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Change in the Air: How the American/US Airways Merger Will Really Affect Your Flying

06/08/2013

What’s the real impact of the American/US Airways merger on the way you fly? Here are some perspectives from people in a position to know. My article first appeared in the May 2013 edition of Business Travel Executive magazine.

By most lights the dizzying consolidation of the United States airline industry is over, having reached an uneasy equilibrium of sorts with projected regulatory approval of the American/US Airways merger. Now comes the interesting part, how it all plays out in terms of managed corporate travel.

Not all that long ago, back in the middle of the first decade of the 21st Century the elite eight still reigned: United, Continental, Delta, Northwest, American, US Airways. The bracket was filled out by two domestic low-cost competitors, Southwest and AirTran. Then, in rapid succession, the dominoes began to fall: Northwest was assumed by Delta, Continental (at least in name) by United, AirTran by Southwest and – soon – American by US Airways. The latter’s name lives on, if not its iconic aircraft livery.

By The Numbers

According to a report jointly authored by the American Aviation Institute, The Airline Zone and masFlight consultancies, here’s how the remaining major players stack up after the US Airways American merger and the AirTran’s integration with Southwest. The data is based on masFlight/OAG schedules for February 1 to February 7, 2013:

– The new American fields approximately 6,448 daily flights. 5,609 of them are domestic, 839 international. That equates with 659,029 seats per day, or 27.5 percents of the total seats in the market. Bottom line: in terms of girth AA will be number one.

– United Airlines will offer some 5,023 daily departures. 4,227 are the domestic variety, 747 international. The report says UA has 18.7 percent of the seats.

– Delta Air Lines total daily flights number 4,684 – 4,244 of them domestic, and 440 international. That gives DL 21 percent of the seats.

– Southwest and AirTran have 3,368 total daily departures. 3,312 of them are domestic, and a mere 56 percent international. Together, Southwest and AirTran have19.4 percent of the seats.

Taken together, the final four command 86.6 percent of the available seats lofted by United States carriers according to the report authored by Josh Marks and Darryl Jenkins.

With almost nine-tenths of the seats sewn up, the issue is, just how competitive are these final four? Eight was enough to spark some spirited competition, but what sort of deals can corporations expect to wrest from a field half that size? Ample, asserts Josh Marks, CEO of the aviation consultancy masFlight. Marks says the US/AA merger essentially “equalizes the networks that each of the three major network carriers offer.” By merging, the AA/US combo becomes far more potent. Good for the airline? Sure, but good for business travelers too – he maintains – because “It should strengthen the hands of corporate travel managers by giving them another airline to provide a global bid” on the same scale that United and Delta are capable of offering.

If the American/US Airways star really shines as projected, the alliances will each have one major U.S. player: American in oneworld, United in Star and Delta in SkyTeam. Seen through this prism, it’s oneworld which gains the most, Star which slips a bit – at least in terms of alliance lift from the United States. Before the realignment, masFlight and OAG found that oneworld had 19.9 percent of the schedule; after the merger it’s 25.6 percent. While small, the shift is nonetheless important. Jenkins and Marks say it “should have a tangible competitive benefit.” That’s because international connectivity is increasingly critical in winning the hearts and fannies of business folk. Nowadays, he who lofts the most seats to the most places wins.

Mike Boyd agrees with Marks assessment. The AA/US combo most probably will “give the corporate travel buyer more options, more leverage” vis-à-vis United and Delta says the president of the Boyd Group International consultancy.

In other words, mass matters.

The issue is, is that mass benign or malignant? Countering the argument that less is actually more is Kevin Mitchell, chairman of he Business Travel Coalition. He contends, “There’s no way to prevent some of the more pernicious effects of concentration.” Used to be that mergers worked best, weren’t as dramatically injurious to competition, when the merged carriers’ routes didn’t overlap. Seen that way, the melding of American and US Airways passes most tests just fine. US Airways is a huge player along the Mid-Atlantic and in the deep South; American not so much.

According to the Jenkins/Marks study there are currently 61 unique airports throughout the world not served by American Airlines, and 130 unique airports not served by US Airways. The report concludes the combined AA/US route network actually “fills geographic gaps and adds nearly 8,000 O&D (origin and destination city) pairs.”

But Mitchell argues that there’s a new math at work now, one made manifest when the final four came into play. He contends “You’re going to see increase[s] in pricing that will have very little bearing on whether there are overlapping routes or not.”

Evidence? The BTC chief points to the fact that 2012 saw 15 proposed fare hikes, seven of which went through. He says that “means that eight didn’t, because one or more carriers said, ‘no.’” By winnowing the competitive field to four he asserts “it’s going to be much easier to put these increases in across the board.”

