As was inevitable, there are now public interest groups decrying a merger between US Airways and American Airlines as anti-competitive and bad for the consumer. No surprise.
Industry consolidation has been good for airline profits and we definitely have seen airlines move towards a more sustainable business model as a result. I would, however, credit capacity restraint for as much improvement in airline profits as anything else. Frankly, all of the major airlines in the United States (with the exception of AA) have impressed me with their discipline in the marketplace. It isn’t a discipline ever seen before and after 4 years, I think we’ve seen a transition to a truly different way of operating airlines.
That new model for operating as an airline includes looking at routes in the right manner, for once. They are now being treated as “businesses” and evaluated individually for profitability. In the old model, it was about market share at any cost. The problem with market share at any cost is that it required unfettered, almost violent, competition between airlines on routes and found routes being operated at a substantial loss for years. That has largely stopped now and I applaud the airlines for showing enough discipline over the last 4 years to make that stick.
Airlines also now seem to recognize that defending market share at any cost is a bad model as well. Curiously, the one airline that seems to have continued to trouble itself with defending routes is American Airlines. Until bankruptcy, the airline has “punished” intruders on its “turf” over and over again with high frequency, high capacity and extremely low fares to push out that intruder.
Finally, I think airlines have actually realized that providing a reasonable service experience is important again. It’s not the service model of the 1970s or 1980s, no. However, it also isn’t the embodiment of the idea that all a customer ever wants is a rock bottom price. If price was truly the only key to winning on a route, Spirit Airlines and Allegiant would be exploding with growth never seen before. They aren’t. In fact, what we have seen is that broader offerings of service levels attract more revenue per seat and that’s what airlines need.
US Airways has, in many ways, been a leader in executing change to meet the new industry model. It has figured out how to drive incremental revenue in ways that exceed most any other airline. At the same time, they have steadily improved customer experiences across their lines both on and off the airplane. They are now an airline that can be depended upon to deliver passengers to their destinations reliably and with their luggage. Am I the only one to notice that US Airways is about the only legacy airline to not experience a major public embarrassment over customer treatment in recent times?
American Airlines is actually the antithesis of US Airways and has shown a strong reluctance to acknowledge the industry changes. They’ve pursued market share, they’ve defended routes at all costs, they’ve been more price driven than any other legacy airline and many LCC airlines. They have not upgraded or improved their cabin experiences in any significant way since the 1980s. Their website drives customers away or at least angers customers. Their aircraft are old, inefficient, and painful to fly.
The SuperLegacies, United and Delta, have done quite a bit to improve everything across the board and one thing that AA hasn’t done: evaluated routes for profitability on a regular basis. Furthermore, UA and Delta now see opportunity on routes that have traditionally been owned by American Airlines. They’ve even overwhelmed cities where American Airlines was once a major presence and a dominant player (NYC, Wash D.C., Chicago, Los Angeles).
SuperLegacies are now evaluating competitors routes and going after those routes which are yielding major revenue. Delta and United both are targeting both AA and US Airways as well as holding their own against airlines such as JetBlue and Southwest Airlines.
Yes, American Airlines and US Airways need each other. American’s operations need US Airways executives who know how to methodically fix operations in a lean manner. US Airways needs American’s hubs and routes to build much better network yield. Yes, US Airways can exist quite nicely as a stand-alone airline. It cannot expect to rise to the scale of the SuperLegacies and compete both domestically and internationally over the long term without a merger.
A combined US Airways / AA company nominally looks like the biggest airline in the world once complete. That won’t necessarily be true. There will be consolidation and rationalization between the two airlines but the entity will be a member of the SuperLegacy group and it will have the potential to compete in the market on a level playing field. That’s all they can ask for.
3 SuperLegacy airlines, Southwest (who doesn’t quite fit into any category now), and a smaller stable of LCC carriers looks about right for the modern competitive landscape. At this point, I actually think we will see increased competition over the long term among the Big 4 and that will be good for the consumer. We will not, however, see that increased competition until there is a Big 4 and until those airlines have time to settle their operations in the new competitive landscape. If the US Airways / AA merger were consummated by the end of 2013, I would expect a rational and highly competitive marketplace to be fully emerged by 2017/2018.
If there is an area where I see reduced competition in the US, it’s among the LCC carriers (and doesn’t include SWA). I think the narrowed gap in costs and differences in revenue models between the LCC carriers and SuperLegacies removes the best business argument for an LCC carrier. It will be a struggle for those carriers in the future and we do need them. On the other hand, if a relatively new LCC carrier with rock bottom costs can’t compete against SuperLegacies, the market place has done its job.
So, no, I do not think the proposed US Airways / American Airlines merger is wrong.
