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Several airline mergers have taken place during the last 12 years, but the American Airlines and US Airways merger is like no other.American and US Airways will become the world’s largest airline once the marriage certificate is signed, and their marriage signifies the final major U.S. airline merger for years to come.
Did I mention that the merger is taking place on Valentine’s Day? The airline industry is a tough industry, and American Airlines and US Airways are combining histories filled with mergers, bankruptcy filings, and labour issues.
There is one question on everybody’s mind. Will the American Airlines and US Airways be a marriage made in Heaven or Hell?
The roots of American Airlines go back to April 15, 1926, when aviator, Charles Lindbergh, flew a bag of mail between Chicago and Saint Louis for Robertson Aircraft Corporation of Missouri. In 1929, consolidation in the U.S. airline industry began to occur as The Aviation Corporation was formed by acquiring young aviation companies, and, by 1930, American Airways was formed from a conglomerate of 82 small airlines.
Shortly after E.L. Cord became the president of American in 1934, he changed the name from American Airways to American Air Lines, and he chose C.R. Smith to be American’s Chief Executive. During his time at American, Smith worked with Douglas to develop the DC-3, and American became the first carrier to fly the aircraft in 1936. Shortly after, American was the first airline to serve New York’s LaGuardia airport in 1939.
Since American played a key role in the development of LaGuardia, they were given extra real estate, and American opened the first airline lounge in the world, their Admirals Club. Also, Smith helped American become the first airline to fly the Douglas DC-7 in 1953, the first airline to offer continuous coast-to-coast jet service with the Boeing 707 in 1959, and the introduction of the Boeing 727 in 1964.
However at the end of 1959 and into the early 1960s, American teamed up with IBM to create and implement the first airline reservation system, SABRE. Smith retired in 1968, and, two years later, American Airlines merged with Trans Caribbean Airways which provided American with their first Caribbean routes. Prior to the airline deregulation act, American was considered a conservative airline, but, in 1981, American made a bold move to transfer their headquarters to Dallas/Ft. Worth and create a hub to directly compete with Braniff (who was the first major US airline to succumb to bankruptcy ,in 1982).
Around the same time in 1981, American introduced the world’s first successful frequent flyer program, AAdvantage, and, in 1985, Robert Crandall became the CEO. Crandall was focused on keeping costs contained, even at the expense of employee morale, and passenger service. Further, Crandall helped American’s ability in yield management by creating the famous Ultimate Super Saver Fares, and the fares undid much of their competition by setting a new pricing standard for the industry.
In 1985, American made it’s first major merger dance in years with the purchase of AirCal, picking up 737s for a short-time. In the 1990s, American expanded their Latin American service through Miami with routes acquired from Eastern Airlines, and American became the airline with more service to Britain than any other U.S. airline when it purchased TWA’s routes to London Heathrow, becoming 1 of 2 airlines at the time able to serve LHR.
The increased European flights helped American create the oneworld Alliance with four other airlines in 1998. During the 1998-99 time period, American, making huge profits, purchased Reno Air to buoy its west-coast service, particularly the San Jose hub (which would later be de-commissioned).
US Airways‘ roots go back to 1939 when All American Aviation became the first airmail carrier to service many small western Pennsylvania and Ohio valley communities. 10 years later, All American Aviation changed their name to All American Airways as they introduced passenger service with their first DC-3′s. However in 1953, All American Aviation changed their name to Allegheny Airlines, and the first Douglas DC-9 made its debut in Allegheny colours in 1966. Shortly after, the first Allegheny commuter service began in the northeast in 1967, and the commuter service is the forerunner of today’s Piedmont Airlines.
In 1968, Allegheny merged with Lake Central Airlines which allowed Allegheny to grow their route network into the Midwest. Beginning in 1968, Mohawk Airlines began to face serious financial and labour issues, but Mohawk was acquired by Allegheny in 1973. Five years later, the government passed the airline deregulation act which allowed Allegheny, like American, more freedom to add new destinations, set prices, and increase competition.
After the airline deregulation act was passed, Allegheny took the opportunity to re-brand the company to USAir in 1979. Shortly after USAir entered new markets in the western U.S., America West Airlines began operations on August 1st, 1981, and their presence in the west rapidly grew.
However, 1987 was a big year for USAir Group when Pacific Southwest Airlines (PSA) and Piedmont Airlines (who provided USAir’s first connection to Europe) became subsidiaries of USAir Group. Both mergers greatly expanded the USAir route network, and, by 1989, both carriers were fully incorporated into the USAir network.
