A Simple Theory of the US Airways and American Merger – and How to Use it to Predict What’s Next

The single biggest focus at American is on integration of two airlines

The ‘to do’ list is enormously long, they’re moving quickly and trying to cross as many things off as they can.

They’re spending a lot of time talking to each other and not as much time talking to customers which takes longer and can complicate the process.

Many people are worried about losing their jobs still.

There are two departments doing the same thing across two airlines, and more or less they only now need one. They don’t need two communications shops, they won’t need two cargo operations, or two revenue management departments, or two sets of teams doing promotions for frequent flyer programs. There’s only going to be one database, one IT platform, one catering manager, and so on down the line.

There were layoffs a month ago — fully expected, but the people affected didn’t necessarily know it was going to be them even if it’s not entirely surprising. And there will be even more layoffs to come. A culture going through loyoffs, even as (if) the airline grows and improves, is a very different one — focused less on long-term, as just one of many byproducts — than one where employees are secure.

Even those staying on are feeling out new unfamiliar territory — new roles, new bosses, a new culture where different things are measured and judged as success.

Fast-paced change combined with employee uncertainty and layoffs can lead to an insular culture

This is why I believe American was caught off guard by the consumer reaction to the changes they rolled out to their program last month (none of which were good, and none of which had been made with any advance notice). They shouldn’t have been, and after the fact that must seem obvious to them, but it’s entirely consistent with everything else going on at the airline that they wouldn’t have been seeing that.

They won’t invest in the legacy US Airways IT platform unless they absolutely have to.

Everyone knows it’s broken, but expensive fixes won’t pay off since the system won’t be around past the time the two airlines combine.

They know what’s wrong with the IT. But fixes aren’t worth it because the upfront costs won’t get amortized over a long useful life… most of the time, at least, except when the fixes are meant to stop heavy financial bleeding.

This would imply that they knew about US Airways not collecting fuel surcharges on British Airways award tickets even though they’re supposed to.

It simply wasn’t a priority to fix, given all of the competing priorities. As joint venture partners with British Airways there are likely even accommodations in place on the financial side of this.

The theory suggests that

  1. they’re ok with not collecting the fuel surcharges as long as it’s not more significant than they’re projecting,
  2. they would have expected it to become known in social media earlier than it was [if they had thought about it],
  3. The Points Guy‘s post alone might not kill it although it would raise American’s awareness and sensitivity to the issue — in fact this model would suggest the issue is linear, the more bookings the greater likelihood of American accelerating a fix instead of letting it ride. That would mean that if it does indeed get fixed, that the more people I’ve helped make aware of the opportunity the more likely I am to have contributed to their deciding it was an important enough IT item to move up in the queue.

American and US Airways will combine sooner rather than later.

They haven’t announced a date for integration, so strictly speaking they don’t even “know” when it will happen yet. And if they don’t get the IT and other checklist items done in time they’ll have to put it off. But the longer they wait to integrate the airline, the more outstanding problems go unresolved, the more losses there will be (relative to projected gains from the merger). There will be internal pressure, analyst pressure, and board pressure to get this done as quickly as they can.

That’s why I think the betting is still good that it all happens over a weekend in ate February or early March 2015. Travel is at a low point and there should be enough time to get things done. Again, that’s just what there will be pressure to drive towards, although they will balance that knowing what a disaster the US Airways/America West integration and Continental/United integration turned out to be.

There will be investments in hard product and cutbacks in soft product, and a greater focus on monetization/ancillary revenue

Scott Kirby is the President and runs day-to-day. He’s a straight numbers guy. He won’t believe it if you can’t prove it on a spreadsheet.

  • Soft product is a tough sell. US Airways finally added inflight wifi when they saw people booking away from their flights and onto airlines that offered internet. But they can’t prove people are avoiding their planes because of lack of seat power. Meals in first class are a tougher sell. Seats on the other hand drive airline choice in premium cabins — business travelers used to actively avoid Amreican for New York – London for instance and now work to get on their 777-300ER flights. Unsurprisingly, the best business class seat was actually one pioneered by US Airways.
  • We’ll see more innovations that clearly move the needle on cost or revenue. US Airways was awful with IT but they did do things that were fairly innovative like tracking checked bags online (lost luggage is a cost center) and testing the pre-ordering of coach buy on board meals (revenue). American starts off with a superior IT infrastructure, and they’ve deployed Samsung Galaxy tablets not just for inflight entertainment (Doug Parker hates expensive, heavy entertainment systems) but also for flight attendants. If flight attendants can hawk paper credit card applications on US Airways, they’ll certainly be deployed with technology as a revenue tool. What will they sell us next?

This model should be kept in mind when predicting any of the changes still to come

The combined US Airways/American frequent flyer program will look more like American’s than like US Airways’ overall, since they’ll use the American technology platform and that business entity is already the more successful one. That’s why when many of the functions are being turned over to legacy US Airways employees, the frequent flyer program stays legacy American and the IT shop is led by legacy American too.

Then there will be a layering on of increased fees, and an increased focus on using those platforms to drive revenue and reduce cost.


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. Wouldn’t it be easy to fix the fuel surcharge issue by having the rates desk go to the ITA website and manually look up how much the BA fuel surcharge is for that date and route?

  2. When do you predict we’ll be able to shift our miles between FF accounts like United allowed? As I recall this happened MUCH earlier than when they were combined.

  3. That’s great that the “IT” team will be coming from AA, where the heck is the “PR” team coming from? I think we all get the culture of employees who feel like they might just be in it for a couple more paychecks but some of the nonsense lately from a customer relations standpoint has been deplorable. You want to make enemies? Keep doing what you’re doing. Customers are not the “enemies” of a business. Something airlines can never fully get through their skulls.

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