Delta (Delta/Northwest).  Star Alliance will have United/Continental and, so far, will continue to have US Airways in the US market. 

Oneworld has American Airlines.  A lone airline ever increasingly burdened with debt and who shows little sign of recovering in a market that several airlines have shown improvement in.  Oneworld has the fewest airline partners although it arguably maintains global coverage.  I see some opportunity for a few of its partners, too. 

QANTAS has long had ties to both British Airways and American Airlines but I wonder if they aren’t looking around and realizing that there may be better opportunities with Star or SkyTeam.  They compete with British Airways on many international routes so I wonder how much love they feel on that side.  It’s true that AA provides them with lots of feed in the US but several other partners could do the same in the same cities.  In fact, I suspect SkyTeam would love to have them on board.  United (Star) already flies US/Australia routes.   In addition, Air New Zealand is a Star member and doing nicely on trans-pacific routes too. 

Oneworld doesn’t directly access Canada and has mediocre ties to Africa (via European partners) and Latin America is perhaps a bit underserved in that LAN is the only partner there and their concentration is on the west coast of South America.   The Far East remains well served by Cathay and JAL but India is conspicuously missing.  That’s a country of 1 billion (with a “B”) people.  You would think that having a regional partner in India would be a priority.   Southeast Asia is weak as it is basically served with flights to and from that region but not within.  There is another 1 billion people located in that region. 

There are several European partners but I do notice that there are two primary hubs:  London and Madrid.  Not the hubs most people want to fly in and out of.  London is congested and prone to delays and Madrid is served by Iberia, not an airline with a great reputation.  It also doesn’t “feel” like a convenient hub. 

What is more noticeable is that the founding partners of Oneworld were mainstay legacy airlines.  Airlines that have not seen any revolution to date and who often are burdened with some of the highest costs to operate in their regions. 

With the ever growing size of both Star and SkyTeam, I do wonder if there will be any room for Oneworld.  Could the Oneworld alliance be absorbed by the other two?

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American Airlines is a pretty conservative organization.  It doesn’t hire from outside the airline very often and it manages itself pretty closely.  It is, in many ways, the IBM of the US Airline industry.   Well, the IBM of the 1970’s anyway. 

Mergers and acquisitions haven’t been a very successful pathway for American.  One look at the TWA “merger” which was really a purchase and you’ll understand why.  They tend to focus on their core strengths and it is particularly difficult for them to adopt new staff and destinations.  Purchases, for them, seem to be more about keeping dominance in a particular area rather than growing their business. 

When Delta and Northwest started off on their merger, it was easy to understand why AA was unruffled by the development.  There was no assurance of success on any level be it financial or operational.  Being the biggest isn’t AA’s game nearly as much as being the strongest and I’m sure their management corps looked at that merger and decided it wasn’t something to worry too much about. 

But Delta has had better financial success than AA and it seems to be “right sizing” aircraft to routes and enjoying better yield and that has got to be attention getting on some level.  It got Continental’s attention apparently.  If the Continental / United deal does go through, I have to wonder who AA starts to look at.   It’s one thing to have an aberration in Delta but it is a whole other bag of bananas to have Delta/Northwest and United/Continental next door to you.

So, is it US Airways?  They aren’t just the logical choice because they’re the only legacy airline left.  There is a certain sensibility to the idea.  AA has no hubs out west (just a large presence at LA) and, in fact, has no dominance in any of the areas where US Airways does operate.  Well, Philadelphia is close to Washington DC and NYC but it isn’t the DC or NYC market either.    AA has no southeastern presence either.  Miami is a hub but it isn’t an regional hub like Atlanta or Charlotte. 

There isn’t much fleet compatibility there and I’m not sure there needs to be.  Delta has shown that as long as you have an economy of scale in the aircraft type, you can have it in the fleet and use it to your advantage by rightsizing your aircraft to the route. 

Labor problems?  Well, AA is kind of used to labor problems and their labor unions are so strong that I kind of wonder if they wouldn’t smack all those US Airways EAST/WEST conflicts into shape.  If nothing else, it would give the EAST/WEST unions something to unify over. 

Say, did you know that US Airways CEO Doug Parker used to work for AA?  His wife still does.  Guess who US Airways’ President Scott Kirby used to work for?  Sabre when it was a division of AMR, the holding company for AA.   Two more of the executive team come from Northwest Airlines from an era when they really weren’t that different from AA culturally speaking. 

Both airlines have a lot of debt.  The US Airways team has actually proven itself to be pretty scrappy in many areas.  They cleaned up the Philly problem from US Airways EAST, managed their finances carefully and have continued to be a player despite unresolved challenges.   Neither has really made money though. 

However, a real merger, not just a purchase and dissolution but a merger, has some potential even if AA’s team retains most of the control.  It has some of the same potential that Delta / Northwest had and fewer of the risks that a United/Continental merger has.  It helps the Oneworld alliance as well. 

While I think AA could do it, I also think the chances for them to screw up a real merger are far higher than I would give many other airlines.   I think they would approach it as a takeover and attempt to dominante everything.  And as a result, I think we would see the hubs in Phoenix, Philadelphia and Charlotte slowly fade away over time with nothing much to show for its effort after 10 years.

