American Airlines-US Airways Merger: Questions and Answers
1. Why has APA chosen to pursue a merger with US Airways?
Your APA leadership has repeatedly emphasized our commitment to pursuing the best available alternatives for the pilots we represent throughout the restructuring process. After extensive review by our legal and financial advisers and subject-matter experts, we're confident that a merger between American Airlines and US Airways would be the best possible course of action for both our profession and for the future of our airline. This post-merger business plan directly addresses American Airlines' two most significant shortcomings: 1) a diminishing network and 2) a serious revenue disparity relative to the competition.
Management's "Cornerstone" stand-alone plan fails to address a potentially fatal flaw - a billion dollar-plus revenue gap combined with a shrinking network. Management's restructuring strategy is mainly predicated on driving labor costs below the lowest common denominator. In a rare show of unanimity, the airline analyst community has universally dismissed management's plan to add capacity in the current economic environment. Almost without exception, analysts agree that a US Airways merger would be the best way to repair American Airlines' network and revenue disparities.
In exchange for supporting this presently contemplated merger with US Airways, APA has a negotiated framework in place for a contract that would be based on our Green Book, as opposed to a terminated contract followed by an imposed 1113.
2. What are the advantages of a merger between American Airlines and US Airways?
During the past decade, AMR management has pursued a strategy of "shrinking to profitability." As a consequence, American Airlines is now a distant third in terms of domestic network and global reach when compared with Delta and United. Through increased marketplace presence, these two network-carrier competitors enjoy a revenue premium relative to American Airlines obtained by "poaching" high-yield business travelers with a superior product and network. This in turn has rendered the oneworld Alliance less competitive when compared with Sky Team and the Star Alliance. No amount of concessions by labor can solve this revenue and network disparity. Trying to remedy those problems solely through the labor cost reductions and organic growth that AMR management has proposed would be difficult at best.
Among other specific challenges, American Airlines is disadvantaged by a diminished East Coast domestic presence, with no hubs there that have the same scale and dominance as MIA or DFW. In addition, AA lacks small and medium-size market presence in the region to feed smaller bases such as BOS, DCA and LGA/JFK. In this slot-restricted, congested environment, we have few options available to us aside from partnering with US Airways, which has a formidable East Coast network.
3. Why not a tie-up with Delta, JetBlue or someone else?
There would be significant regulatory and antitrust obstacles to a merger with Delta, which currently overlaps American Airlines in 69 markets. Of those 69 markets, 28 would be reduced to a single carrier in the event of an American-Delta merger, with 38 anchored to New York. Consequently, an American-Delta tie-up would require significant carve-outs to pass muster with the Department of Transportation and Department of Justice. There would also be significant European Union concerns regarding an American Airlines defection from oneworld or a Delta departure from Skyteam. Assuming those regulatory hurdles were successfully addressed, there is no guarantee that the smaller American Airlines bases that overlap with Delta's network would remain in operation. Delta management has made it clear that they covet Miami and whatever South American routes and JFK slots they can obtain in an acquisition. The end result would potentially be thousands of American Airlines pilots on the street with no recall rights.
A merger with JetBlue would not address American Airlines' core problem in East Coast markets outside of JFK. JetBlue is primarily focused on the leisure market in the Caribbean and Florida, rather than on business travelers. Its two non-contiguous JFK terminals make connections to American Airlines extremely difficult, while JFK is not the favored airport for NYC customers. In many respects, JFK is considered to be "geographically challenged' in the local New York market, especially when compared to LaGuardia and Newark, which offer far more connectivity.
4. Just what does US Airways bring to the table that would help American Airlines?
An American Airlines-US Airways merger would create a comprehensive network that could compete with both Delta and United.
US Airways and American Airlines currently overlap in 13 domestic markets, primarily hub to hub-no international overlap. Both carriers' networks are generally complementary and together are a force multiplier on the East Coast. American Airlines currently serves 33 cities in that region, compared with 65 for Delta, 54 for United and 68 for US Airways.
According to our industry experts, American Airlines would vault from the region's fourth-largest carrier to first by merging with US Airways, with the US Airways Shuttle making up a valuable component. The New York-Boston and New York-Washington, D.C. markets feature some of the country's highest-yield traffic. US Airways has 50 percent of the shuttle seats in those two markets and captures 40 percent of the corporate business. The synergies of the two combined carriers are estimated to exceed $1.5 billion annually.
A merger would also likely catapult American Airlines into the No. 1 position in the Central-Midwest region, and would likewise improve American Airlines' position in the West by flowing more traffic into a strengthened LAX hub.
By serving significantly more domestic markets, American Airlines would be better able to attract more corporate clients and elite travelers, who provide the bulk of airline revenue. Also, current oneworld Alliance members would likely welcome the ability to tap into the bigger domestic network that an American Airlines-US Airways merger would create. That same expanded network could also serve to attract new members to the oneworld Alliance.
5. Why can't American Airlines go it alone in accordance with AMR management's plan?
That plan suggests organic growth, but without exception, industry analysts are skeptical.
What the plan doesn't adequately address is American Airlines' underlying revenue weakness, loss of corporate market share, and a diminished presence on both coasts.
During the past decade, American Airlines remained on the sidelines operationally while the world passed us by. The comprehensive networks that have been created by a combined UAL-CAL and DAL-NWA have put our airline at a structural disadvantage that cannot be remedied with the "Cornerstone" stand-alone plan. A variety of analysts have described management's plan as "more of the same." Please keep in mind that in three of those five "Cornerstone" markets, American Airlines is not the dominant carrier.
Management's stand-alone plan is premised on hopeful projections and assumptions, and does not account for volatile fuel prices and the ability of competitors with deep pockets and stronger networks to respond. Analysts universally agree that AA's plans to grow in an uncertain economy in already saturated markets will erode the entire industry's ability to rationally price its product, make a profit, generate free cash flow and provide for a positive return on invested capital.
We should also keep in mind that the primary tenets of management's plan include below-market labor costs, "doubling down" on American Eagle by buying hundreds of new small narrowbody jets, and outsourcing more American Airlines flying through unrestricted additional domestic codeshare partnerships.
6. Hasn't US Airways been the "poster child" of industry dysfunction since merging with America West?
Like most other mergers, the US Airways-America West tie-up has experienced significant integration issues. The biggest obstacle still remaining is a single pilot seniority list, which would enable US Airways to enjoy the full benefit of the synergies that mergers produce. Dissatisfied with the arbitrator's decision on integration of the two seniority lists, the US Airways pilots decided to litigate the issue and are now awaiting a decision from the U.S. District Court in Phoenix. For now, the two pilot groups work under separate contracts.
The pilot seniority issue aside, US Airways has become an efficient, profitable carrier that is near industry-leading in operational performance. In 2010, the airline ranked first among the big five network carriers in the annual Airline Quality Rating (AQR) report, which benchmarks airline reliability and service. In the just released 2011 AQR report, US Airways ranked No. 2 when compared to network carrier competitors. US Airways management is primarily comprised of the former America West team. They're lean and entrepreneurial in nature. US Airways is a proven survivor that has found a way to adapt and thrive in a very difficult competitive environment, in marked contrast to what has transpired at American Airlines under the current management team.