The APA board has named American Airlines first officer Keith Wilson interim president of the Allied Pilots Association. Interesting to me is that Keith Wilson has been told to work towards getting respect for all the sacrifices made over the past 11 years by AA pilots. Also interesting is the fact that it is Keith Wilson who ran against David Bates in the last APA officer elections.
The patients have taken over the asylum (again) and are asking for all the warm milk and cookies they can get since they had to forgo some of that a while back.
Now that the APA has thrown its temper tantrum, let’s take a guess at where things go for American Airlines for a while. I think that the APFA will see their membership vote no to their contract because, at the end of the day, having a similar temper tantrum will feel more satisfying. This won’t matter because I think the bankruptcy court is going to give AA exactly what it wants: imposed terms on both the APA and APFA.
It’s possible the court will wait for the APFA vote and the judge has shown previous interest in seeing rational agreements happen but . . . the APA vote is a signal to the court and judges are able to be emotional as well. I think AA gets terms imposed and I think Tom Horton gets to chuckle at the unions. He provoked them and got what he wants.
(Update: The court did delay its ruling on the APFA contract. I expect the APFA will also turn down its last offer.)
US Airways and Doug Parker now have a much more difficult uphill battle to pursue a merger. The pilots just damaged his credibility badly and markets will take notice. He won’t have influence through the unions because they are giving up a voice at the table as creditors. They’ve lost some credibility in the PR wars going on and Tom Horton wins this round. It isn’t good.
A merger still is quite possible and still the most sensible thing to do. In some ways, it’s even smarter to do it in bankruptcy as opposed to after AA’s exit. There are decisions that can be made that are easier to execute in bankruptcy as opposed to out of bankruptcy. Creditors (future shareholders) are more willing to accept those decisions in bankruptcy than outside of it. A merged company before bankruptcy exit probably sees a little less shareholder value at the exit but probably sees much more value created for shareholders after 3 to 5 years. If (potential) shareholders are willing to see the long term, this deal makes sense.
But Doug Parker & company now have to go to work hard on bondholders and influential members of the unsecured creditors committee. They have to present a sterling and realistic business case. All their ducks need to be lined up perfectly and even with that, one more thing has to happen:
The current AA executive team has to make a mistake. It doesn’t have to be a very big one but it needs to be enough to cause some to question their ability to deliver on a stand-alone plan. Another quarterly loss could do it. Possibly declining revenues might as well. Delta and United could do US Airways a favor and engage in predatory behavior against AA in its cornerstone markets and that would certainly do it.
A US Airways / AA merger makes huge sense when it comes to competing with UA and Delta. Those two have proven that their scale is helping them in ways that AA can’t experience. It is crystal clear that both airlines need each other in the future.
And if you don’t think this fight is about who runs the company, you are kidding yourself. It really does boil down to that and, in a way, you want that kind of discussion to happen. Doug Parker is seen as having “failed” at 3 attempts to merge with Delta, UA and Continental. I would argue that he didn’t “fail” but that marriages with those airlines were a bit less optimal than they would have been with AA. The real truth is that if anyone is the “ugly chick” in the airline world for the past 5 years, it’s been AA, not US Airways.
After all, it’s AA that has lost $10 Billion in 10 years, not US Airways. It’s AA that has refused to address its costs and revenues, not US Airways. It is AA who has an atrocious relationship with its unions, not US Airways. US Airways’ union problems are a product of the unions, not management. And the circumstances under which those problems occurred can’t happen again because of new federal laws.
I’ll point out that US Airways not only didn’t like AA for a merger partner for 6 years, it went to the very best prospects over and over again. That wasn’t dumb, that was smart. They didn’t lose because they were bad ideas, they lost those merger attempts because their counterparts wanted to remain in charge at those airlines.
You see, those executives didn’t fear US Airways. They feared Doug Parker and the reason they fear Doug Parker and his team is that they are aggressive, smart and overperform. There is firm, consistent evidence of that. Parker & company can make quite a few other executive teams look stupid and no one wants to look stupid.
So, I think Parker will go radio silent for the next few weeks, await some outcomes in bankruptcy court and spend their time quietly working with bondholders and lenders to firm their business case for creditors and shareholders. Tom Horton isn’t dumb but if I had to choose between him and Doug Parker to run a modern airline against the likes of Jeff Smisek and Richard Anderson, I’d choose Parker. Parker is aggressive, hungry and willing to think outside the box when it comes to an airline. Horton hasn’t shown any inclination at adopting new behaviors in light of a changed industry.
I’ve been on vacation since last week and while I was away, I had a peculiar urge to not blog on the airline industry. It’s time to change that.
American Airlines’ three big unions have had votes on last best and final offers taking place with results in from 2 of them. The TWU wisely chose to accept their offers and did so without fanfair. The APFA still has a vote going on that will go past the bankruptcy court deadline as it stands today although the APFA remains confident that they’ll be given more time to conduct their vote. I’m not so sure about that after the results of the APA vote.
