merger

All posts tagged merger

United Airlines Living Up To Its Houston Threat

Posted by mikestengel on July 19, 2012
Posted in: Airlines, Regulations. Tagged: , , , , , , , , , , , , , , , , , , , , , , , , , , , , . 2 comments

First, here’s to 3000 views since April. Thanks for the continued readership!

During my time at United Airlines, a controversial situation developed that threatened the carrier’s largest hub in Houston, TX. Southwest Airlines was lobbying the Houston administration for permission to build an international terminal and begin international flights at Hobby Airport, the counterpart to Intercontinental Airport where United has a large operation. United’s leaders were quick to denounce the proposal, claiming in it’s own study that it would harm United’s operation and lead to job losses in the Houston area.

Fast forward a few months, and the Houston officials granted Southwest their wish, much to United’s chagrin. After all, it’s a sweet deal for Houston since Southwest agreed to pay the $100 million to expand the terminal and renovate the gates, thereby handing an asset to the city on a silver platter. Admittedly, I was first very critical of United’s case against the Houston proposal. In my mind, extra competition was always good and United was trying to be a bully by creating obstacles to Southwest’s entrance into the international market from Houston. That was until I realized that it’s not always wise to kill the goose that laid the golden egg.

Continental Airlines had maintained a large presence in Houston since the late 1960s, and following the merger with United Airlines in 2010, it is still the largest hub in the company’s network. Since the merger, Houston experienced the fastest growth among United’s hubs, adding 12 new destinations since October 2010. It is United’s premier gateway to Latin America, second only to Miami International Airport in terms of passenger traffic to the region. United also recently completed a $300 million renovation of the new international Terminal E and is currently in the middle of renovating Terminal B as a part of a 3-phase and $1 billion project, according to United’s 2012 annual report. In summary, United has made a large investment in Houston with the expectation that they will be able to continue to grow there as the sole international airport for the city.

With Southwest’s new presence, United is living up to the pledge they made in their argument against Southwest’s proposal: to slow down or scale back its operations in Houston. United announced capacity and job cuts in Houston, cancelled the inaugural Boeing 787 service to Auckland, New Zealand, and also cut the international flight to Paris (which seems to have moved to the San Francisco hub). But the majority of the initial route cuts are actually to much smaller markets which are served by 30 or 50-seat regional aircraft. Some of these cities that are being cut include: Asheville, NC; Greensboro, NC; Toluca, Mexico; Tuxtula Guiterrez, Mexico; Waco, TX; Beaumont, TX; and Victoria, TX.

So why is United cancelling its service to Auckland when Southwest is only planning to serve flights to Latin America? It all has to do with connections. The reason why Houston is so successful as a hub is because it feeds passengers from all over United’s network and sends them out on international flights. For example, the flight from Houston to Auckland may only carry a few passengers who are originating from Houston, while the large majority of passengers come from connecting cities. Now that Southwest is a factor, United will not see as many connecting passengers from those cities, and as a result, many other routes suddenly become impractical. In other words, Intercontinental Airport will lose the critical mass of passengers it enjoyed for a long time before Southwest’s international presence at Hobby.

The economic impact of Southwest’s international flights from Hobby Airport on Houston’s economy will be minimal. Southwest caters to more price-conscious leisure passengers who search for the lowest possible fare. In addition, Southwest, although the largest and most successful discount carrier, does not offer as large of a network as United. Consequently, Southwest will not feed as many passengers into Houston from connecting cities. United, on the other hand, attracts higher-yielding business class travelers and offers the large network to feed passengers from all over the country through Houston.

In summary, although the Houston City Council’s decision to accept Southwest’s proposal is good for competition, it’s a strikingly poor decision for the city of Houston. United’s growth at its largest hub is now seriously threatened, and Southwest’s impact will not be able to support the losses. United has also started to implement its promised cuts in Houston and has signaled cuts to future growth plans at the hub. Although United has been the largest carrier to Houston for more than 40 years, has undertaken risks in developing new markets, and has invested significant funds into new facilities, the Houston City Council seems to have overlooked what United has provided for the city and instead elected to threaten the longstanding relationship (see the Pittsburgh-US Airways relationship).

US Airways-American Airlines merger implications

Posted by mikestengel on April 26, 2012
Posted in: Airlines. Tagged: , , , , , , , , , , , . 3 comments

After having just written a post about American Airlines’ bankruptcy, I feel that the topics I’ve covered so far on this website are not very diverse. However, I thought that I’d get a word in before any big news breaks out. By now, you may have heard about US Airways looking into making a bid for American Airlines. Here, I’ll evaluate the two possible outcomes: merger or independence.

MERGER

Evidently, US Airways management won the support of the merger from the three American Airlines unions representing machinists, pilots, and flight attendants. Details on the terms are sparse, but the pieces of information that are emerging reveal that the combined company would be called American Airlines and would be headquartered in Forth Worth, Texas. Furthermore, US Airways claims that they would keep roughly half of the 14,000 jobs American plans to eliminate. I’m not sure where the US Airways unions are in all of this, so we’ll have to wait and see to get their take on this.

