Cranky Flier has a piece today where he answers a reader asking him whether he’s biased against American Airlines by basically saying no, he isn’t biased, American just does stupid things and needs a merger to save themselves. Go read the piece and decide whether a more correct, Straussian reading of his post is “Yes, I am biased against American.”
He begins with a shout-out to American’s achievements in the 1980s:
[T]hroughout the 1980s, American was a shining beacon of awesomeness. It had previously effectively invented the computerized reservation system. It was the first to really make a frequent flier program relevant. It perfected the hub and spoke system. And it successfully developed modern revenue management.
He cites several big errors made at the same time — acquisitions and hubs that didn’t work out — but dismisses those as the airline taking chances. More recent mistakes aren’t judged the same way because American is in bankruptcy, so the sum total of their efforts hasn’t worked out. And that’s fair, but American faces basically the same challenges as everyone else in the industry except that their competitors have all gone through bankruptcy first.
American pushed off bankruptcy, since they wound up there eventually not doing it earlier turns out to have been a mistake, they’ve been operating at a cost disadvantage compared to their competitors for several years. (They have revenue challenges too.) But they’re rectifying that now, and don’t seem to get credit for that.
I’m not sure how relevant it is to drag out mistakes like “More Room Throughout Coach” (extra legroom at every coach seat, since removed) from 2000 or the acquisition of TWA in 2001 as an indictment of the airline’s current management. Sure, current CEO Tom Horton worked at the airline in finance back then but he can hardly be pinned with those strategic errors, having only returned to the airline (from AT&T) in 2008.
The airline isn’t as strong as it should be in Chicago, Los Angeles, or New York. And Cranky faults the airline for failing to control the government in Miami to prevent massively expensive bad investments in the airline there (the costs at Miami are absurd, I sure wish they could have done better to control those, but if they had a comparative advantage in controlling public budgets there are folks across the Potomac from my home where I’d love to deploy them as well).
Thing is, similar pieces could be written on each of the major airlines, highlighting the mistakes and missed opportunities over at United, Delta, and US Airways over the past 15 years. There’s really nothing all that unique about American in this regard, although they’ve certainly made their share of strategic blunders and missteps.
Cranky Flier may not be biased against American but I do think he is biased in favor of a US Airways merger.
He says that a merger
will not only provide an excellent management team, but it will also give the airline added heft in the northeast and over to Europe. It will make the airline more competitive with United and Delta.
But will it?
American’s Europe flights have suffered from revenue challenges, those won’t be helped by a merger and US Airways’ Europe flights would suffer from the higher costs at the combined carrier that would come from the two airlines combining. Where American is weakest is Asia and a US Airways merger does nothing there.
I wonder just how good a management team US Airways has, they’ve done a good job at on-time performance and squeezing revenue out of a stone. But they’ve been willing to bid and possibly overbid for any airline that’s shown a little tail. Doug Parker, after acquiring US Airways for his own America West, at least twice tried to merge with United. He tried to merge with Delta as well. And now American is all that’s left that’s bigger than his own carrier, so they become the perfect strategic option whereas United and Delta seemed to him to be that before. The United merger reportedly fell apart once in the past only because Parker wasn’t going to get to run the combined airline.
Seven years into the US Airways – America West merger they haven’t managed to integrate the pilot groups of the two airlines. Perhaps an American merger would solve that, attempting to integrate three different pilot groups at once, by throwing money at the problem and raising costs across the board.
That Cranky is speculating on the private thoughts of American’s oneworld and joint business venture partner British Airways (that they agree with him!) tells me that he’s got a bias he’s not quite willing to admit to. He says that if they would merge he would be their biggest fan, which is to say that he has a bias towards his former employer American West-US Airways.
Mergers are expensive. They involve combining disparate workforces, in this case likely raising labor costs. They involve combining different IT platforms. They involve combining often incompatible airline fleets, increasing maintenance costs. There are huge marketing expenses, rebranding efforts, and massive distractions from other strategic priorities on the part of management groups.
Sometimes they help get rid of excess capacity in the industry, but that’s a benefit captured as much by the combined airline’s competitors as it is captured by the merger partners.
But most of the hoped-for ‘synergies’ that are supposed to ‘unleash revenue potential’ and ‘improve efficiency’ are hypothetical at best, and realized far less often than we tend to imagine. Mergers are hardly a panacea.
The theory of a merger here that I’ve seen frequently is that “US Airways has really good management” so they would take American’s assets and do a better job with them. But that hardly seems obvious at all.
Meanwhile, American has done a pretty good job during its bankruptcy at beginning to bring down its costs and paint a vision for a better product going forward with lie flat international seats, including on the premium New York-West Coast routes. They’re much farther along in technology than US Airways is — from inflight internet and power (Cranky gives American a hard time about its inflight power but they’re still far better here than US Airways is), to a functional website, a better corporate sales capability, and a better inflight product overall — the coming introduction of Main Cabin Extra (similar to United’s economy plus) helps here.
Meanwhile, the duplication between American and US Airways operations (Los Angeles vs. Phoenix, Philadelphia vs New York JFK in particular) makes the carriers a not-so-great combination. American probably can’t pick up Alaska Airlines, although that would be a better combination if they could (without overpaying). There’s been talk about JetBlue, though I think too many corporate blood gets shed going after dominance in New York where they’re in third place behind United (does Newark really count?) and Delta.
There aren’t a lot of dance partners left in the US market, but that just may mean it’s best to grow as a standalone airline.
I’m not so sure that American’s management believes that (but for their own biased reasons, I imagine they believe they should exit bankruptcy first before doing a deal). So I may be off on my own with this one! And given the sheer number of very smart people who disagree with me, I should probably write a post exploring my own biases. In the meantime I will just keep tilting at this windmill.
Update: Speaking of biases, let me make my own clear — I think that AAdvantage has the strongest top tier elite program, and that American’s inflight product is better than US Airways’. It’s not obvious either of those would change if Parker got hold of the airline.
I expect to benefit personally if US Airways and American merge, I live near Washington National airport which is heavily dominated by US Airways so porting my top tier benefits over to those routes would be incredibly valuable for my flying.
My strongest bias, though, is likely a belief that mergers rarely pan out as well as projected — so a case for a merger needs to be very clearly stated (what is the excess capacity of a capability that the acquiring company has, which when applied to the acquired company makes that company much more valuable) and discounted to consider risk or likelihood of achieving those possible gains.
In this case, it is US Airways shareholders that i expect to lose the most. Acquiring a higher cost airline, and porting those costs over to the existing operation, is a recipe for losing money on current operations. And I do not expect that cost to be outweighed by ‘synergies’ or ‘stronger route network’ (which could be built organically without taking on legacy costs to do so).
This qualifies as a bias in my analysis, but I believe it is a useful bias.