Tom Horton (CEO of American) and Doug Parker (CEO of US Airways) visited the New York Times to talk up the pending merger between the two airlines.
The ensuing piece by Stephanie Rosenbloom lays out many of the issues and concerns flyers have about a combination of the two airlines, and offers a fairly nuanced, balanced, and dare I say reasonable take on what’s likely to happen.
I’ll begin with the ending, a quote from yours truly summarizing what consumers can expect from the merger.
“We have no reason to believe right now that there’s anything dire or scary in this,” Mr. Leff said of the merger.
I explained that I preferred American as a standalone carrier because as a consumer and an elite member of their program, I like the premium focus that American has had, and especially like being fed on most of my flights. It really does come down to, or at least is symbolized, by that difference — that American flights between DC and Chicago have food, US Airways flights of3 hours in length don’t. Different business models, different markets that he airlines serve and these distinctions make sense. But I’ve been a bit fearful of the US Airways decision-makin cultural on these sorts of issues — and Parker’s emphasis on basic on time flying crowding out inflight product and service.
What Will Happen to Miles
We know that the miles will be combined 1:1 between the two programs, into the program that will be called AAdvantage, that will be a member of oneworld, and that will be the largest frequent flyer program in the world.
This will benefit some flyers and others will find themselves worse off. For mileage redemption:
American miles are better for: flying to South America; first class awards to Europe (with fuel surcharges on BA), Middle East (current partner Etihad), and Asia (Cathay Pacific). American gets you intra-Australia flying and flights from the US to Tahiti (Air Tahiti Nui) rather than flying via New Zealand; one-way awards; distance-based award pricing option.
US Airways miles are currently better for: flying business class to Europe and Asia (more partners), almost no routing rules — you get to fly anything you can convince an agent to book (hang up, call back if you don’t like the first answer), some sweet spots in the award chart like 90,000 miles from the US to Hong Kong in business class and cheaper awards to Australia (though American is cheaper for some awards, too, like South Asia); domestic confirmed upgrades with miles and no co-pay.
American isn’t willing to say who their co-branded credit card partner will be after the merger. I’ve predicted it will be Citibank because changing partners would requiring repaying Citi about $600 million in prepurchased miles still expected to be outstanding at the end of 2013. But it makes sense to be coy since that gives them an opportunity to bargain for a better deal.
Rosenbloom suggests grabbing the US Airways card now, for the signup bonus, before that option goes away when the program becomes one as well!
It’s reasonable to think that American will stick with Citibank, Mr. Leff explained, because it would be expensive to buy out the existing deal. In the meantime, try signing up for a US Airways card while they are still around to get a few thousand bonus miles before the merger.
One concern I haven’t seen discussed much — it’s been suggested by Randy Petersen in the past that US Airways was most likely to follow Delta into becoming a revenue-based program. I’ve predicted that the merger avoids too much rocking the boat with members, wanting to continue to promise things like “taking the best from both to create an industry-leading program.” Randy has suggested that a one-time change could be the moment that American and US Airways together take the revenue-based plunge. That risk is dangling out there I suppose, and I wanted to offer that contrarian view.
Is the Merger Good or Bad for Upgrades?
I think the Times piece does a great job describing the effect on upgrades of this merger.
If that happens, upgrades will be free, though there will be more competition for them, said Gary Leff, a founder of Milepoint and the mileage-award booking service Bookyouraward.com. “It’s almost a foregone conclusion that they wind up going with the US Airways approach,” he said.
Also, getting hub-to-hub upgrades at peak times will be harder because more elites will be vying for seats. Another wrinkle: American has more domestic first-class seats than US Airways, said Mr. Leff, who blogs about miles on Boardingarea.com. So American passengers used to flying routes that suddenly use US Airways planes may find it tougher to upgrade because there will be fewer seats. Conversely, former US Airways passengers may happily find themselves on American planes with more first-class seats than they’re used to.
A number of travelers will benefit when their American and US Airways miles are combined, gaining enough to take that family vacation or to bump up a tier in status. But it remains to be seen what those tiers will be. The US Airways Dividend Miles program has four tiers; AAdvantage has three. Mr. Leff thinks the new American will wind up with four tiers.
There will be some winners and losers. I think we can expect that a combined program will have four elite tiers (US Airways currently has four, American is a holdout with three) and complimentary domestic upgrades for all elites (American is a holdout now offering upgrade certificates to Golds and Platinums based on flying plus the opportunity to buy more, and unlimited complimentary upgrades only for Executive Platinum 100,000 mile flyers).
The change to ‘unlimited complimentary upgrades’ is loved by some (don’t have to pay) and hated by others (every Gold and Platinum will request an upgrade almost every time, so more competition).
There will be more elites and more higher-tier than with standalone programs (since folks will combine their US Airways and American flying into a single account towards statys). That makes the competition a bit more fierce.
US Airways has fewer first class seats on average than American (although US Airways has more regional jets with first class). American flyers who eventually find themselves on US Airways aircraft may have a harder time upgrading, with fewer seats upfront. US Airways is currently adding first class seats on some aircraft, but not to as many as American has. Meanwhile, US Airways flyers finding themselves eventually on American aircraft will probably have easier upgrades with more seats up front to upgrade into.