Now for some non-labor related issues. What would the combined company look like and how would it compete? Let’s start with the domestic hubs:

A combined carrier would dominate the east coast, but would be weak in the rest of the country

That’s a lot of overlap on the east coast. The ideal merger would have complementary route structures, not overlapping ones like this. Furthermore, the merger would not really solve the west coast problem that both carriers face. Neither one has a particularly strong operation out there, although American has stated in their bankruptcy business plan that they will really focus on their five hubs and expand service. Internationally, a merger wouldn’t exactly solve the Asia issue either. American’s presence in Asia does not even compete with Delta and United, both of whom operate hubs in Tokyo. US Airways does not even serve a single Asian destination. However, a combined carrier would have considerable strength in Europe, and American’s large presence in Latin America, especially through Miami, would also be beneficial.

Speaking of routes, a merger would have serious implications on the global airline alliances. Currently, American is a core member of the Oneworld Alliance, while US Airways is a member of Star Alliance. I predict that a combined company would be part of Oneworld. Why? United, a founding member of the Star Alliance, already has large coverage in the United States. Therefore, membership in the Star Alliance with the combined company would provide extraordinary coverage and would certainly catch the attention of competition regulators in the United States. In addition, Oneworld and British Airways would fight to the death to keep their footprint in the United States.

What about the fleet? Are the fleets similar, or are they stark contrasts of each other?

The fleets are not exactly the same, but they’re not exact opposites either. US Airways favors Airbus for their narrowbody fleet, while American has remained largely loyal to Boeing. However, American, in addition to 154 Boeing 737NG orders, has ordered 11 Airbus A319, 119 Airbus A321, and 130 Airbus A320 NEO aircraft, so fleet commonality would evolve over the next few years. Furthermore, the combined company would have a combined average fleet age of 14.1 years, a bit high but that figure would come down with American’s new Airbus and Boeing aircraft.

With any merger, company cultures are always a significant factor. Unfortunately, neither company has a strong culture at all (which may be good or bad, depending on how you read it). Both carriers are plagued by horrendous labor relations and have been industry laggards when it comes to competitive and innovative on-board products (not to say that legacy carriers are that innovative or offer new products constantly). For example, neither carrier offers a premium economy option (although AA recently announced “Main Cabin Extra”) while competitors like Delta and United do.

US Airways has revenues resembling an LCC, but has the costs of a legacy (click for large version)

Furthermore, on a 3-tier system of airlines, consisting of regional carriers, low-cost carriers (LCCs), and legacy carriers, US Airways is stuck in between LCCs and legacies. Since their merger with America West, they branded themselves as the “largest low-cost carrier”, but have failed to live up to their motto. Their revenues resemble that of an LCC, but their costs are more like a legacy carrier. Meanwhile, American is a true legacy (with high costs and revenues) and offers full-service products. If a merger is announced, it will certainly be a challenge to address how a combined company will define itself.

INDEPENDENCE

I’ve already outlined what American needs to do in my previous post, The predicAAment facing American Airlines. To summarize again, they operate fairly well but need to get rid of their exorbitantly high labor costs. That would include eliminating or freezing the hugely underfunded pensions (looks like they’re going for the freezing option) and possibly another round of pay cuts, among other things. If they do so and they don’t face any major roadblocks, they will be out of bankruptcy by this time next year. In addition, their large order for new Airbus and Boeing aircraft will boost their fuel efficiency competitiveness and lower their costs further.

US Airways, on the other hand, would face a tougher road if it remains independent. As I previously mentioned, the company is stuck between the LCC and legacy carrier tiers, and that position is hampering their ability to compete because their competition is not clear. While it is true that all airlines compete against each other, they must first compete against other carriers in their tier (if you’re a college football fan, you know that your team must first win the conference title before they win the national championship). These “hybrid” carriers do not have a strong history of success, as illustrated by the short-lived experiments of Ted and Song, low-cost subsidiaries that United and Delta launched, respectively, to compete with LCC’s like Southwest. I do not believe that US Airways would liquidate if they remain independent, but a no-merger scenario would be a huge missed opportunity for US Airways to get the growth it needs to remain truly competitive and to boost itself into the legacy tier.

CONCLUSION

US Airways needs this merger more than American Airlines does. In the last four years, US Airways has held merger discussions with Delta and United, both of which obviously failed. Doug Parker, CEO of US Airways Group, claims that he’s just adamant about airline consolidation in principal, but this latest merger attempt tells me that they’re desperate to boost themselves with a partner because they can’t do it themselves. Unfortunately, US Airways does not bring much to the table besides a large east coast operation.

What do you think of the different scenarios? Which do you think is more likely? I invite questions and comments below.