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Airline Mergers: Why Bother?

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Predictably, when American Airlines and US Airways announced merger plans, US Airways CEO Doug Parker issued a bland statement straight out of the MBA-speak playbook: "The combined airline will have the scale, breadth and capabilities to compete more effectively and profitably in the global marketplace. Our combined network will provide a significantly more attractive offering to customers, ensuring that we are always able to take them where they want to go."

Anyone who's had a detectable pulse for, say, the last 15 minutes, knows that companies don't merge and restructure for the benefit of customers, but to pad their own bottom lines. If customers benefit in any way, it's a happy coincidence and, in any case, it might not last. Large U.S. businesses—cellphone companies, credit card companies, major retailers, cable companies and the like—can no longer disguise the fact that they view customers as marks with bulging pockets. Similarly, with its unbundled fees trend, the airline industry has discovered a way to tap customers for more money without delivering additional value.

So CEO Parker would have us believe the merger will miraculously turn one somewhat horrible airline (American) and one mediocre one (US Airways) into a mega carrier that will somehow delight customers as it whisks them off to hundreds of new destinations in some of the oldest airplanes in the fleet. (Even Aeroflot has newer airplanes.) The logic that suggests management that can't keep one airline solvent will somehow do better with a much larger one escapes me.

The merger news has been met with varying degrees of worry, scorn and even mild enthusiasm. Here in Sarasota, the airport authority is rightfully sweating the potential loss of US Airways service, having been stung when AirTran pulled out after its merger with Southwest. American Eagle used to have a Sarasota presence, but it went away, too. The local airport board has learned to lower its expectations when dealing with airlines.

Judging by a press release from Purdue University's Airline Quality Rating project that calls the merger a likely fiasco, I think we can put that organization in the skeptical column. And they more or less have the numbers to prove it. Purdue's Brent Bowen, Wichita State University's Dean Headley and the AQR project have been collecting and analyzing airline performance and customer satisfaction data for the past two decades. The AQR rates on-time performance, denied boardings, mishandled baggage and a range of customer complaints.

To be fair, the AQR found in 2011 that airlines as a whole are actually improving, with the best performance in the 21-year-history of the survey. Still, American, with a combined AQR of -1.24 is a lower-tier airline, ranking 10th out of 15 airlines surveyed. American's associated regional, American Eagle, ranks dead last, while US Airways is mid-pack. Rated at -1.13, it ranks number eight. US Airways has improved markedly since 2005, but American's performance has improved only marginally. The number-one rated airline, by the way, is scrappy discounter Air Tran, with a –0.48 rating.

Purdue's Bowen reckons that based on merger experiences during the past 25 years, the American/US Airways hook-up won't do anything but reduce customer choices and decrease competition. "There will be no benefits to performance and consumers will not see more quality. Employees of both airlines will be unhappy and destabilized for an extended period," Bowen says. If there's any faint hope that US Airways' better performance will influence American positively, Bowen says he doubts it. US Airways lacks the numerical heft to nudge American's culture upward. Although Bowen didn't say it, I wonder if it's more likely that the combined airline will sag below even US Airways' mid-stream rating.

The merger awaits approval by U.S. regulators, but it seems unlikely they will do anything other than rubber stamp it. Regulators are concerned with broad economic and competitive issues, not whether an airline loses bags and stiffs passengers on boardings and cancellations. So, to summarize: The new, larger airline will probably have fewer total destinations, higher fares and fewer choices for customers and an unhappy, destabilized workforce for at least a period. That makes Bowen's word choice—fiasco—grimly appropriate. Here's hoping it doesn't stay that way.

Comments (50)

In 1978 the government took a highly regulated industry and totally deregulated it. It's been a disaster ever since. I entered the insurance business in '78 as an Independent Agent. That industry did deregulation properly; slowly, carefully, incrementally. This merger may not go smoothly, but ultimately it should be good for all of us. We can't have airlines forever going through bankruptcies--the business needs profitability and stability.

Posted by: Thomas Reilly | February 17, 2013 11:20 AM    Report this comment

When there were multiple separate airlines, if one went bust or was shut down by a strike, there were other options for customers. Imagine the effect of a strike at the new American Airlines. All those planes grounded, all those passengers stranded, and nowhere near enough capacity at the other carriers to take them.

