American and US Airways Make Their Merger Case: What Will Change in a Combined Airline?

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.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. Good, informative post here. I continue to believe that Mr. Parker is well aware of the fact that the combined airline will be something much different than the one he currently leads. That said, I also believe that “revenue based” programs are coming to every airline, not just Delta, and the only reason Dividend Miles isn’t already is that management has been preoccupied with more pressing issues. We’ll see what happens, and I’ll admit it in public if I am wrong.

  2. Hi. Any thoughts on lifetime status…My hard earned 2 million miler/platinum for life is what keeps me tied to AA…I have fingers crossed that it is not discarded but do foresee a match into level 2 of a four tier program rather than level 3.

  3. Could you be any more promotional? Maybe there were a few more of your own quotes in the article that you left out?

    The Onion piece was much better.

    http://www.theonion.com/articles/american-airlines-us-airways-merge-to-form-worlds,31302/

    And you truly do not seem to have learned anything from your past ten years in the FF world. When have mergers EVER been good for flyers? We got the worst of DL and NW – a broken IT engine and dumb phone agents. And we got the worst of UA and CO – UA’s higher award change fees (no more free routing changes), CO’s hanging up on you when wait times are too long, and UA’s brain-dead Indian agents instead of CO’s somewhat decent American agents. Hard to see any benefits.

    Quit drinking the kool-aid and being an industry shill. Just like this will be worse for flyers, the SPG C&P deval was a deval – it wasn’t a ‘justified inflation’ as you and all the other BA idiots put it. Inflation happens when rooms go up in categories every year. To raise C&P rates is “double” inflation – i.e. a deval.

  4. Oh yeah, I forgot UA also instituted CO’s close in ticketing fee. We clearly got the worse of the two airlines but keep telling the world that mergers aren’t bad and pimping your award booking services.

  5. Does anyone know what the timetable will be for being able to start combining miles from both programs?

  6. You stated, re: DCA, “in the past I had seen it only referenced as a hub city.”

    That is factually incorrect, it has been referred/referenced as a “focus city”

  7. @abcx- United had good and bad. For me mostly bad. But let’s not forget the end of Starnet blocking and MUCH more liberal routing rules on awards. And as for ‘pimping’ my award booking service (which I rarely mention on my own personal blog!) where did I do that?

  8. @abcx you say I’m being a shill, claiming mergers are good? I don’t. I say things in this post like “Mergers are always disruptive, ” .. I describe what “US Airways miles are currently better for” .(that we likely lose) .. the possibility of this spurring revenue-based frequent flyer program at American.. “There will be some winners and losers. ” “Regardless, merger weekend won’t be a good time to fly ” I hardly think that’s ‘drinking Kool aid’. Just sayin’…

  9. Is the possibility of not being served a less than $5, high sodium meal in First on flights of less than 3 hours really one of the top concerns of current AA elites? If that’s the case, then this merger is going to go pretty smoothly.

  10. Gary, do you think they’ll stop selling miles cheaply after the merger is finished? Currently US Airways has sales almost every other month. Will that stop?

  11. i have 300k AA miles that have been unused for at least 2 yrs, not because I don’t want to but because how painful and difficult it is to redeem these for international award flights. You have to call and waste 1 to 2 hour on phone for an agent that is impatient in listening for choices and options. The aa.com won’t show most of their so called oneworld partner flight. BA sux due to fuel surcharge rip off so i hate to see it on aa.com.

    AA doesn’t want to list all the partner flights online for award reservation because they want us to waste our miles on domestic trips. I love united.com and have been very happy cos they list all their partner flights online for award booking.

  12. The UA system for awards online is a CO system, built son after CO joined *A.
    So not all mergers are completely bad. That is the 1% good in it.

    But they always tend to take the worst of each carrier
    UA took the CO way of 2.5x for standard anytime awards
    DL took the IT and higher award prices and restrictive rules
    AA – I guess wil take less food, more restrictive parts of the FF program and higher award prices

  13. @Lee and American has recently been selling them for about the same price, only American calls it a 50% bonus and US Airways calls it a 100% bonus– because US bumps up the price in order to discount 😉

  14. Hi Gary. I am 15k away from lifetime platinum but hardly fly them anymore. Should I make a push before the merger or wait? Thanks!

  15. @Sammy I would grab it now. :possible the option will remain, and that lifetime US Airways miles will get folded into the total, but i’d go for it..

  16. This is the first time Gary you scare me that you have become one of “them”. The customers from both airlines are going to get the short end of the stick. Parker is the same guy who charged for soft drinks on flights and if you saw him on CNBC recently lying that fares are not going to go up…just cost savings for the combined airlines. My daughter watched that clip and said he was a “major piece of work” I hope you rethink this Gary, you sound more like an airline insider, than a frequent flyer advocate.

