Cranky Flyer Has Some Good Thoughts on US/AA Merger

Discussion in 'US Airways | Dividend Miles' started by Sean Colahan, Mar 12, 2012.  |  Print Topic

  1. Sean Colahan
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    Sean Colahan Gold Member

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    (Written by Brett Snyder)
    I came across a really interesting research note on American last week that I thought was worth discussing here. Jamie Baker at JP Morgan put out a note entitled “AMR v6.0: Additional Thoughts on Consolidation.” There’s been a lot of talk about how American is focusing on its cornerstone markets, but Jamie points out that it’s really everywhere beyond those cornerstones where the problem lies. With this view, a merger is the only real path to compete.
    Jamie sees American’s revenue problems as a “decade-long marginalization of its domestic market.” What’s particularly interesting about this is that it has nothing to do with the local markets in the cornerstone plan, where American is trying to strengthen itself in its five key markets of LA, Dallas/Ft Worth, Chicago, Miami, and New York. Instead, it actually shows how the cornerstone plan is insufficient in serving the rest of the US. The idea is that with consolidation, Delta and United can now service non-hubs much better than American simply because of all the possible connecting choices going every direction.

    More ...
     
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  2. chz2215

    chz2215 Silver Member

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    Very interesting. Thanks for sharing
     
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  3. Sean Colahan
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    Sean Colahan Gold Member

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    Your welcome. Glad you liked.
     
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  4. Sean Colahan
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    Sean Colahan Gold Member

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    I think it makes some very interesting and poignant points, especially in regards to southeast connections through CLT and northeast connections through PHL...both areas that AA is very weak. Also strengthening European route network as US has 18 destinations (incl TLV) and AA only has 11 destinations (not counting code-shares).
     
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  5. gleff
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    gleff Co-founder

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    Hey, I actually hope it happens -- I'm now an AA EXP and I'm DC-based, I'd love to have all those US Airways flights at DCA bundled in.

    And I'd love all of my US Airways miles to become AAdvantage miles.

    But it just seems like a bad fit -- you don't make money overflying your hubs, JFK/PHL makes no sense, LAX/PHX makes no sense, CLT/MIA could make sense as long as you're not shuttling your South America traffic through CLT (and possibly then should pull down the Caribbean capacity at CLT as well).

    And yet US is strong in the East and the West as is American, with the added bonus that AA also has DFW in the middle of the country. This doesn't really address weaknesses in AA's route network (many of which are handled by the AS partnership, which they need to lock down and not let AS go the way of DL).

    Why merge, though? What benefit does a merger bring that they couldn't accomplish without the monstrous costs involved? Planes are cheap. US won't want AA's higher labor costs. There's a handful of slot controlled airports....

    Sure it could take awhile to get gates at some airports you want to expand into in a big way, but this can't be about gates.

    It's about egos. And about commentators playing fantasy baseball. Hey, this may well HAPPEN. But that doesn't make it a good idea..
     
  6. Sean Colahan
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    Sean Colahan Gold Member

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    I am with you Gary. I think there both good and bad points to a possible US/AA merger. I currently like the state US is in right now. Growing their network slowly and sustainable into profitable markets, making a fuel efficient fleet, constantly improving premium products (can't go wrong with Envoy suites), giving elites good benefits that are actually attainable (aka upgrades), and being a member of the Star Alliance. They are weak in some areas and strong in others, but where US is weak, its *A membership fills in the gaps.
     
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  7. Gtitan
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    Gtitan Gold Member

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    As a CLT denizen where the cost of flying (absent mistake fare ;)) is pretty high, a merger of AA and US would not be good at all for the CLT consumer IMHO. Hope it doesn't happen. Would assume LH will pull out of CLT. Also assume US cuts the direct to FRA out from CLT as well.
     
  8. Sean Colahan
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    Sean Colahan Gold Member

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    I would doubt the FRA cut as its a major city in Europe and US serves all major cities in Europe from both CLT and PHL.
     
  9. Gtitan
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    Gtitan Gold Member

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    Perhaps, but I always assumed that most of the traffic on the FRA flight was to connect in to LH. But, there's always hope. :D
     
  10. DeacFlyer1
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    DeacFlyer1 Silver Member

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    I disagree with some parts of the argument here, although I probably agree with the conclusion. I think with the exception of the current Carribean flying from CLT, CLT and MIA would be compatible as hubs for a combined airline. MIA just doesn't have the same domestic connectivity that CLT offers--there are tons of routes where I would fly XXX-CLT-YYY, but wouldn't want to tack on the time to fly XXX-MIA-YYY.

    In terms of JFK/PHL and LAX/PHX, I think you overstate the scale of AA's operations in both places. Sure, AA has decent international coverage from JFK, but most of that is O&D traffic; they have a pretty small domestic presence outside of a few key city pairs. And somewhat of a similar story in LA...they just don't fly that many places from LA. LAX or NYC are never going to be connecting hubs for AA that feed people from other parts of their network to destinations in each respective geographic region. So keep the international routes that survive on O&D at JFK, but let PHL continue to collect people from all the dozens of small airports across the northeast that aren't served by AA at LGA or JFK (and that won't be because AA doesn't have the extra slots needed to do so). Same story in LA--keep the Hawaii flying and some international routes, but let the cheap PHX airport be your distribution point for your western network.

    Somewhat related, I also disagree that a US merger wouldn't help AA's domestic route network. AA's weakest link is the Northeast, and US has huge coverage there...that part of the network would see a tremendous boost for a combined airline.

