My predictions for an American and US Airways merger

All signs point towards an American and US Airways merger being a near done deal, and I’ve received several emails/questions from readers asking about my thoughts if a merger were to go through. So I’ll share my thoughts, though I’ll preface it by saying that I’m just an airline nerd that’s speculating, so take what I say with a grain of salt.

If a merger goes through I don’t think it’s because the two airlines really complement each other that well, but rather because process of elimination destined them to be together. It’s basically like a middle school PE class where all but two kids have been picked for a flag football team, and now the last two have to stand there awkwardly knowing they’re being picked but not because they’re any good.

Let’s be honest with ourselves, US Airways brings very little to the table. I respect them as an airline and think they run a smooth operation, but their route network leaves a bit to be desired (not that American’s doesn’t). American and US Airways serve a similar number of destinations in Europe, while that’s just about the extent of US Airways’ international route network. Meanwhile American has an extremely strong route network to Latin America, and a weak route network to Asia, where US Airways would bring nothing to the table. So this would simply be a merger to reduce competition and stroke the egos of the executives.

So how do I think a combined airline would look?

A combined loyalty program

I suspect we’d see the following in a new loyalty program:

  • Four elite tiers, similar to what both United and US Airways have (at the 25,000 mile, 50,000 mile, 75,000 mile, and 100,000 mile levels).
  • Complimentary upgrades for all elite members, given that American is presently the only legacy airline that still requires their non top tier elite members to earn/purchase “stickers.”
  • Elimination of American’s complicated EQM/EQP system (whereby you earn both “miles” and “points” for a flight), but rather just a straight EQM system like United and US Airways, where you earn an elite qualifying miles bonus for travel on full fare and premium cabin tickets.
  • Elite mileage bonuses would be cut to match those offered by United and US Airways, with a 25% bonus at the 25,000 mile tier, 50% bonus at the 50,000 mile tier, 75% bonus at the 75,000 mile tier, and 100% bonus at the 100,000 mile tier.
  • American would change their systemwide upgrade policy. Presently they have by far the most generous international upgrade policy for elite members, given that they offer Executive Platinum members eight systemwide upgrades with no fare restrictions per year. I suspect this change would have occurred either way as American rolls out their new business class. I’d guess they’ll cut back the number of systemwides to six, and add either fare restrictions or co-pays, similar to those on upgrades using miles.

Alliances and awards

While the timeframe is anyone’s guess, I would speculate that US Airways leaves Star Alliance within six months of a merger announcement and joins OneWorld shortly thereafter, before the airlines have a single operating certificate. All Star Alliance award tickets would of course still be honored, though once they leave the alliance no changes will be possible. On the plus side I don’t think we’ll see any major adjustments to the airlines’ award charts until the merger is complete, since they have bigger fish to try if this goes through.

Since it’s safe to assume that the combined airline will belong to OneWorld, I suspect that American’s current award rules will continue to apply, which is both a good thing (free changes are allowed after booking as long as the origin and destination remain the same and changes can be made after departure) and a bad thing (routing rules aren’t as generous, no stopovers except at the international gateway, etc.).

So if you’ve purchased US Airways miles I wouldn’t be worried. I don’t want to say that a merger would increase the value of Dividend Miles, but I don’t think it’ll necessarily decrease their value either.

Hubs

Often times the biggest losers of a merger are those in hub cities which end up getting cut back as a result of the merger. We saw this with Delta in Cincinnati and Continental in Cleveland.

US Airways has hubs in Charlotte, Philadelphia, and Phoenix, while American has hubs in Chicago, Dallas, Los Angeles, Miami, and New York.

American has extremely strong hubs and I don’t think we’ll see any “victims” on their end. Chicago is a really strong market for American where they’re neck-to-neck with United, and I doubt they want to give up market share. Dallas is probably American’s strongest hub, and it seems to do well for them. Los Angeles and New York are valuable hubs simply because they’re, well, Los Angeles and New York. And Miami is hugely valuable given that half of American’s route network seems to be to Latin America, and that’s their gateway.