Currently American has the most generous international upgrades in the industry for its top tier elites (8 confirmed upgrades per year on any American flights from any fare). Certainly there’s nervousness about the future. But it’s hard to imagine US Airways top tier elites not benefiting in a merger.
How Will the Merger Affect the Travel Experience?
US Airways runs a good operation. American does as well, their statistics marred somewhat by the job action undertaken by their pilots this past fall — which probably made the merger prior to exit from bankruptcy inevitable.
The biggest fear I had was a repeat of the systems meltdown experienced by United when they merged reservation systems with Continental on March 3 of last year. Doug Parker’s public statements suggest he’s learned an important lesson, and he’s repeated it more than once: unless there’s a compelling reason to the contrary, you stick with the reservation system of the larger airline. It was a mistake he made merging US Airways into the America West system (they couldn’t sell partner international flights for quite some time even!) and he saw the Delta-Northwest integration go more smoothly. Hopefully he sticks to these statements and we don’t get the US Airways system. Regardless, merger weekend won’t be a good time to fly — these things never go exactly as planned.
My next biggest concern is the aforementioned food.
If the merger is completed, the nation will have three major airlines of similar size (American, United, Delta). Mr. Parker said that means they would compete more on in-flight products, like Wi-Fi, seats and food. Yet he pointed out that US Airways research shows passengers care most about basics: getting where they want to go on time (with their bags). That answer doesn’t exactly allay the concerns of American Airlines elite members who are accustomed to being fed.
“If there’s a big fear,” Mr. Pizzarello said, “it’s that instead of my roasted chicken with a nice couscous, I’m going to get pretzels.”
Mr. Leff, who recently had a free beef brisket sandwich while flying on American to Dallas from San Diego, agreed. “I joke that US Airways elites are hungry because the flight has to be over 3 hours and 15 minutes before they serve you a meal,” he said. American, on the other hand, offers meals on flights of less than 2 hours.
“American Airlines is the most generous with food and US Airways is the least,” Mr. Leff said. “One worries that they sort of split the difference somewhere.”
That said, there’s not much issue with the future of the hard product. American’s new business class seat is a newer version of the seat US Airways pioneered.
Will the Merger Increase Fares? Reduce Service?
My prediction is fairly simple:
“For the country as a whole, I don’t see this as a driver of higher prices,” Mr. Leff said, but he added that “there will be specific routes that may be more expensive.”
There’s not a ton of overlap in non-stop routes between American and US Airways. For connecting routes, you have plenty of competition with United and Delta in most markets. The most likely area where we’ll see an increase in fares is non-stop hub-to-hub flights, so Dallas-Phoenix gets less competitive. There aren’t really barriers to entry in those markets, and low cost carriers may sense an opportunity, but if there’s a fare effect from the merger it’s likely to be in cities where American and US Airways operated hubs, but where those two carriers will no longer compete with each other.
The piece suggests that the two airlines overlap on only 12 routes (1.3% of total).
I don’t think it makes total sense to keep all of their hubs, there’s real overlap between Phoenix-Los Angeles and New York JFK-Philadelphia. One of the very first lessons I learned about airline economics is you don’t make money overflying your hubs.
Every airline says they will keep all hubs in a merger, and usually that doesn’t happen or at least hubs don’t remain what they once were. There will be overlap, some flights will shift, even if all cities retain hub status.
Interestingly, in Congressional hearings on the merger, Doug Parker referred to Washington’s National airport as a hub — in the past I had seen it only referenced as a focus city. The government will almost certainly require the airline to give up slots at National — if only because it’s something of tangible value that their competitors can easily lobby for.
Parker made a good case in front -of Congress that the effect of giving up slots would be reduced service to smaller cities from the close-in DC airport. That’s probably true. American would reduce flying to smaller cities currently served by US Airways if they lost slots, and airlines getting those slots would almost certainly look for bigger city routes. So if the merger reduces service, it’s likely driven by requirements imposed as part of obtaining regulatory approval.
Ultimately I’ll admit to liking that this 1500 word Times piece on the merger featured reaction quotes only from me (nine!) and from Pizza in Motion.
Back to the Beginning: Any Reason to Be Afraid?
I suggested that nothing we know now should be cause for alarm. There will b winners and losers — in upgrades, in mileage redemption, in service — but there’s no strong case that the merger is across the board good or bad for consumers. Mergers are always disruptive, especially at the moment airlines are combined, so I’m not actually looking forward to traveling around that time. But it’ll be pain that they get past.
If changes are driven by the merger, in many ways they would simply be the speeding up of changes likely to occur anyway — the merger becomes a time to rethink practices that are otherwise not top priorities to reconsider, but that would probably have been changed eventually anyway.
We don’t get to freeze a mileage program in time and will it to stay the way it is forever. Programs changes, award charts change, policies change. And there will be changes with this merger, but not obviously better or obviously worse than without the merger.
Unfortunately and as much as I love to speculate, we’ll have to wait to see how it evolves — because while I have strong predictions, my sense is that many of the specific decisions about the future haven’t been made yet.