The acquisition of PSA didn’t deliver much lasting impacts as USAirways dismantled the pioneering low cost carrier’s route structure, but Piedmont contributed USAirways’ most dominant hub, Charlotte. Nevertheless, the story does not end here. British Airways (who was and still is a oneworld partner with American Airlines) purchased a 25% interest in USAir in 1994 to acquire USAir’s slots in London. Finally in 1997, seeking a new image catering to business and signaling its transformation into a major “legacy” carrier USAir changed their name to US Airways.
US Airways entered the 21st century struggling financially, and on May 24th, 2000, United Airlines announced a plan to purchase US Airways. However, consumer advocates, antitrust regulators, and labour unions stalled the $4.3 billion merger deal. Subsequently, both airlines were losing money, and United withdrew their offer. Like US Airways, Trans World Airlines (TWA) entered the 21st century in financial trouble having never really recovered from the Carl Icahn buyout.
Similar but on a much smaller scale then American, TWA had fallen into hard times with service concentrated around a single hub of St. Louis, outclassed and diminished European service, and a very old fleet. American Airlines was very strong at the time and rode-in to the rescue. They acquired TWA’s assets in April of 2001; TWA declared bankruptcy for the third time, and they disappeared into the American brand on December 1st, 2001.
Many were surprised that the American/TWA merger was passed by antitrust regulators unlike the potential merger between United and US Airways. Yet, the American/TWA merger was not as smooth as both companies had expected. As a result, American retired TWA Aircraft, dismantled TWA’s St. Louis Hub, and laid off numerous TWA employees.
America West began operations in 1983 as a low cost carrier, and they grew rapidly. America West even applied to begin flights to Sydney and Japan, but the government denied their request. Yet, the rapid growth led to large operational losses, and, from 1991 to 1994, America West operated under Chapter 11 Bankruptcy. America West was able to escape bankruptcy by allowing a large portion of the airline to be owned by Mesa Airlines and Continental Airlines, and, in 1995, Doug Parker joined America West.
He became the CEO of America West in September 2001. On August 11th, 2002, US Airways filed for Chapter 11 Bankruptcy Reorganization, and they filed for bankruptcy once again on September 14th, 2004. Yet on May 19th, 2005, US Airways was able to exit Chapter 11 through a merger with America West. The reverse takeover structure of the America West/US Airways merger was different than past mergers.
Simply, America West purchased US Airways, but the US Airways brand remained dominant while Doug Parker became the CEO of the combined airline. However like the American/TWA merger, the transition was very rocky, and the full integration has yet to be completed. For example, US Airways has two pilot contracts, one for pilots employed by US Airways prior to the merger and one for America West Pilots.
At the end of 2006, many were surprised that Parker made an aggressive takeover bid for Delta. He offered $10 billion to buy Delta, but the bid was withdrawn on January 31st, 2007 as Parker failed to secure backing from Delta’s creditors. While US Airways did not merger with Delta, Northwest and Delta did. When they merged in 2008, merger talks between US Airways, United and American began to swirl, and prior to the United/Continental merger in 2010, United was reportedly in merger talks with US Airways. However, Continental signed a deal with United before US Airways was able to.
Even as the economy recovered, fuel prices stabilised, and the industry consolidated, things only seemed to get worse for American: They continued to bleed red ink while competitors showed profits, AA began to lose significant market share as competitors circled many of their hubs and destinations (with notable exceptions of DFW and MIA), their fleet grew ever older, customers particularly the business travellers looked elsewhere, and morale sunk further.
At this nadir, there were bright spots such as the December, 2010 ordering of Boeing 777-300s which American would be the first US operator of. In July 2011, AA placed the largest order of commercial airliners in history – 260 Boeing 737NG, Max’s, Airbus A319s, 320s, 321s, and Neos. Nevertheless, investors, customers, and creditors were becoming increasingly concerned at the direction AA was flying in. On November 29th, 2011, American Airlines filed for Chapter 11 Bankruptcy Reorganization, and Tom Horton immediately became the new CEO.
The news was shocking as this was the first time American filed for Chapter 11, and, as soon as they did, Parker was on the prowl for a merger. Despite American insisting that they would emerge from bankruptcy independently before a possible merger, Parker worked to gain support from American’s employees and creditors, and the support that he gained helped push the merger.