The Allied Pilots Association has voted down their contract and this brings a flood of thoughts to my mind. Their vote should have been about remaining unemotional. Emotion dictated offering a big “screw you” to any contract but that wasn’t the wise choice in this vote. Accepting the contract offers flexibility in negotiating in the future and a firm role in the bankruptcy reorganization. With the APA holding 13.5% of the equity in the reorganized company, they had a voice that could bark. Without it, they are relegated to the sidelines. An emotional vote wasn’t the way you wanted to go in this.
The APA will be without voice in this process. The bankruptcy court will impose AA terms on the APA. The NLRB will not release the APA to take industrial action against American Airlines for years more now. They’ll insist on more negotiations and even arbitration but they won’t let the APA strike. AA now has zero incentive to do a new deal upon exit from bankruptcy and zero incentive to cooperate in negotiations as the longer they have their terms in place, the better the costs. My best guess? The APA has screwed itself for at least 5 years from the date of bankruptcy exit. They will not be getting a contract that has parity with United and Delta for a long, long, long time. They will have little influence on a merger, if any. The AA executive team no longer need even pay much lip service to the APA. In short, they not only shot themselves in the foot, they shot themselves in the head.
Am I surprised? Actually I was. Why? I cannot say. The truth is that the APA is not a rational organization and it has been mad and throwing temper tantrums for years. When former APA President Lloyd Hill was in charge, nothing got done but pilots got to complain loudly and throw temper tantrums and that felt satisfying. Then David Bates was elected and elected on a platform of approaching negotiations with AA rationally. More surprising was that David Bates and his fellow officers actually did approach their jobs in the union rationally.
So rationally that I forgot about the overall APA membership. Oh, there were hints from time to time. Board members from various pilots’ bases would from time to time throw wrenches into the carefully plotted course charted by Bates but Bates seemed to manage this pretty well and keep some forward progress going. So well that I started to not pay attention to those renegade board members. Bates has done an excellent job of putting smart before emotional. Sadly, pilots don’t want smart. They want emotion.
So Captain David Bates has resigned as President of the APA. The vote against the contract really was a vote of no confidence towards him and his fellow leaders. Bates did the right thing because going forward, he wasn’t going to be an effective leader. Why remain in office as an ineffective leader?
Pilots are weird creatures and their unions are stranger. They will, at almost every chance, cut off their nose to spite their face. They believe themselves smarter than anyone else at the airline and always believe that if the airline would just do what they, the pilots, thought best for running an airline, the airline would thrive.
The problem is that no pilot has ever proved themselves to be an effective airline executive in modern times. To the contrary, most have failed miserably. You can’t “control” an airline. You can manage one, lead one but you can’t control it like you do an aircraft. The airline will provide violent feedback and eject the person trying to control it. It’s not an inanimate object designed for steering inputs. It’s living creature with a mind made up of all of those a part of the organization. It has to be persuaded to do things, not mandated.
The arrogance of airline pilots is nothing new in this area. The greed isn’t either. I am reminded of when Braniff International went to its pilots for temporary cost reductions to keep flying. My father was the man who approached them. At that time, senior Braniff captains were earning as much as 5 times more than my father, one of two executive vice presidents. When asked for reductions to keep cash flow positive, the pilots refused and then offered to just loan the money to the airline via the union and at interest rates above market. Obviously more loans weren’t the solution, Braniff management walked away shaking their collective heads and eventually filed bankruptcy. And never flew again.
All the pilots lost their jobs, had to start fresh at new airlines and at entry level salaries. When the bankruptcy occurred, I remember many pilots stating private (and some publicly) that they never thought the airline would actually stop flying and cease to exist. They believed they were calling a bluff on the part of Braniff management. Many deny it now but that wasn’t true at the time.
AA pilots are a very similar breed. These men and women are going to eliminate their jobs to spite CEO Tom Horton and other AA executives. The thing is, those people will find other jobs and they’ll go on to succeed elsewhere and earn great salaries in industries that pay far better than airlines do. (Airlines are notorious for underpaying executives relative to businesses with similar revenues.) But the pilots are going to end up earning an industry low or moving on to new jobs at new airlines at entry level salaries. That 15 year MD-80 first officer is going to go back to earning $40K a year at some new airline. So is that 20 year 767 captain. And they’ll be bitter people until their retirement.
So, I’ll say this to David Bates: You did well. You presented facts and dealt with reality. You can’t help people who don’t want help and your membership is intent on throwing a temper tantrum at exactly the wrong moment. No good deed goes unpunished and I feel for you because I think you really did work towards productive and rewarding change among your membership.
American Airlines, as a part of its commitment to investigate merger partners during their bankruptcy, has sent out its Non-Disclosure Agreement to all parties interested and confirms that US Airways is one of those parties. The NDA was crafted by American Airlines and, supposedly, in consultation with creditors.
