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Where I Add My Inevitable Two Cents to the Discussion about US Airways and American

Oh, the Chicken Littles have been out in full force for the US Airways – American Airlines merger. The sky is falling for US Airways frequent flyer members, they say. The sky is falling for consumers who like cheap airfare. The sky is falling for American Airlines customers because US Airways runs such a low frills operation. And on and on – perhaps I’m reading more of this from bloggers than from anyone, but if I were to believe everything I’ve read about this impending link-up, absolutely everyone involved will be screwed over.

Fortunately, that’s simply not true.

Although we think of airlines as a consumer business (and airlines have – quite unfortunately – sold themselves to consumers as a service business), they are, depending on how you look at it, either a manufacturing business or, more simply, a utility.

I remember interviewing at Northwest Airlines a zillion years ago, and someone I met with said that Northwest’s then-CEO (I can’t remember who it was) described the airline as a manufacturing company – they manufacture connections at hubs. If you look at the decisions they made in the late 90s and early 00s, that philosophy explains how the airline was run — they put off replacing their then-25-year-old DC9s because, well, why replace them when they were low-cost and allowed them to make connections in Minneapolis between Minot-originating passengers and flights going to Milwaukee.

They’re also quite a bit like a utility – specifically, the telecom industry. Without blah blah blahing about it here, think back to the history of the long distance companies – starting as small regional players which then came together as AT&T, which the government broke up into smaller companies before re-merging and settling on 3 or 4 groups with a national footprint. Or cell carriers, which developed similarly with smaller regional companies combining into a handful of large national players with a few primarily-low-cost-focused regional players. Sound familiar?

My point is that the US Airways-American merger was inevitable. Following deregulation the US probably needed 3-4 national carriers with a handful of niche players focused on the low end. It took a while for that to happen – I guess because funding was so easy to come by for new airlines for so many years (good luck raising money to start an airline today). But it was ultimately putting off the inevitable consolidation that one would expect in either the utility or manufacturing industries (especially commodity manufacturing, which is pretty much what we’re dealing with in an airline).

Dozens of airlines started up in the US after deregulation and we’re left with JetBlue, Spirit and Allegiant (Frontier will be gone soon enough, no?). That’s pretty much it. Spirit and Allegiant lowered their costs enough to thrive as a low-priced commodity provider. JetBlue is an interesting case where (at least initially) they de-commoditized the product and kept costs low, allowing them to provide a low cost, high value product in a commodity marketplace. Nicely done.

In so many industries we see crowded markets evolve into 3-4 major players, and that’s where we’ll end up with United, Delta, American and Southwest driving the industry. (This probably begs the question of what happens to Alaska Airlines – conceivably someone would scoop it up to build out their West Coast presence, but more likely they’ll enjoy their deep Northwest footprint while continuing to innovate operationally and will be left alone for the foreseeable future).

When an airline merger is announced I always see articles suggesting that airline mergers fail because the combined entity will have too much route overlap; or too many hubs; or too many aircraft types. That’s all nonsense. If there’s too much overlap, the combined carrier can redeploy those aircraft elsewhere. Airlines used to focus on 3 or 4 hubs (if that), but the world has changed and carriers are thriving with many hubs — Delta has a significant presence in Atlanta, Detroit, Minneapolis, Salt Lake City, New York City, whatever’s left of Memphis, and a handful of focus cities. Why is it a concern that US Airways and American will have sizable presences in New York, Philadephia, Washington, Charlotte, Miami, Dallas, Chicago, Phoenix and LA (I feel like I missed one)? If Phoenix doesn’t make much sense they’ll downsize it until it does. Is that a reason not to merge? No.

So-called “consumer advocates” complain that consolidation leads to higher fares. That’s probably true for flights between the hubs of two merging carriers (for example, in United’s case, between Chicago and Houston; or between Newark and Chicago). But according to the Wall Street Journal, airfares have dropped an inflation-adjusted 15% since 2000. You simply cannot argue that consumers are worse off because of consolidation. A healthy set of lowfare airlines keeps prices in check (complain about Spirit all you want, but people in Dallas and Houston should be thrilled they’re adding flights there). And you know what’s worse for consumers than slightly higher fares? No flights at all, which is what you would end up with if all of the airlines that have merged out of necessity over the years disappeared. Check out a route map from 1973 some time –you think we haven’t benefitted from nonstop flights? Consolidation has brought dozens (if not hundreds) of new nonstop flights while at the same time providing customers with cheap fares. This merger is just the final piece of that.