American tried to see a cornerstone strategy concentrating around Latin American, code shares with JAL to Tokyo, and BA to London, and key hubs at DFW, LAX, ORD, MIA, and JFK but consolidation still seemed the likely route. It is no secret that American had a tough time dealing with their labour groups as they negotiated new contracts, and negotiating the pilot contracts seemed to be the toughest.
Last summer, American faced an operational slowdown that cancelled many flights as the pilots began to find little things wrong with the aircraft and called in sick more frequently. However on a positive note, American’s financial results continued to improve with the airline reporting a strong operating profit in 2012 4Q, AA announced major service improvements particularly on the new transcontinental and international Flagship flights, unveiled a new simpler pricing structure called Choice, confirmed additional Dreamliner and 777-300 deliveries, and they unveiled their new brand on January 17th, 2013.
In a crescendo, American launched the Boeing 777-300ER on January 31st, 2013 with a service between DFW and Sao Paulo GRU. This service met with rave reviews, yet was interestingly timed to be revealed just before what seemed to be an imminent merger. We covered the flight which can be reviewed here.
Now in 2013, American and US Airways are the only two dancing partners left. Many are beginning to wonder, will the marriage of the two carriers be made in Heaven or Hell? It is no secret that it is a challenge to combine two major airlines, and it has occurred several times in the 21st century already.
The Delta/Northwest merger in 2008 set the bar for a seamless merger (although not everything went according to plan), the United/Continental merger has been plagued with operational issues and financial losses with a major problem being combining the two reservation systems, and the Southwest/AirTran merger is moving very slowly (now they are projecting to be one airline in 2015 rather than 2014). However, Parker has experience running a “reverse” merger which may be able to help American and US Airways beat the odds.
At this point, we know that Doug Parker will be the new CEO of the combined company, Tom Horton will be on the board until 2014 (as a non-executive), the American name will survive, the headquarters will be in Dallas/Ft. Worth, the combined company is worth about $11 billion, and AMR creditors will own 72% of the combined airline while US Airways makes up the other 28% of the ownership.
Further, very few routes overlap. The combined company will leapfrog Delta and United, again become the largest airline in the world and become the leading carrier on the East Coast, Southwest, and in Latin America. According to its press release, AA will boast 6,700 flights to 336 locations in 56 countries.
The Silver Bird will have hubs at New York JFK, Philadelphia, Charlotte, Miami, Chicago O’Hare, Los Angeles, Phoenix, Dallas/Ft. Worth, and major operations at Washington Reagan National. American’s Latin American services and it’s Miami hub are particularly profitable, dominant, and are the crown jewels of the company. Operating revenues combined will be $38.7 billion, there will be 948 aircraft, 189 million revenue passenger miles, and 93,600 employees.
Though American will be in a much stronger domestic position, US Airways weak position internationally means AA will remain in 3rd place in the high-yield premium markets in Europe and Asia where it has very little presence.
There are many questions that remain that will take years to answer among them…
- Which hubs will survive or thrive? US Airways Phoenix hub could be vulnerable given its location between American’s hub at DFW and extensive focus city at LAX. Will American reduce service, ala AA @ STL and DL @ MEM, and seed the contested hub completely over to cross-town rival Southwest?
- Which all important CRS will prevail? American’s Sabre or US Airways Shares and what affect will this all important switch over have on the combined carrier? Our money is on Sabre.
- What will be the affect on the US Airways hub in Philadelphia, which is so close to New York JFK. As American tried to move up from number 4 in NYC will they shift Philly international flights to JFK and other flights to LGA?
- What will become of American Eagle? Will it still be spun-off? How will it interact with USAirways regional operators including PSA?
- Will the new American livery which has been derided by many press and flyers be changed or allowed to continue? US Airways had no input on that.
- What will become of actual employee morale? Will they get all Parker promised? Again, employee relations and labour were troubled during the US Airways, America West hookup. Parker is a respected, straight shooter like Crandall was, however, even if his decisions aren’t always popular.
- Will American begin a major expansion in Europe and Asia to catch up internationally?
- With American ordering Boeing 777-300ERs, 787-8s, and 787-9s, will USAirways Airbus A330s leave the fleet and will the ordered A350 XWB be delivered?
- What form will the passenger experience and inflight service take? American has been on a major march to upgrade its product while US Airways has always been considered at the bottom tier with the exception of its international Envoy service. USAir doesn’t even offer in-flight entertainment domestically.
- Will the removal of a major competitor in the marketplace, will the airline’s finally gain additional pricing power to raise fares?
- And the biggest question – How long and how seamless (or not) will the integration take? Doug Parker has said he expects 18 months after the deal is finally approved.
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