It’s the last part that has me wondering if US Airways CEO Doug Parker knew something about the NDA coming his way before it showed up. Parker seemed to qualify what he thought US Airways support would be for the AA bankruptcy process based on what US Airways perceived the merger process to be at AA. Parker indicated that he thought the NDA would be an indicator of just how “real” and fair AA would approach a merger.
And the fact that he was spinning that NDA 2 weeks ago makes me think that some parties on the unsecured creditors committee leaked details of that NDA to US Airways. Details that might indicate that the merger process at AA is window dressing rather than real.
I suspect that there might be some kind of gag written into that NDA that prohibits anyone from talking about AA in any way. and I’m not certain that that is going to fly with US Airways or anyone else for that matter.
A number of people have found a disconnect in the idea that American Airlines unions would encourage their membership to vote for the recently negotiated terms as a result of bankruptcy court mediation. Particularly so after signing agreements with US Airways in support of a merger.
The answer is that it is a calculated bet on the part of the unions. The terms are better than the term sheets offered by AA to the court for imposing upon the unions. They increase AA’s costs although the terms are less than what is being offered by US Airways. This boxes in AA when it comes to making its case for a stand-alone exit strategy. Once those costs are fixed by a vote, US Airways can better those terms and advance its own business case.
This is why AA and Tom Horton are working so furiously to push away US Airways. It is putting pressure on them to make a better and better business case and that means they have to find an argument for the revenue side of their business. Unfortunately, that argument is increasingly not a very compelling one.
Bondholders have formed an ad hoc committee to try to gain more leverage in the bankruptcy process and US Airways CEO is reportedly directly negotiating with bondholders and offering a better deal.
The walls are closing in on AA management. To succeed in a stand-alone strategy, they must:
Make a cost savings argument that supports a viable business plan going forward. Their costs are now being forced upon them by unions and US Airways which doesn’t make creditors feel like the management has control of the situation.
Make a revenue argument based on the Corners Strategy. This argument is becoming more and more difficult to make since American Airlines still cannot point to revenue improvements that impress anyone. No financial analyst feels confident about AA’s revenue strategy and many are expressing that lack of confidence very publicly. US Airways, on the other hand, is able to point to its own revenue strategies and their unequivocal success: US Airways is earning signficant profits and growing its revenue very successfully despite the inherent weaknesses of its own network. This shows that US Airways management knows how to run an airline today and puts pressure on AA executives again.
AA must convince its creditors that their fortunes are better in a stand-alone strategy than a merger. The argument here is that an exit from bankruptcy will result in those creditors owning shares of a company that is thought to be worth about $6 Billion upon exit. Unfortunately, US Airways is forcing cuts into that pie for creditors outside the company by maneuvering AA into offering pilots a very, very significant portion of that pie.
And that’s why the fight is on. We’ve seem a significant ramp up in PR activities by both airlines and already AA appears to be lashing out wildly in hopes of gaining maneuvering room. Doug Parker and US Airways is applying pressure both externally and internally and has maneuvering room as a function of their financial results.
I expect this fight to get increasingly dirty. AA’s disadvantage in this fight is that AA unions aren’t particularly fond of their executive management and just aren’t interested in supporting them. The DFW area has not, so far, really put forth any strong movement to keep American Airlines a stand-alone company. Why should they? US Airways made the guarantee that the merged airlines would retain both the name and headquarters location in the DFW area.
American has lost public support in its Corners Strategy markets of Chicago where it has to contend with the fact that both United and Southwest Airlines are competing with it. The New York market is being dominated by Delta and United Airlines. There is no groundswell of public support for American’s current management.
American Airlines is launching a PR campaign with the tagline of “I believe in American”. You watch the video here:
I see a Keep Delta My Delta campaign being stirred up by American Airlines. There is a problem with this. Delta employees didn’t absolutely loath and despise their leadership. They had taken hits but they hadn’t taken hit after hit after hit and certainly hadn’t seen contract negotiations drag on for 5 years. They had not signed agreements with US Airways either. This is a mistake on American Airlines’ part and I think they’ll be dangerously close to driving their union employees even farther away from the current leadership. No one likes hypocrisy.
Tom Horton is now going even farther than claiming credit for the idea of an AA/US Airways merger. In addition to all of that, Tom Horton is also bashing US Airways as the airline who needs a merger more desperately than American Airlines. It is his contention that US Airways is desperate, has always been desperate and that he’ll be in charge of any merger decisions at American Airlines.
This is getting personal real fast.
US Airways isn’t wrong when it contends that its a viable airline without a merger. They’ve proved that over and over again over the past 4 years. They earn money, they earn a lot of profit relative to their revenues and they do it consistently. American Airlines hasn’t earned profits, hasn’t even mitigated their losses very well relative to their revenues and has lost roughly $11 Billion over the past decade.
