CrankyFlier reviews the American Airlines bankruptcy and says that the dream result would be US Airways taking over the airline. That makes no sense.
Now, the only argument in favor I can imagine is that it would mean a new management team, and the theory that they can’t make worse decisions than American has over the past decade — beginning with acquiring TWA out of a prepackaged bankruptcy. TWA failed because (1) they paid lower than average wages but still had higher than average labor costs due to crazy onerous work rules, like maintaining a 747 maintenance base when they no longer operated 747s, and (2) being hubbed in St. Louis they had virtually no high revenue origination/destination traffic.
American has had above average costs, in part because they didn’t go through bankruptcy while other major carriers have, but that was management’s decision believing that they could come to agreements with their labor unions without a strategic bankruptcy — something they utterly failed at. And the wasted years in the meantime have meant billions in losses. And poisoned labor relations, with American’s pilots now expecting to eat huge pension losses and flight attendants (who have gotten less media attention) likely to take a major hit to compensation.
But it isn’t just about the labor costs, as Scott McCartney pointed out yesterday, there’s a bigger revenue gap than there is cost gap between American and its rivals.
Delta Air Lines Inc. collected 12% more revenue than American for every seat flown a mile in the third quarter this year. And yet it cost Delta 6% less to fly each seat one mile. (A seat mile, one seat flown one mile, is the standard way to compare unit revenue and costs in the airline industry.)
It’s a similar story when you compare American to United, its other giant U.S. airline competitor. United’s unit costs were lower than American’s, and United’s unit revenue was higher per seat-mile flown. And so it’s little surprise that Delta earned $429 million in the last quarter and United earned $653 million, while American, in the period that includes much of the busy summer-travel season, suffered $162 million in net losses.
American is bleeding especially on its Chicago transatlantics, they’ve killed off the Brussels flight already but London is killing them. Yields have been so low that they wind up pulling connecting traffic out of Los Angeles instead of those passengers flying direct.
Now, what does all of this mean for US Airways?
One of the biggest operational challenges that US Airways has is poisonous labor relations. The America West / US Airways integration hasn’t gone forward yet, even though the pilots were ostensibly represented by the same union. The East Coast pilots lost under their union procedures and arbitration, so since they were the larger group went out and formed a new union whose primary purpose was sticking it to the West Coast pilots (rather than the company!). Meanwhile, there have been recent campaigns against the airline that has had the carrier seeking court injunctions and their own workers.
US Airways hardly has the formula for labor piece, it’s inconceivably that they could smoothly integrate their pilots in with American’s.
Meanwhile, the route networks are hardly complementary. One of the very first lessons I learned years ago is that you don’t make money overflying your own hubs. American is undercutting its Los Angeles – London flights with Los Angeles – Chicago – London, other carriers can pull it off but American doesn’t seem able to.
What US Airways and American would have is a route map that makes no sense. There’s little logic in maintaining East-West service out of both Los Angeles and Phoenix. Meanwhile, neither carrier has a strong presence in the Northwest. American has a huge operation at New York JFK, while US Airways hubs in Philadelphia. I don’t know American’s New York numbers, perhaps they concede to Delta and retrench to Philly?
An American/US Airways combination would wind up with hubs and focus cities all up and down the East Coast, New York-Philadelphia-Washington National-Charlotte-Miami.
About the only places where there’s not meaningful overlap are Chicago and Dallas — both American cities, where a US Airways combination adds nothing to the mix.
It’s not clear how this combination would solve the route and revenue issues, or the labor issues. About the only scenario I can see is on the cost side where American quickly downsizes its fleet and operates with US Airways’ newer planes and with future orders in order to gain fuel efficiency. The pilots still hate it (and relations get worse as a downsized carrier means fewer flying opportunities spread across a fixed number of pilots). And then they axe New York or Philly, axe Phoenix or Los Angeles, and figure out whether Charlotte continues to make sense sandwiched in between DCA and Miami.
US Airways gets mention because it’s about the only player left, and because its management seems to like mergers (they kept trying unsuccessfully with United, after having come over from America West).
Airline mergers rarely bear the sort of fruit that’s promised. And this one doesn’t even seem as promising as usual. There’s real work to be done at American, and they need to do that real work, not just look to make it someone else’s problem.