By law, two separate airlines can't get together and fix prices, but two now-merged airlines can.

Customer service matters to a small company (or at least it should) because each customer represents a larger percentage of the total. An company the size of the new American Airlines can piss off a thousand people a day and it won't matter at all to them.

Posted by: Jeff Rankin-Lowe | February 18, 2013 5:30 AM    Report this comment

I travel a lot for business, so unless there is a specific time constraint, ticket price usually wins out. I can't remember the last time I flew on either of these airlines because their prices were higher and service, at best, OK.

Frankly, for trips up to about 500 miles, it is usually faster for me to go from point A to point B by driving. When you consider the rental car price, gas, and flexibility versus the airline ticket, baggage fees, change fees, special seat fees, special boarding fees (you get the idea) driving is become the more economical option. This is even more true with 2-3 people going to the same location.

With mergers, reduced aircraft and seats, the airlines may soon price their services up to profitability, but may not have the passenger load they expect to support it.

Posted by: Richard Norris | February 18, 2013 6:12 AM    Report this comment

I wonder why it is that people in the press just delight in trashing everything corporate. Is that something they teach you journalism classes? Give it a chance. I have flown on American for more years than I want to count and would not characterize them at all like was done in this article. Both my son and I travel for business a lot and think American is just fine.

Posted by: Stuart Baxter | February 18, 2013 6:57 AM    Report this comment

Paul, you say: "Anyone who's had a detectable pulse for, say, the last 15 minutes, knows that companies don't merge and restructure for the benefit of customers, but to pad their own bottom lines. If customers benefit in any way, it's a happy coincidence and, in any case, it might not last."

Wholly agree. You could also say: Companies don't merge and restructure for the benefit of shareholders. If shareholders benefit in any way, it's a happy coincidence and, in any case, it might not last.

These sort of massive corporate mergers fairly reliably destroy shareholder value. They are useful to the management because it increases the size of the organization (& therefore the size of the paychecks and bonuses of those running it), and because it provides a 3 to 5 year period for which they are not held responsible for the merged company's results. They can hand wave and say 'still doing the difficult task of integrating the 2 operations'.

Posted by: Ceri Reid | February 18, 2013 7:18 AM    Report this comment

Pretty soon there will be one airline and you will have to fly them, fly yourself, charter or drive. I mostly fly Southwest for business because I HATE being nickel and dimed to death...$20 bag fee, $10 for extra legroom, etc etc etc.

If I have more than 3 employees going, a company in the area has a King Air 200 that I am checked out in and I use that...the hassle of the airlines, combined with the loss of time makes me think that even if the King Air isn't cheaper for the "ticket price" the lost productivity and hassle far outweigh any negative.

I'm afraid if the Government does't step in and re-regulate the airline industry it's only a matter of time before there are no airlines in the US.

Posted by: R. Doe | February 18, 2013 7:23 AM    Report this comment

Richard, I have to agree with you about driving. I work for the Air Force at Wright Patt, ohio and I will tell you we are driving. We drive to DC, We drive to St Louis, and we drive to Tullahoma, TN. As a federal worker we are trying to stretch your dollars as far as we can and still do the job. But of course our time and safety aren't worth much to the government. Btw.... No we don't have AF planes we can use, those are reserved for 3 stars and above. And even they are having trouble as the AF cuts back.

Posted by: Richard Mutzman | February 18, 2013 7:27 AM    Report this comment

Ceri, I guess you're right about shareholder value. That one didn't cross my mind but it should have. I'm sure I've lost some investment value due to mergers of companies held by funds I own. No airlines, though.

Posted by: Paul Bertorelli | February 18, 2013 8:10 AM    Report this comment

I have had nothing but sour experiences with AA both as a passenger and as a contract engineer. This company takes the Fun out of dysfunctional. I worked on the baggage handling system at KMIA for 1.5 years. A small example is that their bag tag printers were not maintained so there were bit white streaks in the bar codes. In addition, they printed two of the 4 bar codes around the bag handle area and were unreadable. It is no wonder that every bag from those ticket lines was delivered to the end of the conveyor line, hundreds of feet away from the correct pier. As a passenger: The contractor sent me home every other weekend, so I was on a flight every week. The miles were useless. I brought a friend to Miami and it cost me a hundred dollars. The return leg got changed for another hundred. I wanted to bring a couple children to Miami and it was less expensive to buy tickets on SWA than to use the miles. The list goes on. Perhaps it is a typo, but it may be indicative of the dysfunctional management. "more attractive offering [sic] to customers" Maybe US Airways management can at least get their grammar correct.