US Airways has been pretty smart in seeking merger partners. Even if it hasn’t been able to engage in one since the America West / US Airways merger, it has pushed industry consolidation very hard. Over and over again, US Airways has been the catalyst for mergers. And each merger has benefited US Airways with industry consolidation.
The thing that I find arrogant (again) is Tom Horton’s statements about who’ll be in charge of deciding mergers at American Airlines. Increasingly, his public comments remind me of a certain Secretary of State for Ronald Reagan in 1981. It’s notable that that man was ultimately asked to leave government.
I’m also finding the political intrigue going on at AA to be distressing. Instead of engaging in a real merger examination process, the executive leadership and its attorneys are running around trying to find ways to derail that examination while publicly appearing to embrace it. Not good. It begs the question: What are you so damn afraid of if you think you are so damn good at your jobs.
Members of the UCC and the bankruptcy court judge should consider having a frank discussion with the executive leadership to level set expectations and, perhaps, indicate that egos needed to get put away for now.
I found a rather odd story on the Seattle Post Intelligencer aviation related blog (found HERE) referring to American Airlines indication of interest in possibly having Alaska Airlines as a merger partner. There were two things of interest in this story but before I go on, I’ll just comment that I found it amusing that Alaska Airlines basically replied with a polite response that amounted to “Yeah, we’re happy with where we are today.” And they should be since their own market cap is an order of magnitude greater than AA’s is presently.
The other item is odd. It mentions AA showing interest in Southwest Airlines as a merger candidate. First, I hope Herb Kelleher didn’t choke too hard from laughing. He’s a nice guy and I wouldn’t want to think of him hurting himself. Second, that isn’t a merger, that would for damn sure be SWA taking over *everything*. Third, SWA is much smarter than that and knows how to responsibly represent its shareholders interests in the marketplace.
I hope that the reference to SWA was a mistake on the journalists part. If it wasn’t, then if I were a financial analyst, shareholder or member of the unsecured creditors committee, I would start questioning just what the hell the company leadership is thinking.
There is a report floating around that CEO Tom Horton was actually the first one to suggest a US Airways / AA merger and that he made the pitch to US Airways CEO Doug Parker last September. It’s entirely possible that a union was discussed in September between Parker and Horton. I will suggest that US Airways has been aggressively evaluating merger partners and options for industry consolidation since 2006. You can bet that AA has always been a part of those discussions. I will point out that even US Airways didn’t really find the AA option that attractive but did find both the United and Continental options very attractive as well as the opportunity to buy Delta out of bankruptcy. In short: I guarantee you that US Airways knows much more about mergers and has done real homework on the subject of American Airlines. The same is not true from the perspective of AA and Tom Horton.
AA has announced new aircraft and seating for transcontinental flights. It will use its A321 aircraft order to replace existing (and very old) 767-200 aircraft on these flights. Curiously, AA is promising things like seat back video and lie flat seating for business and first class. It’s also notable that all the other airlines have not gone that far in their product and have not seen revenue consequences for that decision. I have a feeling that this AA on a PR campaign which will see *some* of these options realized. Also notable is that these domestic trans-con 767 have about 168 seats and the new A321 aircraft will have 102 seats. That’s a drastic reduction in capacity for routes that are robust earners for all classes of seating. Either AA will boost frequencies which is somewhat challenging given that some of those trans-continental flights depend on slots at restricted East Coast airports or AA is hoping that just serving business and first class customers will result in a better revenue and profit yield. This is what people are referring to when they say that AA has as much of a revenue problem as a cost problem. The scenario of great reduce capacity on these routes doesn’t coincide with how the industry is executing on those same routes and earning money.
Finally, US Airways gets to crow about record quarterly profits. It’s a timely endorsement of the US Airways management and I have no doubt that American Airlines executives reached into their desk drawers for their roll of Rolaids upon learning of US Airways success.
American Airlines’ CEO Tom Horton is now playing the PR game in the media making it sound, at first glance, that AA is being responsible in its consideration of merger partners. The big sound bite from last week is Horton declaring that American Airlines merger fate won’t be dictated by others.
Problem is, it will be dictated by others, in large part. I have a problem with American Airlines acting as if it has complete control over its destiny today. It ignores creditors and the financial markets entirely and, frankly, this is part of the problem AA has in general. When analyst Jamie Baker asked Gerard Arpey if that was all he had during quarterly financial results a few years ago, it spoke volumes. It still does today.
No case is being made for how American Airlines will conduct itself upon exit from bankruptcy. There have been no giant changes in leadership at AA. Yes, some leadership has been let go but that which remains is still the legacy management. the same philosophies and practices exist today.
So why should anyone believe that AA will do better given what AA has achieved today?