On the US Airways front I think we’ll see Phoenix cut back even further. US Airways doesn’t have any international longhaul service out of there anyway and uses it primarily as a domestic hub, so I suspect we’ll see it go the way of Cincinnati and Cleveland (though I’d argue it already has). While I don’t think Charlotte will be cut back quite as much, US Airways dominates the market so even with some frequency and routing cutbacks, they can still stay in charge there and probably drive up prices even further with enough capacity cuts

And that leaves Philadelphia. Is there enough demand to sustain both a Philadelphia and New York JFK hub? If I had to guess, I’d say yes, given the amount of transatlantic traffic the airlines have out of both markets. I’d guess that long term the airline would use Philadelphia as a hub for European service for those connecting from elsewhere (I suspect it’s much cheaper and more reliable to operate out of Philadelphia), while they’ll focus on improving their product out of New York so that most of their service out of JFK is made up of people originating and terminating there.

When you look at United, they seem to do just fine operating two sets of hubs just a couple of hundred miles apart (Los Angeles/San Francisco and Washington/Newark), so I see no reason that the “new” American couldn’t do the same.

Anyway, I might be jumping the gun a bit, but I figured I’d put in my predictions so that I can later either say “I told you so” or take the walk of shame.

What are your predictions for a merged airline?

Comments

  1. JFK/LGA/PHL is far closer than EWR/IAD. Heck, I think they share the same air traffic control. Wouldn’t that be the textbook definition of way too close ? Even FRA/MUC is twice the distance as JFK/PHL.

    An O&D hub always sound good on paper but rarely pans out, and frequently leads to a slow march to the death bed when marginal routes get cut, further reducing the value of the total hub, leading to more routes becoming marginal, rinse and repeat. UA tried that in both JFK and MIA, and both failed.

    And don’t forget, with the tension between AA and Israel, the future of PHL-TLV might not be as clear cut as one would hope.

    The only great thing for this merger is that the vastly increased domestic pax vol will finally strengthen its meagre long haul network …. if only they would be routed through the right hubs.

  2. agree 100% with your hub theory. i can’t see phoenix surviving. i seriously doubt CLT goes away or is crippled. DL would own the entire South if this happened (no, MIA does not count as the South)

  3. I’d just add that USAir just signed a two-year deal with PHL and the city, which is going to lead to $700MM in improvements to PHL. Granted it’s not a super long-term deal, but I think it’s significant going into the merger.

    The only thing i’m sad about is losing access to the star alliance out of PHL.

  4. CLT would provide the east coast hub that AA had always dreamed of but could never execute fully (RDU and BNA) to connect up and down the east cost.

  5. Lucky,

    As much as I respect you, I have to disagree with you on this matter.

    I find that Tim Horton has taken what is/was a dog and is slowly turning it around. My guess is that if they weren’t paying out for their BK proceedings and costs, they would have turned a profit in Q4 2012.

    While yes the pilots union has agreed to a tentative agreement between airlines, it is just that, tentative. AMR is practically begging AA to merge and I think TH is actually looking to not. Without going into the pros and, well, mostly cons, of the AA/US merger, my guess is that TH and his management team are allowing these rumors to surface to, for lack of a better term, scare their employees to make concessions they would not normally make.

    Of my 12 AA flights I have taken since the start of this year, I have noticed a considerable change in attitudes of everyone I have encountered. Last year, around the time that US offered a bid to AMR for AA, employee attitude dropped big time, the sickouts started happening, and a few other things that were detrimental to the health of the airline.

    The latter part of the year brought out the AATHX and multiple statements from AA’s management, including from TH, that AA is gearing for the future and would like to come out stand alone. This alone brought company moral back up considerably. I wasn’t being stranded in DFW on a consistent basis, although the Grand Hyatt is a nice property and boosted me to Diamond because of the slowdowns.

    Just by looking at the future AA, it looks like they are trying to go it alone. They are ordering brand new aircraft, allowing folks to purchase specific fares that tailor to their needs, dismantling the American Eagle as we know it and re-birthing it into a more modern fleet, getting rid of the MD80s and other aircraft that are becoming troublesome (ie. 762).