  17. Gary, nice article and I agree with your sentiment. I’m glad I am not the only one concerned with onboard meals!

    I really believe Star flyers take US for granted and I know as a primarily UA flyer I will miss them as part of the team. With the great new J seat on US Air plus AA’s new 77W, the combined carrier is going to have a tremendous premium product to offer on longhaul flights.

    Now they need to get to Asia beyond TYO, PVG, and the new ICN route…

  18. Hey Gary,

    Has the recent re-valuation by all the hotels predicted the way this will go? That the response to all those folks bathing in combined miles will be that reward costs go up?

  19. @Glenn – economics of hotel and airline programs are totally different, the earning side of hotel programs have long been revenue-based and the redemption side is somewhat revenue-based with several programs.

  20. “revenue based” programs…appear to be the end of the world for us frequent flyers. Am i correct????

  21. Interesting post, Gary. But it does sound like you’re putting lipstick on a pig simply by not depicting this merger in very stark terms. Sounds like we’re in for worse service, a worse FF program, fewer upgrades, higher prices and, overall, a worse airline than pre-merger AA has been. And not much to compensate, since adding US to the mix won’t improve the route network much.

  22. @Bruce S.. yes, and no. Even if all the *US* programs went there, I’ll just bail and focus on Amex/Chase for points transfers to non-US programs, accumulations in AviancaTaca LifeMiles, etc

  23. Hi, Gary. Isn’t it possible that the awards program will not be exactly the same as AA’s is right now? Even though the alliance will be One World, perhaps Parker allows some of the better parts of the Dividend Miles program to remain in place for booking on partners?

  24. @tommyleo – of course it is possible but i view the exceptional values in a given award chart as an anomaly that tends to go away over time ANYWAY so once it’s being looked at consciously I tend to doubt the decision would be to make the American chart better int he way that US Airways was.

  25. Gary, I should have been more specific. I believe AA’s regular (non-Explorer) partner awards have very strict routing guidelines. As you can imagine (based on my US award travel experiences), I would love to see those AA restrictions eased. 🙂

  26. @tommyleo – I could see the routing rules being relaxed, sure. But as a first approximation, if they just graft onto the existing AAdvantage platform that already talks to oneworld partners etc then those would remain in place. They would have to consciously be dismantled. Could it happen? Sure. United got more flexible routing rules when Continental took over. But it wouldn’t be my starting bet.

  27. I remember being excited about the UA/CO merger, with Smisek promising “changes we’ll like.”

    Just take a look at the UA FT forum and see how people feel about Jeff’s “changes we’ll like.” Now he’s running the airline into the ground and people are jumping ship. I jumped over a year ago and have had 0 EQM/EQS on UA last year or this year because of the “changes we’ll like.”

    I hope Doug and Co. learned something from the DL/NW and UA/CO mergers. If he didn’t, then we’ll see further declines in service and no real incentive to be loyal anymore. Being loyal to one’s wallet and “kayaking” will make the most sense.

  28. I have to say the balanced “winners and losers” take doesn’t square with my perspective as an AA EXP. As I read through each of your categories, it seems like things have the potential to get better for US fliers at the expense of AA’s. How does an AA flier benefit unless s/he happens to live in a US hub city (that doesn’t get cut)?

    Let’s tally up the potential downside to an AA elite:

    – Risk of revenue-based
    – Potentially adding a 4th tier above current EXP
    – Fewer upgrade seats available
    – Possible loss of existing AA hubs (by definition convenient to AA elites) in exchange for what, Phoenix? As a place to visit/work/travel through, LA beats Phoenix and NYC beats Philly, hands down. Maybe AA hubs will prevail, maybe not. All downside, no upside here.
    – Risk of worse food
    – Possible loss of SWUs
    – Merger integration issues

    And the potential benefits:

    – Chance that some award redemptions will become easier

    Seems pretty bad for AA elites, Gary!

  29. I expect the fares will continue to rise. After the Continental/United merger we’ve seen our airfares here in Houston just considerably and Houston was never a cheap fare city. The increases have not just been on hub to hub routes either. Mergers are about cutting competition and costs while at the same time increasing fares. It’s not about making employees or customers happy. The lies that airline execs tell when trying to justify their mergers to the gov’t are incredible. The fact that the US gov’t continues to approve the airline mergers with little to no conditions solidifies my opinion that our gov’t is in the pocket of big business and that it’s their interests, and not the average citizen, that the gov’s is looking out for.

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