I’ve admired Delta CEO Richard Anderson’s attitude since his return to the airline business which is that an airline he runs will be run with an eye to returning an appropriate profit in both good times and bad. He’s largely succeeded in that goal. Anderson recognized that the old models of business were done and that it was time to make change happen in ways that made financial sense as well as sense for employees.
American has been desperate to be able to point to other airlines and recognize that labor costs and productivity would rise to AA’s level in short time. The problem is that that hasn’t happened and there is nothing pointing to that happening any time soon. Even AA’s neighbor, Southwest, is aggressively addressing its costs in order to remain competitive while engaging in practices to grow revenue to support sustained profitability.
And when it comes to revenue growth, neither of those two airlines are doing it by grabbing market share at any price. Both are continually evaluating all their routes and where they do not make sustainable financial sense, they’re being cut. New opportunities are being sought over and over again and many of those new opportunities are coming at the expense of AA.
Both external and internal forces are shaping AA’s merger options as we speak. Ignoring those forces and continually declaring that Things Will Be Better is foolhardy. Playing a PR game that clearly indicates interests on the part of AA management reside in being the dominant merger partner to reap rewards is foolish as well. Those who have influence, aren’t so stupid as to not notice that play.
And acting as if Alaska Airlines, JetBlue, Frontier or Virgin America are solutions to your problems is just insulting those who understand the industry.
It is interesting to me that AMR is crowing about its reported Q2 profits of $95 million (excluding bankruptcy costs and special items). American Airlines is #3 in revenue (behind Delta and United Airlines) presently. Delta and United Airlines are projected to report net income in excess of $500 million.
Alaska Airlines, number 7 in revenues (and certainly in possession of a greatly inferior network and high-ish labor costs) has pulled in $105 million in net income.
US Airways, #5 in revenues, should be reporting about $250 million in net income. Southwest Airlines, #4 in revenues, should also be reporting about $250 million in net income. It’s notable that SWA also has exceptionally high labor costs (although it also has exceptional productivity from that same labor group).
I really wouldn’t go bragging about $95 million in what is arguably an excellent quarter for all airlines. This is, if anything, a reminder that the costs aren’t the only thing at play here. There remains a significant revenue problem that doesn’t really get entirely addressed in the Corners Strategy.
Futhermore, crowing about revenue performance gains isn’t entirely honest either as American Airlines already has the most room to make a difference. AA has not brought itself to parity with the other legacy airlines on the revenue side of the equation, it simply has experienced revenue growth that all other legacy airlines have also experienced in the past financial quarter. The real question is how would American Airlines done if it had parity with United, Delta and US airways. Legacy network carriers who all operate with similar equipment, similar approaches and with the same hub advantages and disadvantages.
US Airways announced that they had bought a small amount of American Airlines holding company AMR’s debt. They purchased $1 million in debt for $600,000. This enables US Airways to have status as a creditor of AMR in court and, potentially, gain more insight into AA’s bankruptcy strategy.
It gives US Airways a seat at the table in a more formal sense and is enough to be taken seriously without being so much as to alarm the markets.
But AMR couldn’t resist speaking out against it. American Airline’s spokesman told the Dallas Morning News that it was a publicity stunt and nothing more. I would suggest that American Airlines play that publicity game very, very carefully. Ridiculing a suitor and the only viable suitor for a merger and while you are under bankruptcy protection with creditors who already aren’t sure you’re acting in their interests or your own, seems foolish.
Acting snide can have the effect of making the financial markets and creditors think you’re behaving above your position in this bankruptcy. While it is a company who is in bankruptcy and it is other companies who are the creditors (with the exception of large labor groups), the people participating in this process are all human beings. Human beings are capable of being offended or annoyed and those human beings control the destiny of American Airlines in large part.
It is being reported that American Airlines is now considering 5 merger partners and they are US Airways Group Inc., JetBlue Airways Corp, Alaska Air Group, Republic Airways’ Frontier Airlines, and Virgin America. There are interesting choices here but at the same time one can see a less than enthusiastic theme here.
Alaska Airlines is a great airline and has a great operation on the West Coast of the United States. That said, be 100% sure that Delta isn’t about to let Alaska Airlines get away without a fight. I would rate this opportunity rather low.
JetBlue is another interesting option in that it would bolster American Airlines in its cornerstone market strategy as it applies to New York City with its operations centered on JFK. I think that JetBlue is rather stagnant and while it offers market share, there is nothing else here to be gained and given AA’s history of buying airlines and then not knowing exactly what to do with them. . . this merger could happen but it adds little value to AA overall and certainly doesn’t bring American Airlines back into United and Delta’s scale. All it does is leave existing AA management in control of AA.
Frontier and/or Virgin America? No value added here. There is no great complementary system found here, the management of either airline isn’t doing very well and the most that happens is that AA eliminates a tiny bit of competition on some profitable mainline routes. These are red herrings in my opinion and I think there is very little probability of a real merger with either of these airlines.