Posted by: peter koza | February 18, 2013 8:43 AM    Report this comment

Honestly, I do wonder about folk who complain about the deregulation of the airline industry. I mean, if you're looking for a return to high-service (often over-the-top high) at coach prices that would make today's business class fares look cheap, I guess that's a good thing to call for. But, the number of people who have been able to fly affordably was dramatically increased by deregulation - and that's been true even as the airlines have gone bust over and over. The point of deregulation was to offer better value to the consumer - and it has worked. And, yes, I know we're being nickel-and-dimed: the airlines would just love to charge a single all-in fare (and they'd like to include champagne and caviar and lie-flat seats in that fare), but they can't because consumers are nickel-and-diming right back, choosing the airlines that offer the lowest bare-bones fares. We have met the cheapskates, and they are us - and we can get what we want (cheaper travel) because of deregulation.

Posted by: Thomas Boyle | February 18, 2013 8:43 AM    Report this comment

Most air carriers are no more than high-tech third-world bus rides. I cannot remember the last really pleasant trip by airline. Airline travel has replaced the root canal as the benchmark for unpleasant.

Probably the main reason for the merger is the corporate hope that they will reach "too beig to fail" status and tap the taxpayers for bonus money.

Posted by: Richard Montague | February 18, 2013 9:09 AM    Report this comment

Will this merger turn out to be the best thing to happen to General Aviation? Sounds like it might. I guess we'll know in four or five years.

Posted by: Pete Kuhns | February 18, 2013 9:14 AM    Report this comment

What amazes me about airline mergers is that the weaker one somehow buys the better one. United bought Continental? Also, continental was a usual winner of customer satisfaction awards. This hasn't improved United's standings at all.

Posted by: Eric Warren | February 18, 2013 9:19 AM    Report this comment

xx

Posted by: Jim Howard | February 18, 2013 9:39 AM    Report this comment

If we still had regulation we would not have Southwest or Jet Blue.

Posted by: Jim Howard | February 18, 2013 9:39 AM    Report this comment

But, we might have Pan-Am and TWA.

Posted by: Thomas Reilly | February 18, 2013 9:43 AM    Report this comment

I'm a Reagan Republican (not Bush), I believe in deregulation, but not totaling throwing an industry into turmoil. Pan-Am didn't have a prayer. It needed to done thoughtfully and carefully--like pilots approach their job.

Posted by: Thomas Reilly | February 18, 2013 9:47 AM    Report this comment

The more recent example is the mortgage related real estate collapse that damn near destroyed us all. This was a result a Alan Greenspan's refusal to regulate derivatives and thoughtless support for overturning the Glass–Steagall Act allowing banks to run amuck. Airlines, banks, insurance companies, etc. all need some regulation to protect us from ourselves.

Posted by: Thomas Reilly | February 18, 2013 9:53 AM    Report this comment

I owe a debt of gratitude to American Airlines. If it had not been for their supreme suckage at customer service I might never have become a pilot with his own aircraft. Some of my very worst travel experiences have been with American and that set me on the path to aircraft ownership.

This merger will no doubt set the standard for horrible customer service with incredibly high fees. Bravo.

Posted by: Ric Lee | February 18, 2013 11:28 AM    Report this comment

I really think that Americans are getting to the point where they see the futility and the sometimes brutal treatment of the TSA, and are beginning to decide to skip the airlines. TSA will surely be able to say how safe the airlines are, once they are all gone. As long as we do not allow TSA to take over trains (they have) and ships (they have) and do VIPR highway stops (they do) and sporting events (They do) and shopping malls (coming soon to a neighborhood near you) maybe when the last airline goes under, the government will deem the TSA to be obsolete.

