There is no need to fly everywhere in order to gain market share like usair. It would be better served flying to the premium destinations where business people go or need to go. There are the facts.
no Mikey, the fact is that there is a revenue advantage based on size among comparable carriers. B6 and AS are not comparable to the network/legacy carriers and have created a niche and have structural advantages which allows them to overcome their size disadvantage to the network carriers.
But AA and US do compete with DL and UA who are larger and, all things being equal, have the ability to move revenue. Problem is, esp. for UA, all things are not equal, with AA esp. right now.
Bob,
If you really talked to a strong cross-section of FL employees, many would have preferred to stay independent than become part of WN. Talk esp. to FL pilots who are losing the majority of the aircraft in their fleet and will be “transitioned” over to WN only where it is possible to accommodate them w/o limiting legacy WN pilots’ ability to advance their careers.
Other groups like the FL FAs have fared better – there are threads on this forum highlighting the merger tension between each group but in the best case, FL employees as a group are not going to end up better off than WN employees; although individual FL employees will do well, most will not do better or will be no better off.
The whole idea of a merger in any industry is that the combined company is financially stronger than the parts – employees just are not going to disproportionately benefit compared to the rest of the benefits of the merger – which is largely to reduce costs and in the airline industry, reduce capacity which brings better pricing control by allowing fares to be raised. WN was clearly focused on eliminating a competitor at MCO, MKE, and BWI and gains enormous benefits on the revenue side that they are not going to share w/ their employees.
Look at every airline merger and almost always you will see employees of one of the two merger partners faring better than the others. AA/TW was all about disproportionate pain being inflicted on TW employees – we still read about it. HP/US was so difficult and is still unresolved because HP and US had such different employee costs and seniority profiles than no one could come up w/ a fair integration plan… so Parker has benefitted by keeping many of the two employees separated and at low pay.
Unless the HP employees are thrown out and separated, the problem will not go away with AA/US.
The reason why DL/NW went so well from an employee standpoint is in large part because DL and NW had almost identical employee costs even if they came up w/ very different ways of managing their employees.
7X7 love,
Thanks for your kind words…. I continue to be absolutely amazed at the expectations that so many people at both AA and US and among the analyst community have for this proposed merger.
I have never seen a merger that is supposed to deliver so much to so many – and there seem to be people gullible enough to believe it will deliver.
End global hunger anyone? AIDS will be banished to a small island somewhere in the middle of the ocean? Dems and Reps will start to cooperate in Washington?
Please people – take off the blinders.
There are a few basic principles that few seem to understand and which continue to influence how people see this merger.
1. As you note, analysts do not represent employee interests – they represent investors – stockholders largely but also debt holders, including the creditors who hold AMR’s debt. They are looking for the best return for those investors – and they could care less whether employees win or lose in the process. The most likely way to ensure the success of investors is to force employees to take cuts. Anyone who can’t see that and who don’t believe that all of the promises will give way to further cuts is living in la la land and unable to comprehend history which is replete w/ examples of employees taking cuts to make business plans work.
2. AA employees and their unions for 10 years have been looking for the silver bullet to avoid the painful cuts that are part of BK. Every other legacy airline employee has gone thru the same process. No one doubts how painful the non-BK cuts are that AA imposed but the company didn’t succeed in turning around – and that is not entirely because the cuts were not large enough. But AA has no choice but to take another whack in order to make the company work and history shows that employees almost always disproportionately take the largest cuts in the airline industry.
There is no silver bullet. Expecting US to shorten the pain of those cuts is a mistake that will very certainly bite.
3. Few people here get the concept that it is rare for network carriers to create new revenue; instead that revenue is largely shifted between carriers. Low fare carriers like WN used to stimulate demand by low fares but fuel is too high now for any carrier to cut fares low enough to really stimulate demand so revenue is just shifted between carriers.
AA and UA with their highest costs and more difficult labor relations have been more of the target of revenue being shifted away from them to other carriers – low fare carriers and DL – than AA and UA have gained from other carriers. The transcons are perfect examples of how AA and UA have lost their dominance and how other carriers have continue to expand.
4. People here get really squirrely when competitive factors are brought up in the industry but they very much influence the successes of various airlines in the industry and still affect how well airlines do in BK and as they come out.
Even in the earliest days of the industry, the US government designed the US airline system so that there were pairs on competitors in nearly every market set…. Over the Atlantic it was PA and TW, in the south it was DL and EA. And along the northern tier between the largest business markets it has been AA and UA. Other airlines like NW were one of the “chosen competitors” over the Pacific but created niche positions in another region such as the Midwest.
Mergers have tried to create advantages by one carrier over the historic legacy competitive relationships that have existed but the AA-UA competitive relationship is just as strong as it always has been and the two have rarely done well at the same time. One’s pain is the other’s opportunity.
During much of the late 2000s, including shortly after the UA/CO merger, UA was gaining at AA’s expense which reversed the growth of AA in the late 90s when the ESOP at UA was creating so many internal issues that limited UA.
When Eastern failed, DL lost its traditional “competitive mate” and developed a mindset that they would push their way “up” in the US airline foodchain, forcing competitive changes on the rest of the industry –something they have done well. Piedmont first and then US later have tried to be the competitor to DL on the east coast but are simply outclassed in terms of size.