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During American Airlines earnings call yesterday, one financial analyst got a little rough with AA and, more specifically, Gerard Arpey and Tom Horton.  By rough, I mean the question posed was “Is that all you got?”  The Dallas Morning News Aviation Blog has a good description of the exchange HERE. 

They make a good point.  American Airlines has really been a disappointment for a decade and the leadership has frequently leaned on multi-year plans and talks of how well things are going and what can be expected from new deals and new alliances.  Sometimes it is talk of how one time expenses got in the way of a profit, etc.  At the end of the day, you really should deliver something now and then.  I would point you to Continental as an excellent example of this.

American Airlines didn’t file bankruptcy.  Everyone talks about how they did the right thing and didn’t file bankruptcy.   The employees gave back 30% or more of their salary instead.   Problem is, when your competition (United, US Airways, Northwest, Delta) does file bankruptcy and does lower its costs and does streamline its operations and does reinvigorate its workforce, they’ve got you boxed in.   All the airlines in that list gained a permanent advantage over AA and regardless of the talk of “doing the right thing”, AA has a big disadvantage. 

What’s really frustrating isn’t that disadvantage.  What really irritates people is the leadership’s habit of deferring and delaying to another day many of the problems that do, at some point, need to be solved.  It’s the risk created by ignoring, deferring or delaying the resolutions of these problems that makes one so irritated and, dare I say, now a bit unconfident about AA’s long term future? 

They have an old, fuel inefficient, passenger inefficient fleet.  Much of that renewal has been deferred resulting in a fleet of aircraft that is more maintenance intensive, which carries fewer passengers per segment and which burns more fuel doing it.   

There isn’t a labor group at AA that isn’t spoiling for a fight at this point.  The risk of one or another getting their way and having a strike is increasing month by month.  For 4 years, we’ve seen AA labor groups have their contracts become amendable, negotiations begin and then . . . nothing.  There is no sense of urgency on AA management’s part to have this settled.

These issues and more make it appear as if no one is really solving problems.  They’re deferring them, delaying their resolution or, in some cases, just ignoring them but no one is showing up, raising their hand and saying “We solved this problem.  It won’t be on our plate anymore going forward.” 

The thing is, bankruptcy would have done that for them.  There would have been final solutions and the airline would be coping with immediate problems instead of being bogged down with what is really nearly 20 years of baggage.   My point is, I’m not sure bankruptcy *was* doing the right thing. 

It’s OK to describe problem resolutions as ongoing for a year or two or maybe even three.  It’s been going on a lot longer than that at AA and JP Morgan analyst Jamie Baker has noticed.  And I think this is just the beginning.

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The FAA has denied exemptions for their 3-Hour Rule at NYC area airports.  They replied:

“Passengers on flights delayed on the tarmac have a right to know they will not be held aboard a plane indefinitely,” U.S. Transportation Secretary Ray LaHood said in the department’s announcement. “This is an important consumer protection, and we believe it should take effect as planned.”

 

” In denying the requests, the Department concluded that airlines could minimize tarmac delays by rerouting or rescheduling flights at JFK to allow the airport’s other three runways to absorb the extra traffic.”

 

“The Department also noted that it has the ability to take into account the impact of the runway closure and the harm to consumers when deciding whether to pursue enforcement action for failure to comply with the rule and the amount of a fine, if any, to seek as a result of non-compliance.” *

And that is really what I both expected and hoped for as a reply.  I am certain the war of words is not over, however.

*  These quotes are from the Dallas Morning News Aviation Blog entry which can be read HERE.

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Senator Charles Schumer has obtained “commitments” to not charge fees for carry-on luggage from several major legacy airlines.  Read HERE for the entire story.

There are a couple of things I notice.  First and foremost is that each airline making the commitment (American Airlines, jetBlue, Delta Airlines, United Airlines and US Airways) each have significant operations at La Guardia or JFK Airports (or both.)  Airports in the state of New York and both of which are within Senator Schumer’s power base. 

Also notable is that Continental has been quiet.  Continental’s operations for NYC are concentrated at Newark Airport located in New Jersey.  Well, I also suspect that new Continental CEO Jeff Smisek is sensible enough to ignore the Senator. 

Of course they made the commitment.  It doesn’t fit within their business model and is impractical for them to try.  It costs them nothing to make the commitment and get their name in the news much as Spirit has had theirs in the news since making the announcement that they would charge carry-on fees. 

The only people benefitting from Senator Schumer’s diatribes is Spirit Airlines.  I leave Senator Schumer out of that equation because the more he speaks, the more it becomes clear that he doesn’t know what he is talking about and that this is more about his name in the press that advocating something for his constituents. 

Imagine the good that could be done if he shouted as loudly for redefining NYC’s air traffic area and getting better air traffic control systems in place. 

Instead he leads the charge against an airline who has no New York bases and who flies just 14 flights from NYC (La Guardia) to destinations such as Detroit (2 flights), Fort Lauderdale (7 flights), Myrtle Beach (4 flights) and Atlanta (1 flight). 

Hard to view them as a threat to NYC area consumers particularly since they offer flights on the NYC – FLL route as low as $60 each way with a checked bag fee of $19 and who *still* allows personal items free on board if they fit under the seat in front of them.  

Let me point out that several airlines who he received commitments from charge *more* for checked baggage. 

So much for reality.

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