Posted by: Bruce Liddel | February 18, 2013 11:33 AM    Report this comment

This merger like all the rest are about UNIONS. Unions end up driving up ticket prices because the monopoly of a large carrier allows it. THIS IS WELL KNOWN AND A SCAM ON THE FLYING PUBLIC.

Posted by: G Bigs | February 18, 2013 1:39 PM    Report this comment

Well if YOU want more of a say then regulate the airlines again. It's really that simple. Prices WILL be higher but the service will be defined by the consumer via the regulation committee.

On all of the business news channels I always hear so-called business experts saying that "the Airline Business model is broken". Yet I NEVER hear any of these geniuses offering any REAL solution. The airline industry as it stands today is in all likelihood the most regulated deregulated industry in the world. It IS very broken but letting the consumer be Nickled and Dimed to death by a free market approach does not seem to be making anybody happy either.

Posted by: Randolph Palma | February 18, 2013 2:32 PM    Report this comment

If you guys want a real education on the airlines and their silly practices, read "Why Can't we Make Money in Aviation". It will blow your mind.

Posted by: Ric Lee | February 18, 2013 2:52 PM    Report this comment

It's not broken for everyone. Southwest seems to do OK, no? And I know why. Their fares are set right, for one thing. Just priced a biz fare to Las Vegas. Southwest was $606, Delta $501. That's a big delta, so to speak.

Posted by: Paul Bertorelli | February 18, 2013 2:55 PM    Report this comment

In the above mentioned book, Southwest is the one shining example of a well managed airline.

Posted by: Ric Lee | February 18, 2013 2:58 PM    Report this comment

Southwest Air manages their unions and their fuel purchases better than most. BUT their cattle cabin service is one of the worst in the industry. Some people are okay with such treatement. fine. They have a niche. And they do keep ticket prices lower because they buy fuel on the futures market when it dips.

Posted by: G Bigs | February 18, 2013 3:04 PM    Report this comment

The trick to Southwest is they deliver what they promise better than most. They just promise less. IMO, you won't get any better without getting rid of either the union model or the amount of government interface. The easiest solution would be for an airline to build their own airport.

The nickel and dime stuff will run its course. Can't blame it on the airlines. If you can't innovate - manipulate. Between consumers choosing price over value and obscene levels of constraints from all levels of government plus unions you get what you get.

Posted by: Eric Warren | February 18, 2013 4:36 PM    Report this comment

The American flying public has made very clear what their top three priorities are when choosing an airline: price, price, and price. The airlines are just delivering exactly what their customers value most.

Four airlines probably is about two too many to work in customers' favor.

Posted by: Thomas Yarsley | February 18, 2013 5:15 PM    Report this comment

Check your facts, Bigs. Southwest fares are not lower. On may routes, they are higher. I just gave one example.

Posted by: Paul Bertorelli | February 18, 2013 5:51 PM    Report this comment

Southwest is the world's largest low-cost carrier. They have 40k emps and and do 3,500 flights a day. They operate in 40 states. The company is the 3rd most admired of all companies in the US. Southwest keeps its airfares low and competitive despite being a union shop. They have the smartest management in the airline industry who keep both emps happy, passengers riding, and fuel cost under control. In fact, Southwest is a typical Texas company avoiding heavy local regs and taxes being based in Texas. They ONLY fly the economical Boeing 737s. And regularly hedge fuel prices by buying large futures contracts when price is low. If Southwest did not compete well on fares they would NOT carry more passengers than any other airline in the country. Are those enough numbers for you Paul?

Posted by: G Bigs | February 18, 2013 6:20 PM    Report this comment

TO Mr.G Bigs, I LOVE YOUR DIRECT NO NON-CENT$ STYLE!

You have ALL, nearly all, nailed down - now don't get a "big" head,(above the neck-pun intended)and "WRIGHT" in every comment I've seen by you to date!

Doesn't it realy boil down to good competent MANAGEMENT in the final analysis of ANY business and that PROFIT(did I offend the non-capitalist?)is the primary motive for being in business?

You think(wishful?)this could transcend to the recreational aviation BUSINESS(I hope I didn't offend the social avaitors)side of GA before it becomes extinct?

