Why a US Air & American Airlines Merger Is Bad For Most….& Good For a Few

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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.

Bottom Line

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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37 responses to “Why a US Air & American Airlines Merger Is Bad For Most….& Good For a Few

  1. Wow Darius this is a new low for you. How selfish can you be? You want to travel the world on other taxpayers money now?

    “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!”

    Not every country can afford to prop up their airline industry after it “makes” bad decisions. That is why you have had airline collapses. Do you know the quickest way to become a millionaire? Be a billionaire and buy an airline.

    I also don’t agree with you on this statement.

    “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 Tim 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.”

    How do you know there will be lower levels of service and cutbacks? AE is adding first class to many of its birds, and I believe AA’s focus on service is what has gotten it through bankruptcy thus far.

    Let’s make no mistake about it, American’s problems are led by the fact, that prior to AA entering BK this time, it had never been in BK. USAIR on the other hand has been in BK twice in the last decade. AA ultimately had labor costs that were to high to be really profitable, which is really why this whole BK started. The purpose of BK was to cut labor costs and try and bust some of the unions.

    This also disturbed me D.

    “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 didn’t mention that United was 5th best. Maybe because Chase is the majority of your affiliate income, and you wouldn’t want to piss them, and their marketing partner United off. Yet, it is ok to spin AA as a hated company by consumers…oh wait, that’s right. Citicards and their marketing affiliate AA do not offer as lucrative affiliate income on some of their cards.

    This is like tail wagging the dog. If you bash AA and Citi, you get kudo’s from Chase. Then once you do, you try to fly on airlines that have been bailed out by other governments and hedge funds, and travel on those airlines for “big travel and small money”

  2. Darius, You are right on………….American is where it is because of its employee’s arrogant attitude and disdain towards it’s customers. I first heard the term Sky N_zi’s over 30 years ago, and it has rung true, time and again. They also screwed the employees and customers of Reno Air, TWA and Air California………… Karma is a bi_ch, American. And W isn’t in office to help ya all.

  3. I’m just wondering when I need to start stocking up on US Airways Miles.

  4. Industry consolidation is ultimately devastating for the consumer. The casino industry is the ultimate example. During the expansion phase in the 90s, it offered wonderful opportunities for consumers (and also for employees, including minorities and women, who got opportunities that didn’t previously exist for them). The giveaways were amazing and far overshadow anything the airlines have ever given away. Then the gov’t allowed these monopolies, and the next thing you know most of the Vegas strip is basically owned by two super corporation — and the stupid people just sit by and let it happen. More than that. The stupid people pay $50 for a buffet that should be free to a gambler and stand in line for the privilege. They pay idiot “resort fees” for sweet eff-all! The rich giveaways have vanished. And is the casino industry better off? The well-advertised troubles in the Nevada economy can answer that question for you. “Efficiency” is terrible both for consumers and employees. Consumers lose their affordable fun…and employees lose their houses.

    Now the same thing is happening to the airlines. Ultimate result of this “efficiency” is that many consumers (especially older ones) will no longer be able to afford to fly and many airline employees will no longer be able to afford to live indoors because they’ll be out of a job! I’ve seen this movie and I just don’t understand why the courts don’t put a stop to industry consolidation and near-monopolies.

    This is pretty much bad for everybody. Trust me, you are not going to see a better return on your IRA just because a bunch of airline employees got put out of work, any more than you saw a better return when a bunch of casino or housing employees got put out of work. Industry consolidation is bad for everybody, even investors, unless you’re one of the very few at the top and those guys have enough billions already if you ask me.

    I admire your optimism, but there’s no way that gambling on airline stocks is going to replace the income lost when the giveaways disappear. Trust me! I’ve seen this movie before, and it just doesn’t work that way.

  5. Don’t be so freaked out about the potential merger! Personally I am excited for the merger. I like the access to the Northeast that the merger will bring. American Airlines gains 58 new destinations after the merger, US Airways gains 127 destinations after the merger. They currently only overlap on 12 routes!! So if anything, it is just a great big network expansion than a loss of competition on existing routes.

    US Airways has great access to Europe (my primary flying destination). The big problem with this (potential) deal for most investors is that Asia was not added to either airlines portfolio. Currently American has 5% of the US market to Asia and US Airways has 0%. However, I could see the merged airline shaking things up and using extra long distance aircraft on new routes to Asia.

