What Looms Ahead with AA/US Merger?

Prices likely to rise with US / AA Merger

A likely result of the US Airways – American Airlines Merger

February 20, 2013 – (Louisville, KY): The merger won’t begin until the 3rd quarter of this year, but once the wedding cake is cut, forget the honeymoon and fasten your seatbelt low and tight across the waist.

Today I spoke with Mike Benjamin, CEO ofFlightView Inc., about the American Airlines and US Airways merger. When asked for his general thoughts, Benjamin explained what he saw as the upsides and downsides which lay ahead for the duo, as well as the traveling public.

On the upside, Benjamin sees the US Airways and American combination as good since it creates a stronger carrier which should result in a better overall customer experience. The larger network is helpful and the combined loyalty program is likewise an upside. However, Benjamin was quick to point out, “This is the first of big mergers where two different alliances are involved.”

As I explained in my February 14th article, US Airways is part of Star Alliance and American is part of oneworld. The new American Airlines will remain a part of oneworld but US Airways will first have to break-up with Star Alliance.

This begs a lot of questions such as when will US Airways kiss Star Alliance goodbye and part ways? When will US Airways begin its oneworld relationship? When will US Airways Dividend Miles and American AAdvantage miles merge? This could get interesting and there may even be an opportunity to redeem awards with both alliances, depending on how the cards are played.

Now to the downside, which you’ve likely figured out, yet don’t want to hear: the merger will result in higher airfares. Benjamin said, “Fewer carriers in general makes it easier to keep prices strong.”

Providing the merger is successful, we’ll only have three legacy carriers left. I personally believe this creates an environment which is ripe for low cost carriers to expand, but we must also keep in mind low cost carriers are not immune from mergers either. Southwest gobbled up AirTran and is in the final steps of merging AirTran into the Southwest network.

However, other players exist including JetBlue, Frontier, as well as Virgin America. These three carriers have room to expand and connect new markets. While Virgin America has yet to post a profit, prices drop by 30% on average after they enter a new route. There’s also the ultra low cost carriers, Allegiant and Spirit.

A couple additional start-up carriers in the works include People Express, which will be based out of Newport News (PHF) and plans to operate by this summer. A second potential start-up is Carlsbad based California Pacific Airlines, a niche carrier for residents of Northern San Diego County.

Airplane Landing in Thunderstorm

Airplane Landing in a Thunderstorm

Just how bumpy could the ride get?

“It’s good that we’ve had two other mergers to set the pattern” said Benjamin. Neither merger was perfect, but they’ve set the bar for the American – US Airways merger.

As a Platinum Elite Frequent-Flyer with Northwest Airlines during the Northwest/Delta merger, one of the largest problems I faced early on was which employee group was “in-charge” of my ticket. During the early-days, codeshare agreements were initially used to link the networks of the two carriers. Each carrier also had their respective website and sold tickets on both Delta and Northwest stock.

Needless to say, I encountered a number of problems in the early days of the merger, but once the Northwest site went offline and everything was handled by Delta IT, flying at Delta improved. Today, Delta’s frequent flyer program may not be the best, but the airline is not only tech savvy, but they’re the best of the legacy carriers when it comes to delivering a quality, consistent product.

The work groups at each carrier will have to come together, but Benjamin sees two other issues at play – Information Technology and Regional Carriers. Merging the computer systems will be a significant challenge. According to Benjamin, there’s a lot of old software systems involved, which work very well, but how do you merge them with minimal downtime and inconvenience to customers?

The other concern Benjamin addressed is all of the regional carriers US Airways has and how they’ll work together. There’s Air Wisconsin, Piedmont, PSA, Mesa, SkyWest, Chautauqua, and Republic. On the other side, AMR corporation owns American Eagle. That’s a good eight regional groups to integrate and organize.

American Airlines and US Airways jets at MSP

American Airlines and US Airways Jets at Minneapolis/St. Paul International Airport

Consolidation, Hubs and the Department of Justice

Lets face it, there will be some consolidation and some hubs will downsize regardless of what you may hear from Tom Horton, Chairman and CEO of American, or Doug Parker, Chairman and CEO of US Airways and the soon to be combined American.

Benjamin feels with the overlap in the Southwest, Phoenix may face some consolidation, but strongly believes Miami will come out a winner with its status as a Latin American gateway.

On the other side of the coin, Professor Robert Mittelstaedt, licensed commercial pilot, business professor, and dean of the W. P. Carey School of Business at Arizona State University believes Phoenix will come out as a strong winner.

Mittelstaedt said, “Southern California is unique with smaller airports serving large areas of the megalopolis where customers would prefer to start a journey closer to home in Orange County, Long Beach, Burbank and other cities over driving and fighting traffic and parking to get to LAX for a nonstop coast-to-coast flight. Phoenix plays an important role as the hub for those cities with nonstops to major East Coast cities. American does the same thing through Dallas from Orange County, but not in as many airports as US Airways does through Phoenix.”

On the topic of network overlap, Benjamin expects to see consolidation at Indianapolis, Columbus, and Tampa, three cities at which each carrier has a strong presence. I personally believe there’ll be some downsizing when it comes to medium sized markets as well as secondary airports. It’s in the airlines best interest to keep a tight control on inventory to keep prices profitable.

One region highly populated between the two carriers is the mid-Atlantic and greater New York City area. Both Washington DC’s National Airport (DCA) and Philadelphia (PHL) are US Airways hubs while American Airlines is strong at both New York LaGuardia (LGA) and New York Kennedy (JFK).

When it comes to hub downsizing or re-balancing, Mittelstaedt said, “There will certainly be some rationalization of schedules, and the Department of Justice could force the new American to give up some gates, but the most often mentioned site for that is Reagan National in Washington.”

As previously mentioned, US Airways operates a hub at DC’s Reagan National Airport (DCA), a slot controlled facility. One only need to look back a year at the slot-swap deal US Airways made with Delta Air Lines. Delta gave up slots at Washington National in exchange for coveted slots US Airways held at New York-LaGuardia (LGA). For the deal to be completed, some slots at both airports had to be released to smaller carriers and new entrants.

On a closing note, the new carrier will have to play catch-up when it comes to consumer technology. Frequent Flyer’s want easy to access WiFi in both airports and on aircraft, but most importantly, a WiFi network that actually works. As a traveler myself, I’ll be the first to admit the WiFi systems in many airports don’t work well and I often end up going back to a cellular 4G connection.

As most of us carry smartphones these days, it’s also important the airlines provide plentiful electric outlets or re-charging stations, especially at their hub airports. Once in the air, the same applies – reliable WiFi and along with the ability to charge devices from phones, to tablets, to laptops.

The airlines know this is what consumers want and Benjamin believes this is an area the combined carrier, especially with their new aircraft orders, will be able to address based on their scale as the world’s largest airline.

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