The DL/US LGA/DCA slot swap was primarily designed by US to minimize the competitive overlap between DL and US and provide US with a part of the market where it can successfully compete – and US has succeeded by finding its own niche – CLT, DCA, and PHL – where it is the largest carrier and where it does not need to fight against larger and lower cost carriers such as it had to do w/o success in NYC where US simply doesn’t have the mass or financial strength to fight for a dominant position in the market.
Meanwhile AA and UA continue to beat each other up and try to gain a competitive advantage over the other….
A large region why AA’s revenue performance has fared as well as it has in BK is because UA has botched the CO merger so badly that AA has regained a lot of revenue that UA gained from AA during the late 2000s and shortly after the UA/CO merger was announced. In markets where AA competes with low fare carriers and DL, AA continues to lose revenue to those carriers but more recently that is being offset by what AA is gaining from UA.
It is very possible that AA could retain that revenue and that revenue advantage could further strengthen the possibility of making AA/US a much stronger carrier than a lot of people think.
UA faces some major strategic challenges that could lead to significant openings to AA if AA manages those opportunities well in the event of an AA-US merger.
a. Loss of CLT- SE. UA is benefitting from being able to place its code on a lot of US markets in the SE that would be handed to AA which is already stronger in the SE than UA.
b. Loss of TAM (Brazil) in the likely shift to oneworld from Star. UA’s presence in Latin America was largely centered around Brazil and Argentina before the CO merger. Given DL’s equity stake in Gol, the other large Brazilian airline, UA’s position in Brazil – the largest market in S. America will fall if/when (not announced yet) AA gains an advantage over UA in Brazil.
c. With the DL/VS deal, UA will fall to #3 in LHR and see AA and DL in nearly every UA market to LHR directly or via their UK partner while UA will have no UK partner. Also, UA does not serve JFK-LHR which is a much larger market than EWR-LHR which AA and DL will/currently serve thru a partner while UA has no presence existing or planned on JFK-LHR.
d. UA will be hurt by increased competition in NYC from B6, DL, VX, and WN. CO grew as much as they did because no one really challenged them at EWR and AA and DL ignored LGA and JFK for years. The market preference (largest local share by airport) in NYC is LGA for shorthaul flights and JFK for longhaul flights. Even with AA’s reduced position, if AA starts to fight back at LGA and JFK, it is likely to regain share from UA at EWR. Given UA’s dual NE hub strategy – EWR and IAD – the chances are real high that in time UA will shrink its presence at EWR.
Just this week, UA announced hourly service EWR-LAX/SFO in order to fight off VX’s entry into the market. Based on what happened at ORD, UA’s actions did not stop VX but did result in them gaining share at AA’s expense – but that increased capacity was very costly to UA’s financial performance.
e. UA has a much higher dependence on 50 seat RJs than AA, DL, or US due to CO’s pilot contract; they are less capable of competing for flow traffic because RJs cannot economically do that well and other carriers are capable of offering higher quality service at lower costs than UA can. It will take much longer for UA to rebalance its 50 seat RJ heavy fleet than it will for AA or DL which will affect profitability and service levels.
f. UA was not kidding when it threatened the city of Houston regarding WN’s international expansion at HOU. CO’s hubs were much more heavily focused on local int’l traffic than other carriers and WN’s entrance into HOU-Latin America will affect UA more than would a similar expansion hurt other carriers.
g. UA jumped ahead of AA and DL with their joint ventures to Asia but AA and DL still have advantages and UA’s defensive nature against AA’s expansion is very costly. Just as I mentioned above, UA is dead set to try to limit AA’s growth in Asia – and UA serves nearly every Asia market that AA also serves. But as in LAX-PVG, AA and UA’s combined total revenue on that route is barely more than DL carries on LAX-NRT, a route where DL carries more revenue than AA and UA combined do on their own aircraft. DL’s LAX-HND route carries more revenue than AA does on either of its two LAX-Asia flights. Just as in so many other markets, AA and UA aggressively compete against each other to the detriment of each other and DL esp. manages to find a niche where they thrive. Tokyo remains by far the largest revenue market in Asia.
h. UA will face higher, immediate merger costs vs AA/US which will have years of “acceptable” delays in passing increased pay along to labor. UA is now at that place in their merger even though they are not seeing the revenue increases that should come from the merger. It is very possible that UA might not see near as many revenue benefits as they think they will see, esp. if an AA-US merger happens – while UA’s costs will start to increase fairly rapidly as a result of agreeing to labor integration costs without corresponding increases in efficiency and labor productivity.
Thus, it is very possible that AA-US might fare better than a lot of people might have previously imagined – but that is due largely in part because of the competitive dynamic between AA and UA that is unique in the industry. Nonetheless, AA and UA have been targets of competitive assaults from other airlines in the industry more than the other way around. US by merging with AA will move from its protective niche.
But as long as AA and UA both exist side by side, there will be a tit for tat that manages to keep them locked into fighting with each other. Even if AA wins in the near term, UA will figure out a way to change the dynamic back... they have multiple times before - and then the cycle starts all over again.
Revenue in the industry – including thru mergers – is not created anymore. It is traded between carriers. It is doubtful that AA and US will be successful at gaining revenue from any other carriers other than UA.