    You mentioned that AA was the 8th most disliked company; but you forgot to throw in the rest of the story. Airlines in general in the US are disliked (save for Southwest which is loved- this stems in part from them making a good deal on fuel in 2008 and being very profitable because of it. Hence, they could pass on great savings to consumers). Delta is #10, US Airways is #9, and United #5 on that list. So lets put this in perspective here…

    Lastly, you speak of the fears of increased prices. Firstly, a more profitable airline is likely to be able to offer more great deals on routes (Southwest example above). American was not profitable. They had to try and eke out money wherever they could. And according to PricewaterhouseCoopers, mergers between 2004 and 2011 (which include THE biggest airlines mergers) only resulted in a 1% increase in fares when adjusted for inflation.

  6. No matter what, this merger is going to hurt our group. Just as you stated less choice of who to fly = less benefits they have to offer which united is all for. I think Mile programs will start to change for the worse and domestic virgin, jetblue, and southwest will start looking as a better option to many.

  7. The Name of AA CEO is Tom horton not Tim!!!

  8. US airline programmes are already so much better than Asian/Australian/European ones – no fuel surcharges (except AA on BA metal) and the ability to trade and exchange miles on Points.com, where the DL miles that I earned for free on e-rewards and e-miles can essentially become UA miles by virtue of paying a fee… Try doing that to some orphan miles on SQ/TG!

    As a person who is based in the Asia-Pacific region after 2 years of doing a Masters in the US – I’m still in love with my UA, AA and US frequent flyer programmes. No Asian ones are ever gonna beat them! Can’t say the same for DL though 😉

  9. All other poits in the post/comments aside, could you please give facts to support this statement:

    “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.”

  10. My experience with AA customer service has been horrible. I’ve had so many problems with them over the past few years (cancelled flights, delayed flights, lost baggage, broken stroller, etc) and it’s always a nightmare dealing with the customer service people. I’ve gotten very little compensation for all of that. So as to the point of AA having a bad rep service wise, it’s true in my house. Hopefully that will get better, it’s bad to see how that could get much worse.

    On a side note, I’m going to use the rest of my miles to book a first class trip to Hong Kong on Cathay Pacific in case the new airline is not part of One World.

  11. In the long run, less competition in an industry = NEVER good for the consumer.

    • @Wow – We are all directly or indirectly benefiting from the taxes we pay. Mortgage deductions, highways, student loan deductions etc. I’d rather see my taxes subsidize air travel, than say promote corn ethanol over the more efficient sugarcane ethanol etc. It is pretty clear that the US Air model of lower service will be rolled out on AA once Parker is in charge (just like United has cut back on offerings after the merger). Yes, United is bad as well, but this is a post on US Air and AA. Personally I don’t like the cut backs on United, but I can see how it makes good business sense for them to do it.

      @Scott – Any time is good since diversification helps a lot in this hobby.

      – To be clear – I’ve never suggested that airline stocks are good investments.

      @Peter – I’m not “freaked out.” I just don’t see this as long term benefit to consumers. 🙂 The other airlines are disliked, but they accept it and go about as business as usual. They don’t spend millions of dollars (like AA seems to be) trying to change the perception of their brand. I don’t believe the PWC included baggage and extra fees – just the base ticket price.

      @Roman G – Thanks! You know I was hungry when I wrote that.

      @gb – Most non US frequent flyer programs either charge fuel surcharges on awards or have very high mileage redemption charts. With decreased competition and higher utilization of planes, US frequent flyer programs will, at some point, be less generous than they currently are.

  12. Thanks, it’s a great analysis. So would it make sense to buy some stocks of either airline now?

  13. You never responded to my point regarding only 12 routes which are flown by both airlines (have since found that this is actually 13 routes, not 12). How is this going to lead to overall fares going up if they are only direct competitors on 13 routes. A United and Delta merger would be terrible. A United and American merger would be terrible. Why? Because these are DIRECT competitors, they fly very similar routes. THIS would be bad for consumers.

    As far as the article goes on fares, yes- airlines have resorted to other revenue options to get income. However, there is a big positive in this too. Airlines needed to increase fares to get more income to remain profitable/to try and get profitable. Rather than increasing fares for EVERYONE, they give you the option of paying for a checked bag. If it is a matter of increasing fares for everyone/taking away a benefit for all and then charging those who want to take advantage of that benefit, I choose the latter.

