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It is pretty likely that American Airlines and US Air will announce plans to merge very soon. In reality, Doug Parker, the current US Air CEO, will be CEO of the new American Airlines (which will be run a lot like the current US Air).
In my opinion, the merger is bad news for most folks who pay cash for airline tickets & has the long-term potential to ultimately be bad news for folks who collect and redeem airline miles for tickets. But the merger is great news if you’re an airline investor or if you run another US airline!
I don’t expect the merger to be blessed easily by European and US anti-trust regulators, but I expect the merger to ultimately go through.
Bad News for Consumers
The American Airlines and US Air merger isn’t by itself bad news for consumers. But it represents further concentration of the US airline industry. And further concentration and fewer airlines means less competition and higher ticket prices.
I personally would much rather have more airlines, frequently competing with each other, making bad business decisions (fare wars and unprofitable routes, etc.) and going bankrupt (after subsidizing my travel with their bad decisions!), than to have fewer airlines operating more efficiently. There are always billionaires and governments eager to help out failing airlines!
And I see the merger as just another small step towards the day when US frequent flyer programs will not be as generous as frequent flyer programs in the rest of the world. American exceptionalism is declining, and with fewer US Airlines there will be less need to have attractive frequent flyer programs to attract consumers. Why would a savvy airline manager want his or her frequent flyer program to be “best-in-class” when the consumer doesn’t really have a choice of a better frequent flyer program and airline to fly on?
So I expect the merged American Airlines to cut back on the generosity of their frequent flyer program, introduce new fees, and make it harder to extract benefits. I’m not saying that it will be impossible to extract benefits from the merged American Airlines – just less lucrative than before.
Good News for Airline INVESTORS
But the potential merger is great news for airline investors in the US, US Air stockholders, and American Airlines creditors. Doug Parker, who will be the CEO, is a smart and savvy business man.
Parker’s vision of a lower cost airline providing a lower quality of service is much more likely to succeed than American Airlines current strategy of branding itself as an airline with superior service and hoping that consumers pay a premium to fly on American Airlines.
I don’t look forward to the lower levels of service and cutbacks that are inevitable on the merged American Airlines. But I see Doug Parker’s strategy as a much better strategy than the current strategy of American Airlines CEO Tom Horton. Horton’s strategy is to “re-brand” the airline as one providing superior service and hope that consumers pay a premium price to fly American Airlines.
If you read many miles and points blogs, you sometimes see a simplistic theme emerge: Southwest, Ryan Air, Spirit = Bad. American Airlines (insert current airline provided over-generous benefits) = Good.
But Southwest, Ryan Air, and Spirit Airlines are very profitable and have made air travel possible & better for lots of folks. Yes, they don’t have first class and make money on extra fees, but they are much better run than American Airlines. As an investor, I’d prefer owning stock in Southwest, Ryan Air, or Spirit than, say, American Airlines.
For better or worse, Americans are willing to outsource (read = give up) their service and manufacturing jobs to other countries, just so that they can get lower prices on the goods and services they consume.
It is completely unrealistic to expect that corporate budgeting offices and the average US consumer will pay MORE for an American Airlines flight, just because they give you a better quality Pajama in first class or because they serve fancier food!
Re-branding an airline (or any product) takes time, effort, and money. It doesn’t happen in a few months, but takes years to build the trust and goodwill which are the hallmarks of good brands. American Airlines ranked as the 8th worst company in the US last year!
You can’t re-brand a company with such a bad reputation by offering better pyjamas in First Class, a better paint job on their plane, or a new amenity kit (like American Airlines has tried to do)! You need lots of time and money to actually train your employees and overcome the years of negativity surrounding your brand.
And this is why American Airlines’ current strategy under CEO Tom Horton is going to fail: Almost no one wants to pay higher prices in the US for marginally better airline service and building a brand takes lots of time and lots of money, neither of which American Airlines has.
Doug Parker at the helm of the new American Airlines is good news for American Airlines and the rest of the US airline industry. But I don’t see it as good news for folks who pay cash for airline tickets or for the continued generosity of US airline frequent flyer programs.
To be clear, I don’t expect a sudden claw back of benefits, but it will happen gradually and over many years. And don’t see any reason to stop collecting American Airlines, US Air, or other frequent flyer miles and points either!
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