The “New” American

Last week on Valentine’s Day American Airlines and US Airways unveiled their long  awaited merger agreement. For the past year or more airline analysts had predicted the deal, which they saw as the only way to rescue AMR, parent company of American Airlines, which has been operating under Chapter 11 bankruptcy protection since November 2011.

But American’s management team, led by CEO Tom Horton, seemed intent throughout to follow a “go it alone” strategy to emerge from bankruptcy. After months of negotiations, however, American recognized the benefits of a merger first proposed by US Airways CEO Doug Parker. Indeed, the $11 billion deal seemed the best possible one for American’s creditors and the airline’s future.

For Parker, the merger represents a major victory for his vision of airline consolidation. He first acted on that when his America West merged with US Airways, with the surviving carrier adopting the US Airways name, and moving its headquarters to Phoenix with Parker at the helm. Parker also proposed mergers with Delta and Continental, but missed out on the big deals of the last few years when Delta merged with Northwest and Continental merged with United. But soon he now will find himself overseeing the new largest airline in the world.

When the deal closes, Parker will find himself as CEO of the “new” American Airlines. He will add the title of chairman next year when Horton steps down after the newly merged airline’s first board meeting. There’s a certain poetic justice to that since Parker started his airline career in office cubicle at American, just as Horton did

Effectively the new American will be part of a new “Big Four” carriers that will include Delta, United and Southwest, though the latter airline doesn’t have the international reach of the other three. Indeed, many analysts have said the American-US Airways merger just might be the final big combination between major U.S. airlines. It also just might be the last time a major U.S. airline, in this case American, will have to file for Chapter 11 bankruptcy reorganization. Though maybe in the airline business it’s best never to say “never” again.

While the deal is being seen as a win for shareholders, creditors and Wall Street, there’s a wide difference of opinion about just what the “new” American will mean to consumers. For their part, “new” American executives say it will result in more options and more interconnected service for passengers. They also note that this is the first major merger that had out-of-the-box support from the labor unions for both airlines, meaning there are not likely to be disruptions or job actions.

But other observers believe the merger will result in less service domestically as the merged carrier cuts back at some of its hubs and also reduces regional service throughout the country. For their part, the “new” American’s executives say they officially plan no reductions at major hubs, though Horton said eventually the airline would have to do what’s best for shareholders after the merger deal closes.

Some industry groups, including the Business Travel Coalition also say the “new” American will be detrimental to consumers. “From a consumer standpoint -- individual traveler or corporate travel department -- there are few benefits to offset the negative impacts of this proposed merger that include reduced competition, higher fares and fees and diminished service to small and mid-size communities,” the Business Travel Coalition wrote. “To be clear, there is benefit in a financially viable air transportation system. However, previous mergers have already enabled seat capacity cuts, higher fares and billions of dollars in fees for ancillary services resulting in a financially strengthening industry. As such, consumer harms from this merger are indeed exacerbated, as there are no substantial countervailing consumer benefits.”

For travel agents, of course, the American-US Airways merger also has an impact though it might not be apparent for several months.  Jerry Behrens, senior vice president for strategic development at Travel Leaders Group, which has been long-time partner of both airlines, points out that historically the way American and US Airways treated travel agents has been quite different.

Behrens says that since US Airways has primarily competed on the domestic front only, it wasn’t overly friendly with the travel agency trade, whereas American, which has a strong international network, was considered agent friendly. At the same time, Behrens believes now that Parker will be competing on a more international stage, he will adjust his strategy accordingly and focus more on agents.

Behrens also says that rather than decreased competition, the merger might actually mean more options for business travelers, especially the newly combined carrier will be part of a much stronger oneworld alliance. “This makes oneworld more competitive with SkyTeam and Star Alliance,” he says. In addition, he believes the competition among American, Delta and United will even more intense, though that competition may be more on product and services than on price.

Jim Osborne, vice president-air, space and specialty products for Virtuoso, believes having gone through two mega-airline mergers already, this latest combination will only result in business as usual for agents and airlines. “It gives so much greater depth to American and US Airways,” he says. “Everybody thought American was big, but they didn’t realize how big US Airways was internationally as well.”

On the other hand, Osborne observes that there will most likely be less competition. “Fares in certain markets will certainly go up,” he says. “We've seen that already…where there’s less competition there's going to be higher fares. But on the loyalty side customers are going to get more. I also think it will create more options for the customers.”

Michael Holtz, president of New York-based SmartFlyer, which has a strong airline booking business, echoes Behrens in noting that while American has been a great partner for his agency, US Airways was not as easy to work with. “But Doug Parker is pretty intelligent,” Holtz says. “He knows the deal and he has pretty good incentives to do good business. These are the same people who had a small airline in America West and now they have the largest airline in the world. They are smart enough to realize that travel agencies are important to them.”