    And my final point of disagreement is that this is driven entirely by egos (and I'm assuming you mean those in Tempe). I'm sure that's a factor, but the bigger reason driving this talk is that most people seem to feel pretty strongly that AA still won't be competitive long-term, even with a Chapter 11 reorg, just by cutting some costs. Other action needs to be taken--generally around improving their route network--in order to remain competitive. I think it's that realization that primarily fuels these hypotheticals.

    Having said all of that, I do agree with your conclusion that an AA-US merger still may not be a good idea. Besides the monstrous costs, as you say, a merger with US still isn't going to get AA flying to Australia, still isn't going to get AA flying to Asia (their paltry offering of PVG, PEK, and NRT doesn't really count as "flying to Asia" in my book), or really add a ton to Europe (although US does fly to more European destinations that AA does), at least to the level of service that UA/DL have...and I think all of these things are important if AA truly wants to be a competitive global airline the likes of UA/DL.

    As a US elite, I hope it doesn't happen...but things may already be on that path, for better or worse.
     
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  11. DeacFlyer1
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    DeacFlyer1 Silver Member

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    At least you don't have to worry about that in the short term--there are two daily CLT-FRA flights in the schedule starting towards the end of May, and continuing all the way until the beginning of November this year!
     
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  12. Seacarl
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    Seacarl Gold Member

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    I don't know what the odds are of this merger, but it certainly seems like the only merger that could pass anti-trust scrutiny. I don't see how a DL-AA merger could pass. DL might pick up a few assets or they might want to just bollix up AA's reorganization or ensure that the creditors get more and AA emerges weaker.

    But if there is a US-AA merger, I don't think you can assume that the result looks anything like the scope of both operations today. I would imagine that US's management team would be taking over AA, and that they'll bring Doug Parker's financial discipline to the combined airline, which will included jetisoning anything that doesn't pencil out. That might mean downsizing JFK/LGA - which is really primarily an O&D market as AA really doesn't connect much between JFK & LGA, and has limited connections at JFK. It could mean similar reductions in LAX, and maybe taking a look at whether hubs in ORD or PHX should remain.

    I think the resulting airline would be made up of the most profitable parts of each airline, which I believe would be MIA, DFW, CLT as the core, and perhaps PHL. It doesn't address AA's Asia weakness. And I assume the combined airline would move to Oneworld for anti-trust reasons, though *A might be a better alliance, and it's not beyond the realm that the combined US/AA would be allowed to be a second Star member in USA

    Really depends on which Alliance a combined airline would belong to. FRA is an important destination so it could continue to support one FRA flight even if US-AA went to Oneworld, and you would expect service to Oneworld hubs in LHR and maybe even MAD.
     
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  13. gleff
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    gleff Co-founder

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    And I have to assume, in part due to antitrust issues, that the combined entity is a part of oneworld.
     
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  14. eponymous_coward
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    eponymous_coward Gold Member

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    I think that if a US/AA merger happens, it will follow the lines of DL/NW and UA/CO- the merger partners will date first as part of the same alliance before they get married with a merger. ;)
     
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  15. autolycus

    autolycus Gold Member

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    Hmm... I'm racking my brain here and can't think of any way that the alliance choice will have an effect on whether a merger is allowed by DOT/DOJ. The standard they currently apply focuses entirely on the effect the merger would have on city pairs and market share in those city pairs. Picking OW vs. *A would have a petty insignificant effect on those factors. At most, there'd be a shift in a few flights here and there from one international partner hub to another. AA daily service from JFK-LHR might drop by 1-2 flights and JFK-FRA might add 1-2 flights/day, for instance. The net effect on competition from that alliance change is pretty much zero. I'm certainly not as familiar with the respective alliance networks' route maps as you, but I can't imagine a set of city pairs that have competition now that would be left with competition if a US/AA merger happens under OW but without competition if a merger happens under *A. Sure, you might lose some non-stop flights from JFK-LHR, but there'd still be plenty of competition with BA and DL still both serving the route.

    Perhaps some routes like DFW-LHR and DFW-SYD would be lost, but there would still be plenty of other options available to get between those markets such that no monopoly or even substantial loss in competition would occur.
     
  16. Seacarl
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    Seacarl Gold Member

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    I don't see that AA has the time to wait while US switches alliances. And US has more benefits as part of *A than they would in oneworld. So I would only expect an alliance switch as an integral part of a merger.
     
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  17. eponymous_coward
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    eponymous_coward Gold Member

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    UA had enough time to wait when the CO/UA merger fell through in the mid-2000s. And US has one important benefit that they are missing from being the red-headed stepchild of *A: ATI immunity for TATL operations. If joining oneworld could get that for them, US would be gone as soon as they could.
     
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  18. Seacarl
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    Seacarl Gold Member

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    You are not remembering the history of CO's switch to *A. UA had solicited CO to bid but CO wasn't interested. CO was in Skyteam alongside DL and NW. Then DL bought NW and all the Skyteam biases went toward DL and NW and against CO and CO realized they would be weak in Skyteam, and CO took the initiative to switch to *A. At the time there was no merger proposal; it was simply that CO wanted to be in an alliance where they could have a stronger role. It was only when the switch was underway that the merger dance started again, and I think that UA hinted they'd merge with US unless CO stepped up.

    I'm sure US isn't happy about not being part of the UA/LH/SK/AC ATI and I'm not really sure why they weren't invited in. But the OW ATI is only BA/IB/AA so probably less valuable. US would probably be happy to join either.

    I don't think the domain name purchase reported elsewhere means anything other than a squatter buying some property. I don't necessarily think this is a done deal, but Doug Parker may put himself in the best possible position if he ends up with AA's European and South American routes and DFW & MIA operations and stays in *A.
     
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