    The only thing I see going for this merger is simply fleet commonality and this isn’t much because as the two stand today, their only two common aircraft are the 762 and the 757, of which, IMO isn’t enough for this to happen.

    I just don’t see it, and I could be way of base and it could happen, but just like I was with the DL/VS prediction, I hope I am 100% correct because I have been loving this new AA.

  6. Awesome post — so glad you did this.

    Part of me is hoping you’re right about the elimination of the charge for 500-mile upgrades for lower-level elites on the combined airline. I am currently Silver on US, and my biggest fear about the merger is that I will no longer get free upgrades. (Of course, the fact that I will be competing with far more elites in a combined airline means that my upgrade rate will probably go way down anyway, which stinks.) I also think I’ll miss the vastness of the Star Alliance network if and when we go to OW.

    One thing you didn’t mention is the status of DCA (my hometown airport), a focus city for US. I wonder what will happen to it…seems like it’d be tough to maintain hubs at JFK and PHL and a huge presence at DCA as well (especially when AA also maintains a focus city at LGA).

  7. one thing to note with US is that while they have a very poor international network, they are very strong on the east coast, where AA is quite weak. While domestic routes tend to not be lucrative like international routes, having a stronger hold in the east coast can help drive loyalty. Don’t forget that US has a strong grip on DCA. Despite all this, I do agree that US doesn’t bring much to the table, and I do agree with your overall feeling of this being a merger of airlines left out of the merger process. I do think, however, US holds a little value for AA, but US will gain more from AA than AA will gain from US.

  8. I’m not convinced it will happen either. But if it does I’m going to presume that the FF programs from each will combine and that my lifetime miles on US will get added to my AA account. I’m at about 1.5MM now so adding my US miles will get me very close to lifetime Platinum.

  9. As an AA loyalist, I don’t want this merger to happen, but it is starting to feel more and more like an inevitability. Horton has definitely backed off his comments about AA emerging as a stand alone airline. If anything, he has to be worried about his own job security as very few CEOs survive bankruptcy and I can’t imagine him and Parker running the show together. I think he has done a decent job with AA, but with AMR, investors, and many of the unions pushing hard for the merger, there is only so much pressure AA can withstand.

    As for what happens after, I agree with most of your predictions Lucky. I actually do think there is plenty of east coast traffic to maintain hubs in JFK, PHL, and CLT. LGA is questionable since US has already retreated quite a bit there, but it would be nice if AA and US joined forces there to really give DL a run for the NYC money.

    May be interesting to see what happens with BOS as both AA and US each were the main carriers at Logan at some point, but have lost a lot of ground to B6 now. AA continues to back off at Logan especially on intl routes, but maybe with AA and US together they could maintain some presence there. Unfortunately I imagine with JFK and PHL it will like fall by the way side.

    It is unfortunate that US doesn’t have more overseas routes and wouldn’t add much to the worldwide network, but maybe the solidification of the domestic network could be a place to start and we will see AA/US just grow from there.

  10. @Zach – “I find that Tim Horton has taken what..”

    LOL. You must be Canadian, too. I almost did the same thing.

  11. Great post. Thanks for writing. I am skeptical that both JFK and Philadelphia can work long-term as transatlantic hubs. They are within driving distance so even to some extent split the local traffic, which is not true of EWR/IAD. And I think a combined airline would have to make a decision about how they want to funnel their domestic traffic on to overseas flights. I think Charlotte, meanwhile, is going to be more emphatically a domestic hub–they’ll funnel though Miami on most of the international traffic.

  12. Your second paragraph is spot on. This is not a merger under ideal conditions for AA. AA is finding itself to be too late to the party and there’s only one partner to chose from and that partner is so desperate to be chosen.

  13. Hey Lucky,

    What happens to frequent flyer accounts if you have miles in both? I would assume that the accounts get merged, but am not too sure.

  14. I am indifferent (at this point) to the merits of a merger, but I DO NOT WANT Dougie and his cronies to run the merged airline.

    I do not want to see AA’s unions rewarded for their temper tantrums against AA’s current management team (I think Horton’s done a pretty good job so far, given what he’s had to work with). Nor do I want to see Dougie rewarded for his childish whining about how a merger is inevitable, why won’t everyone agree with me spiel, which he began as soon as AA filed for bankruptcy.