Posted by: Rod Beck | February 18, 2013 9:10 PM    Report this comment

Mr. Bertorelli; I guess the "higher" fare aren't the ONLY condideration, which, since the airline industy (seats)is PRICE driven for the most part. Interesting contradiction to an old idea that PRICE is always a major motive for purchasing. Often , when a "customer" has attained a loyality to the "whatever" i.e. quality service,competeent and freindly employees, equipment (aircraft in this case)and reliable "on time" service, you have a WINNER! I would bet that on the routes that are HIGHER are do to: 1. No little competition to that destination? 2. Lower seat factor (ratio of filled to unfilled) resulting in HIGHER break-even point?

Posted by: Rod Beck | February 18, 2013 10:26 PM    Report this comment

Where else in business can you charge for a service at rates less than it costs to operate, then repeatedly declare bankruptcy (to invalidate contracts with union employees or otherwise and vendors) and continue to operate? Allowing these mergers is actually not allowing competition to weed out the marginal airline businesses that could not survive otherwise.

Posted by: matthew wagner | February 18, 2013 10:53 PM    Report this comment

All the talk about Southwest has not addressed their business model. When is the last time you flew Southwest to Europe? South America? China? Japan? You won't, that is the way Herb Kelleher set it up. This has worked for them so far, but be aware he is no longer in charge. The new management wants to expand and branch out to overseas destinations. It wont be long before Southwest becomes just another "big box" carrier. They are already diluting their advantage by flying into major airports like Denver (and their getting killed by airport fees)Their fuel hedging program has not worked for them lately, and you can see the profits dropping.They are telling the employees to tighten their belts for the rough road ahead. I can only hope and pray that American can come out of this stronger, and better, (bigger is a given) I've worked for them for 26 years and I am ready to do my part to make American the best airline in the world. Give us a chance.

Posted by: Darren Carriker | February 19, 2013 12:31 AM    Report this comment

". No little competition to that destination?"

Again, not really. Certainly not always. Just plug in some representative city pairs and you'll find that Southwest is rarely below its competition. Take LAX-LAS. Lots of competition. A seven-day fare, web, is $153 from Southwest, $123 from Delta, United and American, $75 from Spirit, $166 from US.

I've flown Southwest for many years and love it. But it ceased by the discount leader some years ago. It remains, in my view, the customer service leader. You can change flights without fees, free bags, friendly agents and cabin crews and so on. But also, a limited route structure compared to American or Delta.

Bigs said they keep ticket prices lower. Lower than what? Not break even, that's for sure. His facts are just wrong.

Posted by: Paul Bertorelli | February 19, 2013 6:15 AM    Report this comment

Speaking of innovation, anyone know how Delta's purchase of their own refinery is panning out?

Posted by: Richard Montague | February 19, 2013 7:46 AM    Report this comment

Delta lost $63M on its refinery in the last quarter of 2012 and projects $100M loss for 1Q 2013. According to Platts, this may because it's an old refinery configured for Nigerian crudes, which trades at a premium above the Brent index. They are thus making more expensive gasoline than other refiners.

I don't know what this does for their tax writeoff position. Here's an article on it:

www.snipurl.com/26fcxnf

Posted by: Paul Bertorelli | February 19, 2013 8:44 AM    Report this comment

For those here who think CAB regulation was so wonderful, read some history of the airline business, pre-1978. During the Howard Hughes era, TWA still lost money. Route awards were based on political spoils, not always the public "good". Western was denied routes to Hawaii during the entire Kennedy/Johnson administration. Juan Trippe's Pan Am got whatever it wanted.

Posted by: Jim Lo Bue | February 19, 2013 11:24 AM    Report this comment

I thought Delta buying that refinery was a bad idea from the start. Major refiners usually close and put up for sale a refinery because of crude supply issues, not because is is just getting old and needs repairs. Yes, fuel is probably Delta's #1 expense, so it is temping. But, airline management barely knows how to run its own very complex business and eek out a profit. The refining and marketing part of the oil business is very complex on its own.

Posted by: Jim Lo Bue | February 19, 2013 11:33 AM    Report this comment

I guess the real BOTTOM LINE is almost all of aviation in general is; "Show Me The MONEY"! I know,I know; "We're doing it for the LOVE of it"!

COURT GUARD:"Yes sir, divorce count is 2 doors down on the right, bankrupcy? yes, that's back 3 doors and on your left"!