US Airways: Enough said already. There are complementary systems, there are good executives who know how to make money and there is enough scale to compete effectively with United and Delta. It’s interesting to me that US Airways’ Doug Parker says that he still hasn’t been contacted by anyone with American Airlines. This is the least attractive merger path for AA executives and, yet, the one that makes the most sense.
I think the intent in leaking these potential merger partners to the press is to appear to be doing something about examining all options while focusing all the real effort and work on a stand-alone emergence from bankruptcy. While that gives people like Tom Horton a chance to realize extremely beneficial financial rewards and an opportunity to keep their jobs, I’m not sure that it means that US Airways can’t be the dominant merger partner.
AA is almost certainly going to emerge with a higher market capitalization than US Airways presently has. However, that doesn’t mean that they have very much maneuvering room against US Airways who has been building cash holdings and operating their business both profitably and sensibly. AA’s current cash holdings are almost certainly going to be reduced in this bankruptcy and will be needed to finance both operations as well as aircraft purchases. Furthermore, creditors and shareholders aren’t likely to be amused at the notion of using those cash holdings for a purchase of US Airways.
I would like to see a conversation about AA’s ability to be a dominant merger partner today. This is an airline that has essentially dismantled every purchase and just made it go away. Reno Air, TWA and Air California all were airlines purchased by American and removed from the competitive landscape without adding any real value from the purchase with the exception of some aircraft. They were, for all intent and purpose, minor asset purchases.
Is that what creditors and shareholders want to see out of the next merger? My guess is that won’t fly with anyone.
American Airlines CEO Tom Horton says the company is ready to explore merger options with all suitors now that the picture of AA’s health is more clear going forward. Likely part of this is driven by the half steps it’s gained in negotiations with the unions and its greater certainty of what court rulings might be.
I’ve pondered this development and announcement since yesterday and wonder if Tom Horton isn’t going to make a play for a merger with US Airways that sees AA as the dominant carrier going forward. The best defense is a good offense comes to mind.
Spirit Airlines began service at DFW about 1 year ago and really began to amp up its service at DFW just after American Airlines entered into bankruptcy. They’ve announced the addition of 5 new cities from DFW including Baltimore and Houston in September and Oakland and Los Angeles next April. They’ve also filed paperwork to serve Cancun from DFW.
This would bring Spirit’s service at DFW to 25 daily flights to 20 destinations in just over a year. Not bad.
Proof that the DFW market is *not* a low fare market. Spirit is seeing load factors close to 90%. JetBlue and Virgin America have discovered opportunity here as well. Delta has started flying into DFW right on top of American Airlines turf.
This isn’t just an incursion against American Airlines. It’s an incursion on Southwest Airlines turf as well. Both of these airlines have been fat, happy and sassy with their respective domains here in the DFW area. Each has enjoyed a kind of monopoly on their services in and out of the DFW metroplex area.
As a resident of the area, I’m glad to see the competition and particularly glad to see Spirit’s competition. The truth is that it is unlikely that I personally will ever fly Spirit. I’m 6’2″ tall and a big man. Spirit’s 29″ seat pitch isn’t exactly my idea of even a leisure flight at a low price.
I expect we will see even more competition in the area and particularly so at DFW. DFW airport isn’t an expensive airport to fly into and with AA’s bankruptcy, I expect we’ll see some terminal consolidation over the next year freeing up more gate space for more airlines.
Bloomberg Business Week says that American Airlines will be seeking an extension (90 days) to have an exclusive right to present a reorganization plan to the court. This would nominally prevent US Airways from making its own proposal in late September.
It’s quite likely that this extension will be granted given what has been going on with the Section 1113 hearings in that a ruling on abrogating the union contracts has been extended to August. The bankruptcy judge is likely to cooperate with American Airlines on this extension as it grants American the reasonable opportunity to put its plan together once it knows what its labor costs are likely to be.
Expect to see many unsecured creditors (unions in particular) object to this extension.
To a degree, this works in US Airways favor. It allows them to make their case stronger with unsecured creditors and point to AA’s inability to get its house in order.
I think this a mistake on AA’s part as it signals that it is now reacting to US Airways instead of its own problems. To creditors, directors on its board and others, this isn’t what you want to see in a bankruptcy.
Pay cuts are the hot point for the American Airlines unions and particularly so for the APFA (flight attendants union). The section 1113 hearings will move to abrogate those current contracts and unilaterally impose terms but that doesn’t mean the unions just have to unilaterally shut up and do nothing either.
American Airlines will still have a flight attendants union and will still be subject to NLRB (National Labor Relations Board) and the Railway Labor Act. In short, it still has to negotiate a lasting contract with the union and the union still can ultimately resort to labor actions against the airline. All the Section 1113 hearings do is potentially kick the can down the street for a few years more.