  14. If I currently have the Citi AA visa business card, can I apply for the CitiBusiness® / AAdvantage® World MasterCard with 30k bonus miles offer? Is this a different product than the AA visa business card?

  15. US Air has just shown us how they are going to treat those of us who are AA fliers post merger. They cut out their most generous mid winter award to Europe with not only no notice, and no grace period to redeem it, but without so much as a public announcement. One day you are planning to apply for such an award, the next day you see it no longer exists. This is our future as members of US AAir….

  16. AA can double their prices for all I care. I’m not flying United or Delta ever again. I’ll happily pay more for AA if it ensures I don’t have to deal with hateful UA flight attendants and horrible DL service.

  17. Darius, right on! Thanks for the informative analysis. All I really need to care about is the very last paragraph of this post, great work thanks.

  18. Robert, if you mean US off-peak awards, they are still available, you’d just have to fly coach. I just came back from an off-peak Europe trip yesterday in coach – totally tolerable. But I guess it depends on whether the flight or the trip is more important to you.

  19. I thought this was a very well thought out and put together commentary. From my perspective I thought this merger was inevitable, not since AA went into bankruptcy but since UA and CO announced their merger. There is no way either US or AA can seriously survive much less thrive against the giants that have come out of the DL/NW and UA/CO mergers. And there is no doubt that in the long run, in fact probably in the very near short run, it will be a bad result for the consumer. I won’t try to predict changes in the service level or the mileage program, but all I do know is that the merged company will have one less competitor to worry about under-cutting them, and that will give the new management team the leeway they need to make changes that today they would never get away with.

    On the flip-side, the old model where the US had 6 major legacy carriers was clearly not sustainable. Having 6 huge companies flying half empty planes across the USA and beyond was ridiculous. So at the very least these mergers do in my view increase the long term viability of the industry as a whole. I would still be very hesitant to invest in an airline though. Maybe there is some money to be made in debt financing, but I can’t think of an easier way to set fire to your money than an equity investment in a US airline. I am reminded of the old gag that if you want to become a Millionaire, take a Billionaire and convince them to start an airline.

    And I am very interested and curious as to why here in America we seem to like settling for such poor quality. We all know the large airlines here suck compared to their European and certainly next to their Asian peers. And yet there is such a huge amount of wealth and taste for luxury here. Things don’t add up. My only explanation is that the real high end of luxury here is catered for by the private airline sector, and the rest of us unwashed masses have to all slum it together with the peopleofwalmart.com that you also find frequenting SouthWest. I really, really like Americans idea for a better quality product, and yet I can’t help agreeing it is headed for disaster. Those who can really afford luxury go private, the rest fly coach and hope that their evips will gain them some form of comfort.

  20. wowow great pics in india i want a tunic…

  21. One good thing that came out of the UA/CO merger was that they used CO’s award booking website. So much better than the old UA one since it allows you to see all partner availability. AA’s booking site is a little better than it used to be by allowing you to book on at least a few partner airlines. The current US Airways one seems to have limited availability and requires RT ticketing.

    I’m assuming that the new AA/US will maintain the AAdvantage program. At least you can book one way tickets. And, the off-peak …October 15 to May 15…20,000 miles OW to Europe is a real deal. So is the 50,000 First/Business. Of course, that may all change.

    Merger or not, the service on most of the US based airlines is pretty mediocre. It becomes more acceptable when you’re not paying for a ticket.

  22. Roman G | February 11, 2013 at 9:41 am |
    The Name of AA CEO is Tom horton not Tim!!!

    Roman, who gives a crap Tim, Tom whatever, they are bankrupt and the laughing stock of the industry

  23. That American Customer Satisfaction Index that gives you the number on “disliked companies” is garbage. We discussed it here: http://milepoint.com/forums/threads/united-airlines-earns-spot-on-most-disliked-companies-list.41967/

  24. @ Peter

    “You never responded to my point regarding only 12 routes which are flown by both airlines (have since found that this is actually 13 routes, not 12). How is this going to lead to overall fares going up if they are only direct competitors on 13 routes”

    The reason is because a given route between A and B isn’t just competing with other exact routes. They’re also competing with other connecting routes that get someone from A to B

    AA’s NYC –> LAX route to an extent also has to compete on with US getting you between the 2 cities connecting through PHX or PHL

    Similarly, AA getting someone from LAX to LHR via JFK has to compete with US being able to get that same person from LAX to LHR via PHL.