Posted by: Rod Beck | February 19, 2013 4:51 PM    Report this comment

I can't believe all the negative comments here. Everyone needs some kind positive fix.

Posted by: Stuart Baxter | February 19, 2013 7:33 PM    Report this comment

Negative comments or just those who see the REALITY of so much non-cent$ and aren't lving in Disney Land?

Posted by: Rod Beck | February 19, 2013 8:07 PM    Report this comment

Oh. Then all who read these blogs and consume the information from this newsletter are, like the Obama crew, supposed to simply accept what is said on face value and not question or clarify - sorta like little yes-men bots? There is plenty to disagree when it comes to the dysfunction in this country, especially when it comes to giant mergers, union bullying, outright lying from the government, and threats to our freedom to fly and even own a gun. If you want everyone smiling and lockstepping, move to China. They like unquestioning bots there.

Posted by: G Bigs | February 19, 2013 8:49 PM    Report this comment

Mr.Bigs; Thanks for "seconding the motion"!

Posted by: Rod Beck | February 19, 2013 9:19 PM    Report this comment

I have a proposal for all the fans of re-regulation: go start an airline and run it as you would like to see regulated airlines be run. If you're right, passengers will flock to you. If you're right, you won't need to use force (i.e., regulation) to make people buy the product. And, really, if you had to use force it would just prove you were wrong in the first place, wouldn't it?

Good luck! (Yes, really - good luck, I hope you get rich!)

Posted by: Thomas Boyle | February 20, 2013 2:46 AM    Report this comment

I predict the biggest losers will be the US Airways employees, followed closely by the customers and shareholders. Mr. Parker's management team has not shown an ability to easily grasp the difficulties of international operations, especially regarding ETOPS, and this merger will present problems of a much higher magnitude. Having suffered three mergers as an airline pilot I have seen good, the bad, and the ugly of these events. The US Airways pilots have no guarantee of route protection that I can see and stand to lose their international flying. The American Airlines 'culture' is deeply ingrained and in many ways American will be the survivor carrier in this merger. Many executives have attempted to impose their will on corporate culture. Most failed. I suspect that many of the problems that put American in bankruptcy will remain. Only the lawyers will find this a profitable exercise. I hope I am wrong. History suggests otherwise

Posted by: John Snidow | February 20, 2013 12:00 PM    Report this comment

John, where does that culture come from? Why is it the way it is? I've heard this view from other sources, including AA pilots.

Posted by: Paul Bertorelli | February 20, 2013 12:33 PM    Report this comment

Culture is an interesting phenomena that I have observed but not studied. Experience suggests to me that corporate culture is strongest in companies that are very old, like American Airlines with a history dating back to the early 1930s, companies with unusual beginnings like Flying Tigers with it’s link to the original American Volunteer Group in China during WW II, or a relative late arrival like Federal Express that succeeded against all odds with a completely different business model.

In the Marine Corps there is a strong culture of being underfunded, undermanned, and over achieving that the Corps has used to great advantage.

‘Culture’ is really based on employee pride of having succeeded at some level. These attitudes can be a wonderful motivators like being able accomplish more with fewer resources. It can also get in the way of progress when it leads to a corporate insularity such as not needing improvement or new technology because the company has always accomplished what it does with older processes. “We do it this way because we have always done it this way!” In other words, it inhibits progress in the latter case and Pan Am was a great example of that.

Posted by: John Snidow | February 20, 2013 2:16 PM    Report this comment

Old airlines are not about culture they are about being infested with OLD, EMBEDDED, UNIONS. The railroads are also infested and are the least efficient companies in the country.

Posted by: G Bigs | February 20, 2013 2:49 PM    Report this comment

And for those readers who would like a slant on GA and it's lack of application of traditional business pratices other than the "airlines", as Ric Lee suggested in, "Why Can't We Make Money In Aviation",kindly check out our many no non-cent$ articles by Mike Dempsey, and my recent feature, "Will BUSINESS Ever Come To Recreational Aviation" Dec 2,2012, which Mike and I feel is perhaps 50% of the root of GA's problem. get-aviation.com or aviationbiz.us

Posted by: Rod Beck | February 20, 2013 8:49 PM    Report this comment

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