Finally, on the frequent flyer front. I can understand why there may be some concern, especially from US Airways Dividend Miles members. The tie up with Star Alliance (which will end at some point after the merger) provided some amazing fuel surcharge-free international redemptions. And you can kiss that 90,000 mile business class Asia award goodbye. But US Airways also had some annoying quirks (no one-way redemptions). Like with everything, there will be good and bad. And honestly, it doesn’t really matter what you think because this merger is going to happen, and Dividend Miles will disappear and in 18-24 months you can enjoy whatever the AAdvantage program has to offer. Northwest Worldperks had some pretty good awards too, and that’s gone and no one talks about it anymore. In 36 months no one will miss Dividend Miles, trust me (well, except for those of us who churned that credit card over and over).

That’s a lot of words to say this: consolidation is inevitable; US Airways has some of the best managers in the industry and will make AA a successful airline in a way that their own management could not; you won’t lose any service; your fares won’t go up; and you’ll still collect a ton of frequent flyer miles. You think there’s really anything bad about a world where you can print frequent flyer miles through credit card signups and then use them on alliance carriers to go wherever the hell you want for free? We’ve got it pretty good.

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  1. “Oh, the Chicken Littles have been out in full force for the US Airways – American Airlines merger. The sky is falling for US Airways frequent flyer members, they say…. perhaps I’m reading more of this from bloggers than from anyone…”

    Oh come now Jared, there are lots of different elements to this analysis. There are winners and losers. And it’s been pretty inevitable but not because it’s in the best interests of US Airways shareholders.

    * American frequent flyers. Nervous because US Airways has fewer first class seats on their narrowbodies and doesn’t provide meals on 3 hour flights. Worried because US Airways has done a lot of study of revenue-based programs. You mentioned Northwest, where did Fern Fernandez used to work? And do you know who was hired a year ago as his deputy managing Dividend Miles?

    * US Airways frequent flyers. Hopeful they get those gorgeous eVIPs that American Executive Platinums get (while American EXPs worry about losing them). Salivating over actual FOOD on airplanes (bags of chips don’t count). Those US Airways elites are HUNGRY! Sad that they’re going to lose 90,000 miles for business class to Hong Kong but they were going to lose that anyway with the coming devaluation. If anything a merger puts off some of the bigger devaluations they would have seen, for awhile anyway.

    Travelers writ large. Are going to have to suffer through another IT disaster from combining the two carriers. Even Delta-Northwest wasn’t pretty. America West-US AIrways was really rough. But United-Continental, most recent in our minds, was an absolute meltdown.

    American’s creditors. Pretty sweet deal with 72% of the company.

    US Aiwrays shareholders. Kinda hosed, Parker overpaid because he wanted to be king.

    Doug Parker. Homeboy gets to run the biggest airline. Feels like the king of the world. He’s superman,, as-described by Jason Lee in a Kevin Smith film.

    Horton. Gets a golden payout (details TBA…) Deserves to be remembered for the good job he did in restructuring, and in negotiating a great deal for his creditors. But in the end probably won’t be remembered at all.

    Long-term viability of the assets. This combination isn’t terrible but won’t see the predicted synergies. They don’t help each other that much. And while the industry may have needed more consolidation, US Airways shareholders would have been better off as free riders instead of the ones footing the bill to make it happen…

    • Ooh, fun — a discussion! I’m happy to oblige:

      - US Airways’ stock is at it’s highest point in at least 5 years (as far as the chart I just saw goes back). I cannot imagine US Airways shareholders can complain about that.

      - American frequent flyers? They’ll still be on American planes with American frequent flyers going after the same seats. There is so little overlap between the two airlines that I’m not sure anyone can really expect a flood of US Airways elites suddenly showing up in Dallas. And for domestic travel all of us can buy a sandwich, even when we’re sitting up front. AA flyers were never getting an independent airline back – if the worst they suffer is a loss of a meal in first class, I think they’ve done OK. The old AA is gone, US Airways or not, and it was never coming back.

      - US Airways FF should probably be the most upset, since they’ll lose Star Alliance redemptions. But they’ll gain one-way redemptions. I guess this one really depends on how someone uses their points.

      - Again, US Airways’ shareholders – especially those who have watched the stock nearly triple – should not be complaining.

      - Doug Parker deserves more credit than he gets. Saved US Airways. Ran a completely underrated ship over at America West. I’m not 100% convinced AA can really be saved, but I’ll give him the benefit of the doubt.

      - I think you’re completely right about Horton — the merger would have had no shot at all if it weren’t for his restructuring work. But you’re also correct that Parker will get all the credit.

      - No merger sees the predicted synergies. But neither one of these airlines was going to make it long-term on their own. I think we’ll be pleasantly surprised.

  2. It’s Probably Official | Traveling To… - pingback on February 14, 2013 at 12:10 am
  3. Best two cents I have and probably will read for a long time! Amen and Thanks!!

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