    If AA & US merge and Dougie is in charge, I will do everything possible to avoid the merged carrier. Living in DC, I probably won’t be able to avoid them completely, but I’ll sure as hell try. If that means flying DL and dealing with SkyPesos (award calendar & availability) or Flying Blue (YQ, which I’m willing to pay, but not eager to pay), I’ll do that. If that means schlepping out to IAD and flying out of the archaeological ruins that UA calls C & D concourses, I’ll do that.

  15. @ Colpuck — Well of course US Airways would leave Star Alliance. I was simply speculating on the timeline.

  16. Will AAngels have to teach geography to US Airways personnel? On one hand, I hope not. There is no other hand.

  17. Lucky,

    Do you see any value in “buying into” U.S. Airways Chairman Preferred and betting it will convert to Executive Platinum?

  18. Your predictions on what a combined American/US Air would look like are similar to mine.
    – new 75K tier
    – reduction in Plat from 100% to 50%
    – reduction in system wides from 8 to 6 or less
    – copay for SWU / and or SWU not useable on bottom 4-6 fare buckets

    Also I think we will also see a reduction in the domestic first class service. Meals will turn into snacks/chips/crackers except on transcons etc. No menu on transcons.

    Also I would predict that buying miles will not be as cheap as US Airways 1.1 – 1.8 cents during sales but move up to 2.0-2.5 cents for miles during sales.

    Also I think availability will also move to match a more limited US availability.

    I would also like to add that Phoenix is BIG for the empty hole that American has for us Pacific West Coast flyers. Although there is a hub in LAX, American has relied on Alaska to serve Vancouver, Portland, Seattle and the Bay Area.

    However, I think as an American Executive Platinum, I would leave if they join with US Airways.

  19. I suspect that if there is a merger that AA will cut loose some of their longer eastward RJ routes out of ORD their longer westward routes out of PHL, and force more connections. AA is 3rd in Chicago on mainline domestic destinations behind United and Southwest, and a merger certainly isn’t going to help much.

    I also think we’ll see a lot of 190s over time, a plane size which AA hasn’t really had since the F-100s.

  20. @ Nick — That’s a great point. They’d definitely honor it, though I’d hold off a bit longer before doing that, once things are more certain.

  21. Thanks, Lucky. I imagine ExecPlat is way more lucrative than Chairman’s Preferred… and if you could instantly buy up to Executive Platinum from nothing for $2,999, is it something you’d do?

  22. @ Nick — It would definitely be a great deal, though I suspect they wouldn’t give the eight systemwide upgrades with the bought up status if it came down to it (though they may not have systemwide upgrades at all after the merger, so…).

  23. I’m curious as to what the fleet will look like if the merger goes through- since American has Boeings, just took delivery of the 777-300, and their MD80s but US has mostly Airbus equipment. And their products are different. Just cram both fleets together and weed out the oldest? Doesn’t sound very wise to me for efficiency or cost.

  24. I’m with Zach on this one. Lucky, this is a really good post, but it assumes that AA/US are merging, which I believe is still up in the air. I think it’s inevitable that US merges with SOMEONE down the road, but I don’t think that AA needs US in the slightest.

  25. In regards to hub selection, I think the one thing people are forgetting here is that US Airways is based in Tempe AZ, a hop skip and a jump down the freeway from Phoenix Sky Harbor. It’s semi-equivalent to if Northwest had bought Delta and then given up on Minneapolis as a hub. Obviously it was the other way around, but they still kept the Hub there, and loyalty in the region for Delta is pretty high. I can’t think of any of the majors right now that doesn’t have a major hub in their home city, and I doubt US+AA would break from that.

    I would see the same situation being likely in Phoenix. Loyalty among companies and residents in the region for US is pretty high (with a notable Southwest faction as well) and they have very strong share at the airport. They may not run any international flights, but I don’t see that as being the dominant factor in hub selection for non-coastal US cities. They are an important corporate presence in the region and I think sometimes people underestimate that pulling power.

