ANALYSIS: American-US Airways details will be in the execution

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American Airlines and US Airways merger will create a competitor comparable to Delta Air Lines and United Airlines in the US market, but many details of the new carrier will remain a mystery for months to come.

The new American will be based in Fort Worth, Texas, with US Airways chairman and chief executive Doug Parker as chief executive, and AMR chairman and chief executive Tom Horton as non-executive chairman. The airline will fly 6,700 daily flights, to 336 destinations with 948 mainline aircraft and retain its combined orderbook of 607 aircraft, based on current operations. It will remain a member of the Oneworld alliance.

That is what we know.

We do not know what is planned for the combined network, how its regional feed and fleet will be structured or even what its livery will be - Parker avoided the topic of paint schemes at the merger announcement. Then, of course, there is the whole integration of the two carriers, which is expected to be complete and producing revenue synergies by 2015.

"I've long been a proponent of industry consolidation," said Parker in Dallas on 14 February. "This is the last needed piece to rationalise the airline industry."

Little can be officially decided the until the merger has antitrust approval from the US Department of Justice (DOJ), though Parker and his management team almost certainly have an as yet undisclosed plan for the combined carrier. Horton and Parker said that they expect a ruling in time to allow for a third quarter close. The required documents were filed with the DOJ on 31 January.

Domestic network

The new American will have hubs or focus cities at Charlotte, Chicago O'Hare, Dallas­ Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington National.

American-US Airways domestic network (February 2013)

Innovata FlightMaps Analytics

"We're not at a point where we can talk about network rationalisation because we're not at a point that we can do so," says Horton. "Our plan is to maintain all of our hubs. [But] markets change and we will do what brings the greatest return for our shareholders."

"[The merger] is built on the notion that we're going to build and expand our existing hubs," he adds.

Delta significantly cut back operations at Cincinnati and Memphis following its merger with Northwest Airlines in 2008, despite similar assurances from executives that it would maintain all of the carriers' hubs prior to the deal. Capacity at Cincinnati will shrink by 27.5% and at Memphis by 40% between June 2010 and June 2013, according to Flightglobal/Innovata data.

United and Continental also said that they did not plan to cut capacity prior to their merger in 2010. While they have kept all of their pre-merger hubs, capacity fell by 1.5% in 2012 and 0.2% in 2011. Management has provided guidance of a further 1% cut this year.

Jamie Baker, an airline analyst at JP Morgan, said that the bank expects the DOJ to require that American and US Airways to divest a modest number of slots at Washington National and that the airlines will shift some capacity between its hubs once the deal closes, in a report.

"Though we believe the merger has limited capacity implications for 2013, we also believe the deal will ultimately drive a multi-year conservative capacity tailwind at the combined carrier," said John Godyn, an airline analyst at Morgan Stanley, in a report. He added that management at the airlines' is "positioning" ahead of antitrust approval with its comments on continued growth.

Moody's Investors Service sees the deal as a credit negative for US airports. Capacity reductions are likely to be concentrated at small airports that both carriers serve, for example Fresno and Huntsville, and at hubs that compete with others in the combined network, for example Philadelphia and Phoenix, it says in a report on 18 February.

Dallas-Fort Worth will be the merged American and US Airways largest hub with 12.3% of enplanements, Miami is second with 8.5% of enplanements and Charlotte third with 6.5%, according to Moody's.

Asia gap

The new American will be a dominant carrier across the Atlantic and to Latin America, though will lag behind Delta and United across the Pacific. American flies to Beijing, Shanghai Pudong, and both Tokyo Narita and Haneda airports, while US Airways has no routes to Asia.

American-US Airways international network (February 2013)

Innovata FlightMaps Analytics

American plans to begin daily flights between Dallas-Fort Worth and Seoul Incheon from 9 May.

"It's still not where we'd like it to be," said Derek DeCross, vice­ president of global sales at American, on the combined network across the Pacific in an interview with Flightglobal. He adds that the carrier has a "de facto very strong network into Asia" with its immunised joint venture alliances with Japan Airlines to Japan, and with Qantas Airways to Australia.

Andrew Nocella, senior vice­ president of planning and marketing at US Airways, added: "We're going to work hard to fill that gap over time."

Organic growth is the new carrier's only realistic option for growth in the Pacific. The combined fleet would allow the new American to begin flights to the majority of destinations served by Delta and United, including Hong Kong, Osaka Kansai and Taipei. Southeast Asian destinations, including Bangkok and Singapore, remain beyond the range of the airlines' current fleets.

Regional feed

The fate of AMR subsidiary American Eagle Airlines is arguably the biggest regionals question following the merger announcement. American was planning to spin off the carrier as a separate company prior to its entering chapter 11 bankruptcy protection in November 2011 but those plans were delayed due to the filing.

"The lift that's currently being provided by Eagle to the network, as far as I know, will entirely be needed at the larger airline," said Parker in Dallas. He declined to comment on the possibility of divesting the carrier but added that there are many still decisions that need to be made.

Dan Garton, chief executive of American Eagle, told Bloomberg that he expects a decision on the airline's future this year.

The balance of the new American's regional feed will be provided by a variety of wholly-owned and contract carriers. These include US Airways-owned Piedmont Airlines and PSA Airlines, as well as Air Wisconsin, Chautauqua Airlines, ExpressJet, Mesa Airlines, Republic Airlines and SkyWest Airlines that have capacity purchase agreements (CPAs) with American, US Airways or both.

The number of large regional aircraft in the combined carrier's fleet will also need to be determined. A memorandum of understanding outlining an interim agreement between American and US Airways and their pilots in the event of a merger allows for aircraft with 66-76 seats to total up to 25% of the combined mainline narrowbody fleet - or 200 large regional aircraft based on a combined narrowbody fleet of 801 aircraft.

The new American could add up to 119 large regional aircraft under these limits. This would allow for the addition of 53 Embraer 175s under a CPA between American and Republic that was signed in January.

American and US Airways have 81 large regional aircraft in their combined fleets, not including the 38 Bombardier CRJ900s and 38 Embraer 175s in the US Airways Express fleet that are exempt from the restrictions.


Whatever Parker and his executive team decides to do about their network, gap in Asia and regional feed, integration of the two airlines will be their biggest task following antitrust approval. They are already off to a good start.

Tentative agreements have been reached with pilots, flight attendants and ground workers at both carriers, which removes some of the biggest obstacles to a smooth integration process. On the technology side - an issue that beguiled United last year - Parker said that they are approaching the merger with the premise that US Airways will adopt American's systems unless there is a "very compelling reason not to do that".

"US Airways-American has spent the past year courting labour and the two airlines share similar IT infrastructure (notably, Sabre)," said Baker in the report. "Given that labour and IT are typically the most problematic areas of integration, we expect a reasonably smooth process from here."

A conservative integration timeline is also expected to be a benefit. Executives anticipate $1 billion in net annual revenue synergies by 2015, which gives the new American more than two years to complete the integration.

"We like to set our targets so that we can exceed them," said Parker responding to analysts questions regarding the timeline. "We should be able to get this done sooner rather than later."

The synergies are split between $900 million in network revenue synergies and $550 million in cost savings that are partially offset by $400 million in labour harmonisation expenses, according to the airlines.

American and US Airways generated $38.7 billion in combined revenue in 2012 and are expected to generate about $40 billion this year.

"It's all in the execution," says Horton on the integration. "If we don't get this right the revenue synergies don't exist."