February 18, 2013
Credit: Photo Credit: Michael B. Ing/Airlinersgallerycom
When US Airways tried to merge with United Airlines in 2010, Continental Airlines CEO Jeff Smisek, called his counterpart at United, Glenn Tilton, to persuade him otherwise. “I did not want him to marry the ugly girl,” Smisek said. “I am much prettier.” Smisek was convincing enough then and has been leading the merged United Continental ever since. But now the “ugly girl” has found a partner—the much bigger American Airlines. And with few options left, the 35-year history of consolidation in the U.S. airline industry since deregulation in 1978 takes an unusual turn.
It is unusual in several respects. The new airline—poised to become the largest in the world—will be effectively controlled by management of the far smaller partner, US Airways. One of the most outspoken characters in the industry and at the same time the longest-serving CEO of any major U.S. carrier, 51-year-old Doug Parker has pushed hard to make the combination happen. The merger is occurring in spite of the fact that American did not want it and arguably needed it less than US Airways. American CEO Tom Horton will remain, as executive chairman, but only until the new company’s first annual general meeting. While unions or shareholders have stood in the way of other mergers, workers and owners/creditors have long been convinced that Parker’s proposal is the way to go, even if American’s management was not.
Union support and management caution may become important factors as the two carriers integrate over the next few years. As convincing as mergers may look on paper, history shows that it is often much tougher to reap the benefits in reality. A lot of mergers in the last three decades did not work as smoothly as the companies involved had hoped. In fact, some argue that while the deals have been beneficial for the industry as a whole, they typically have not been advantageous for the two new partners. And among those on the bleeding edge of consolidation in the past have been American and US Airways.
American bought Trans World Airlines (TWA) out of bankruptcy in 2001 just ahead of the major industry downturn initiated by the Sept. 11, 2001, terrorist attacks in New York and Washington. American subsequently shut down TWA’s St. Louis hub and cut capacity roughly equivalent to the former rival’s size. US Airways itself is an amalgam resulting from a series of takeovers. And it is still struggling to integrate America West, the latest carrier it bolted on, following a deal Parker engineered in 2005.
Among the more strategic issues the new American-US Airways combination must address is the shape of their future network. The carriers will have to resolve competition between US Airways’ hub at Phoenix Sky Harbor International Airport and American’s much larger one at Dallas/Fort Worth International Airport as well as their East Coast hubs used for transatlantic operations, US Airways’ at Philadelphia International Airport and American’s at John F. Kennedy International Airport. Nevertheless, the merged carrier, to be based at American’s Dallas hub, plans to operate more than 6,700 daily flights to 336 destinations in 56 countries without giving up any of the current hubs.
Combining the fleets appears to be the least of the challenges ahead. Although US Airways operates mostly Airbus aircraft, American has already committed to a mixing of its narrowbody fleet, with large concurrent orders of Boeing 737 and Airbus A320-family aircraft, says Craig Jenks of New York-based Airline/Aircraft Projects Inc. In terms of widebodies, a merged carrier would add just one type—the Airbus A330-200/-300. American has simplified its Boeing fleet to 767s and 777s, with 787s scheduled for delivery in 2014. Adding the A330 will carry some cost disadvantages but also some revenue benefits, Jenks notes.
The industry’s poor track record on specific mergers has led many to conclude that they do not eradicate fundamental airline weaknesses. But lately that perception has changed. The combinations of Delta and Northwest Airlines as well as United and Continental, among others, have arguably led to tighter capacity control. Even Southwest Airlines gave up its conservative stance and bought AirTran Airways in 2010.
The Delta-Northwest and United-Continental mergers featured similar divisions in fleet types. Analysts agree their examples—and fleet integration—will prevail over the long term. More broadly, recent precedents bode well for American and US Airways. “The challenges of implementing this merger are all challenges which have been shown to have been surmountable [in previous mergers],” Jenks says. “I do not believe there is a new challenge out there that hasn’t already been addressed.”
The merger represents an evolution—not a revolution—of the competitive landscape of the U.S. airline industry, he adds: “It’s simply a continuation of an existing trend.” Just three U.S. legacy carriers will remain, down from six only a few years ago.