    So don’t confuse the small amount of “overlapping routes” with the fact that they don’t compete. If you need a reminder of that, just type in 2 cities into Expedia, and you’ll be reminded when you likely see a price on AA for that trip and one on US

  25. I’m not sure why some commenters seem to show up with accusations and a chip on their shoulder.

    Daraius’ thoughts are interesting and I agree that we are seeing a race to the bottom-less service, less quality, save a few bucks. It is sad to say that seems to be what the customer wants. And, yes, less reason to compete with FF benefits, which will mean a smaller playing field for those of us in the game. It seems the enigma may be how the remaining airlines can keep the illusion of value in their programs high enough to keep the banks and other 3rd parties selling them, all the while devaluing them lower and lower.

    Maybe some former employees from programs already trashed like BA have experience to offer advice on where to draw the line.

    • @Dave – You should ask your financial adviser for advise, since nothing I write should be considered as advice.

      @jim – You may be able to get it for a different business, but I suspect you won’t get it for the same business again.

      @Robert Hanson
      – Exactly, and it isn’t like Delta is any better!

      @MilesAbound – Agreed. But airlines seems to attract the irrational, so an unprofitable industry doesn’t necessarily mean fewer airlines. Also, in my opinion, flying on Southwest is a much more pleasant experience in coach than on any other legacy airline.

      – Perhaps the methodology is garbage, but most US airlines (excluding perhaps Southwest and Jet Blue) have a terrible reputation. My point is that it takes years of hard work and lots of money to overcome such a bad perception, and American Airlines clearly doesn’t have the time and money to do so. And even if they are successful, is the average US flyer really going to pay a premium to fly on American Airlines?

      @Lenny – Very well put!

      @Sam – Or perhaps the IRS!

  26. What are the thoughts on the potential consequences with using Brittish Airways Avios points on AA metal for great value on short haul flights? That is the only reason I have them, and this is making me kind of worried it is going away….

  27. How do you handicap the notion that we will be able to use BA Avios points on US Airways? That would be good news for those of us in the west.

  28. Anybody willing to predict if they maintain one-way award bookings or if they go to the “ROUNDTRIP ONLY” model? As long as the award booking rules stay more similar to AA than USAirways, I’m all for this merger. Bring over my useless Dividend miles into a program I’ll actually redeem (there’s jack $h!t i’ll redeem on US Airways from Denver…I have a SW Companion Pass and a large stash of United miles for anything international…both those airlines are Denver hubs). So if Dividend Miles effectively turn into AAdvantage Miles, boo ya…here’s to booking one-way international awards with a stopover and getting free legs out of them!

  29. @ Lenny: But the even BIGGER picture is that one can fly LAX/LHR on BA, LH, TK, AC, etc. with one stop. All of the big AA and US hubs are served directly by multiple foreign airlines. Nearly anywhere in Europe is a one-stop from anywhere in North America with multiple routing choices.

    @ Gabriel: Those Dividend Miles are quite useful as *A miles on UA from DEN, in some cases even better. (Anywhere in China with a few days in Seoul or Tokyo for 90k in J). Or I’ll take those useless Dividend Miles off your hands!

  30. In this brouhaha, there may be one tiny bit of upside to be found in e-miles.com

    {e-miles: You do a lot of small surveys and look through ads for a couple miles here and there – mostly good, as D has mentioned, to refresh miles in danger of expiration.}

    They’re just finishing an upgrade of the e-miles site and I noticed that e-miles translate into other programs at a one-to-one rate. EXCEPT (and here’s the change) you can now choose to deposit those miles into several different programs. Before you had to choose one and that was it for the that account.

    Now, when you have enough to kick over (looks like 400 e-miles minimum) you can choose how to divvy them up.

    Of course the magazine and restaurant.com offers are the worst, imho – throwing them away. 500 can be changed into 500 United, USAir, Frontier or Alaska miles… or Southwest, if you’ll use that one.

    What looks a bit better is that you can swap 500 e-miles for 750 IHG priority club points; .5 A+ Airtran credits or 1000 Hilton Honors points.

    Now with AA & US teaming up… it might be advantageous to fill up on as many Dividend Miles as you can get, since AA is not part of this program and, I assume, the miles will be equally weighted when they’re merged.

  31. I have the same question that Gabriel has. If the merger continues the AA policy of one-way reward travel than this merger is worth it’s weight in gold, simply because UA is the only other airline that does it (outside of SW); any guess D what will happen?

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