If the pay cuts are significant (and they almost certainly will be) and affect differential pay in particular, at what point do flight attendants just leave the business? It doesn’t happen very often today because seniority drives people to hang on. Seniority equals higher pay. Some flight attendants out there in the world did see the writing on the wall when it came to legacy airlines and jumped ship to other airlines such as JetBlue to start fresh and build a new career at a new airline. Some just left the industry altogether but those are few and far between in general.
But at what paycut do we see AA flight attendants seek work elsewhere? The interesting thing to me is that when flight attendants do leave the business, they generally move on to more financially rewarding jobs, not less rewarding. Granted, the economy today isn’t friendly to the idea of shopping for a new career. On the other hand, people are hiring and people are getting hired and there are plenty of jobs out there that could offer as much or more financial reward and quite possibly a better quality of life.
What also may be missed in this is that there is more incentive to jump ship for the junior flight attendants than the senior flight attendants. Retaining high paid, senior flight attendants doesn’t exactly help an airline much and that is particularly true for American Airlines.
Doug Parker of US Airways came to the DFW area with AA union leaders in tow to do media interviews in both Dallas and Fort Worth and make the case for a merger between US Airways and American Airlines. I have to believe that American Airlines executives would have liked to have arranged for his plane into DFW to be diverted.
So far, AA hasn’t reached any agreements with either the pilots or flight attendants. The pilots refused to send the last and best offer to its membership and we’re not surprised whatsoever. At the end of the day, even with the contracts abrogated, AA *still* has to come to terms with its unions and it’s doing a very poor job of that. Even the bankruptcy judge has pointed out that both parties will be stuck with each other.
There is a perception in these struggles that unions are always about more money. It is often portrayed as more, More, MORE on the part of airline unions and the thing is . . . it isn’t true. More money is rarely the true issue with employees.
We hear over and over again that more money doesn’t make for a more happy employee or a more productive employee. It’s quality of life that does so. The secret to Southwest’s success with its employees and productivity isn’t the high wages (although they are very high), it’s the cooperation that exists between company and unions that provides high quality of life.
Furthermore, employees really do want to see their companies succeed. Company success provides more stability than anything else for employees. So when American Airlines union leaders start talking about how they recognize that concessions will be fairly drastic no matter what the bankruptcy outcome and that their chief focus is now on company viability, don’t go thinking that is a smokescreen.
It isn’t. American’s biggest problem with its labor is not money. It’s a loss of confidence. That loss of confidence didn’t happen over night and it didn’t happen accidentally. There is little leadership at AA and that has been true since Gerard Arpey took over many years ago. AA executives are very, very good at managing certain aspects of an airline. They manage finances and fleets very well. They can apply the science in running an airline with the best of people out there.
What they haven’t been able to do is inspire employees and bring about both revolutionary and evolutionary change. They haven’t been able to get their labor to start marching together and working together to compete. That’s leadership and leadership isn’t accomplished by cutting management ranks and consolidating responsibilities. It’s about finding one Great CEO who then has to find many great managers to execute a vision and leadership.
Believe it or not, US Airways and Doug Parker do this. They do it despite big problems with their pilots and flight attendants. Despite the bickering that exists in those two labor groups alone, they still operate an airline that has improved its quality in every area and dramatically so. They get employees to cooperate and to excel at their jobs. Look at the fantastic job done in cleaning up the problems in Philadelphia, for instance.
AA unions see that and recognize what’s been lacking in their own company for a long time: leadership.
QANTAS is moving from 4 flights / week to daily flights in its DFW to Australia operations. QANTAS flies non-stop from Sydney to Dallas and non-stop from Dallas to Brisbane with follow on service to Sydney using the Boeing 747-400ER aircraft it has. Previously, it’s been reported that QANTAS load factors have typically exceeded 85% and that the flights have, at times, been load limited or range limited as a result of both passenger and cargo demand.
In other words, this route is *really* succeeding for QANTAS and is attracting a lot of American Airlines network feed. Most felt that this route would go to daily service fairly quickly and it has after about a year of service. My prediction is that the next step will be to add an A380 to the route. Think I’m crazy? I’m not.
The 3 class 747-400ER carries 364 passengers and travels the route at the very limit of its range. 85% load factor for that aircraft translates into about 310 passengers. If the aircraft is being load or range limited with those load factors, it sounds as if there is more demand than can be supplied by the 747-400ER. An A380 can supply 450 seats, ample cargo capacity and has more than ample range to fly DFW-SYD and SYD-DFW without being load limited or range limited at all. 310 passengers equates to 69% load factor for the Airbus A380. If QANTAS continues to stimulate demand and work well with AA making DFW a gateway city to Australia (which is very attractive to east coast residents), an A380 absolutely could be justified as the next step.