Ah, but what about the policing power of a suddenly wider-ranging Southwest. Armed with a slew of almost new AirTran 737-700s, and a covey of new close-in international routes won’t WN play its well-practiced role as cop on the block? Mitchell’s not so sure. He says there’s “much less incentive” for Southwest to “continue to discipline the marketplace” now that AirTran is tucked firmly under its wing. As for expansion, “They’ve run out of low-hanging fruit: underserved and overpriced markets.” Add to that the fact fuel costs are up and Southwest’s cost-cutting latitude is curtailed – at least so goes one side of the argument.

In their study of the impact of the AA/US merger, Jenkins and Marks counter that pricing pressure will remain “alive and well.” While conceding, “Southwest may not be as aggressive as it used to be” the report goes on to say their “competitive footprint is wide.”

Mike Boyd believes corporate travel buyers still enjoy a modicum of leverage with the airlines – this by virtue of influencing the sojourns of sought-after business travelers. But, says Boyd, the irreducible fact remains “At the end of the day airlines aren’t adding seats. They aren’t adding flights.” And as a result of that he says, “Corporate buyers are going to have an increasingly hard time – with or without the merger.”

Mitchell reasons this way: even if carriers continue to offer discount programs in the near- to mid-term future those price breaks could well be off higher base fares. Then, “discounting becomes a little bit of a game [because] the market has lost the discipline to keep these prices in check.”

While JetBlue and Virgin America continue to tilt with the network carriers on lucrative transcontinental and other long-haul routes, brash, unbundled Spirit Airlines is giving flyers new options in markets such as Dallas/Fort Worth. Frontier is testing Trenton as an alternate to Philadelphia, and classy Alaska Airlines remains a carrier of choice where it chooses to fly. Here and there, on a market-specific basis, market discipline still exists. What doesn’t exist is any reasonable hope that a squadron of new entrants will descend from the heavens and ignite a series of price- plummeting brush fires across the continent. Those days, all agree, are over.

“Forget it,” says Boyd. First, there’s fuel costs. They’re so high that the used DC-9s and 737 classics that did all the heavy lifting for new entrants once-upon-a-time are no longer options. As for newer, fuel-efficient models, Boyd says the cost of a new flying machine today “is probably 400 percent more, adjusted for inflation, than it was 35 years ago.”

“New entry airlines gaining a foothold anywhere in this system at this point is virtually impossible,” echoes Kevin Mitchell. “Can you imagine investors plopping down a couple of hundred million dollars right now on a new airline?”

Hub-Bub

If pricing is an issue, then so too is placement. Delta’s Cincinnati operation is a shadow of what it once was, and Memphis isn’t the force it once was. The American/TWA merger at the dawn of the new century rendered TWA’s Lambert St. Louis International simply a strong spoke in AA’s scheme of things. When airlines merge, hubs can wither. So, whither Phoenix, Charlotte and Dallas/Fort Worth? The first two are US Airways’ hubs, the latter AA’s linchpin.

Boyd believes DFW could leach some of Phoenix Sky Harbor’s traffic. The rationale: DFW “is a much better connecting point” transcontinental traffic flows, say, from the Northeast to the Pacific Northwest. In the end, however, he believes PHX will fare well. “There will be some adjustments, but [it] will still be a connecting hub.”

As for Charlotte, the airport could well grow under the aegis of an AA/US amalgam. Despite the fact CLT has a comparatively low amount of origin and destination, or O&D, traffic, it’s a prime connecting nexus, a wonderful counterbalance to Delta in Atlanta. Also arguing for its staying power, says Boyd, is the fact “its feed markets are very close [to] places like Roanoke.” The city is also a prime banking center, an epicenter of an area in which “you have lots of Asian investment.” All of that augurs well for the airport’s continued ascendance in the new American’s scheme of things.

So, in the larger scheme of things the final four is all but a fait accompli. As of this writing there seems scant chance regulators will veto the plan to fashion the planet’s largest airline. Now it’s a matter of corporate travel buyers learning to live with the fact, and continuing to exert as much leverage as possible when dealing with the carrier’s that survive.

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2 Comments
  1. You spend a lot of time talking about the effects of the mergers on corporate travel programs. But what about us poor individuals who travel for both business and pleasure? I see nothing good for us from the consolidations and the new meg-airlines. Any thoughts? Thanks, Baron Wolman, a “JoeSentMe” subscriber…

  2. David C permalink

    What about some thoughts on what kind of carrier the “new” American will be? Three-class service with the amenities of a national ‘flag’ carrier, suitable for use by business travelers? Or the progeny of Allegheny Airlines, with two-class service and a leisure traveler focus?

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