    That being said, Doug Parker has shown a willingness to buck convention a little bit in terms of CEO ego things (e.g., when America West took over US they took the US Name), so I wouldn’t rule out the possibility of him decamping over to Dallas and giving up on Phoenix, but I think that’s fairly unlikely.

    The other thing is that I would debate calling LAX a full hub for AA and that whatever presence at LAX precludes Phoenix from remaining a hub. American calls it a hub on their route map and in talking to the press, but it has very limited west coast flights and not as wide a range of flights to elsewhere in the country as you would expect from a full hub. AA’s route map from LAX looks to me like the route map from a focus city in a major population center: more population (especially transplants) means more routes to non-hub airports than average, but not a true hub. Even Delta and United do the same thing (for some reason you can get direct Delta flights to Indianapolis and New Orleans for example).

    In regards to the merger happening, I think the WSJ story that ran this week that said Horton is negotiating his future role at a combined company indicated that talks have moved beyond pure posturing and negotiation ploys and into the “this is probably going to happen” phase.

  26. @Chris (post 35), I believe it has already been stated by both camps that a merged airline would be headquarted in Dallas, and not Tempe.

  27. Fair point, I missed that in the stories. I still think they keep Phoenix, but not because of hometown loyalty then.

  28. It will happen – not because it should but because enough people THINK it should. PHX will be gutted soon thereafter, but I think this creates opportunity – there are still legitimately underserved markets out of PHX and it’s hard to believe another carrier wouldn’t swoop in and add SOME service back.

    The more worrisome bit in this discussion is that DL & UA both have gone through (or are starting) pretty major changes to the downside in their FF programs. Industry logic would dictate that the new AA would do this “to stay competitive” in the market.

  29. A look back tells me that PHL is much more profitable than JFK, ORD or EWR considering the many more connecting cities that feed PHL and can require higher fares.

  30. My 2 cents worth……Only future for PHX would be to serve secondary W Coast destinations currently being done via LAX on A-Eagle. AA badly needs mid-Atlantic hub to serve both NE and SE secondary markets. CLT is it. No idea where PHL would fit into equation. As for the program, three elite tiers are sufficient. Four is too many. Eliminating EQP and using only a EQM scheme is OK by me. Aligning elite bonus miles w United / US Air is not a deal breaker. As a frequent long-haul traveler, cutting systemwide upgrades would be a bad deal.

  31. A minor side prediction – US’s strength on the east coast will mean the merged airline will likely end the AA/B6 partnership.

  32. LAX and SFO really aren’t that close together. 5-6 hour drive and really completely different markets. PHL and JFK have similar markets.

  33. Try driving from PHL to JFK. It takes hours.
    EWR and PHL are same market.
    JFK and LGA are same. EWR and JFK may be. Not PHL and JFK.
    In fact BWI and PHL may be same market at that distance.
    so anyone below exit 5 on NJ Tpk will have to look at BWI as a home base with that logic

  34. This merger is 90% likely to happen because it will increase shareholder value by letting the combined airline shed the weakest parts of each network. That’s definitely PHX on the US side. I think CLT is extremely safe because it’s effectively a fortress hub and benefits from the DL pricing umbrella at ATL. On the AA side, DFW and MIA are safe. It’s less clear to me that ORD is as safe as you say. There’s competition from WN at MDW and AA is smaller at ORD than UA. Yield is not what it used to be at ORD. The NY area is extremely competitive and yields aren’t that great, and the same can be said for LAX. If Doug Parker is in charge, he will be disciplined about jettisoning low-yielding routes.

    The combined airline will not have a good Asian gateway.

  35. I can tell you that no one in the PHL market ever wants to go out of JFK unless they are forced to. EWR and PHL share customers, PHL and JFK have about as much crossover as JFK and BOS. PHL is also necessary to prevent monopolization of the entire mid-Jersey to Northern Virginia area by United. Due to the bookends of IAD and EWR both serving as major United hubs, reduction of service to PHL will lead to a major shift in traffic to EWR/IAD and United. If anything, the addition of longer haul planes from American will open up PHL-NRT and other routes.

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