US Airways and American Airlines on Thursday touted the benefits of their plan to merge, which will create the nations largest airline, with its second-largest hub in Charlotte.
US Airways CEO Doug Parker, who has pushed for a merger since American entered Chapter 11 bankruptcy in 2011, will become the new companys CEO and one of its directors. Tom Horton, chief executive of American Airlines parent company AMR Corp., will serve as the companys chairman for about a year, and Parker will become chairman upon his resignation. The airlines expect the merger to close in the third quarter this year.
Ive known Doug as a colleague and friend for more than 25 years, and as many of you know, hes a first-rate leader, Horton told analysts Thursday morning. He had initially tried to fend off Parker attempts at a merger, but started merger talks last year after Parker won the support of Americans unions and many creditors.
The combined carrier will keep the American Airlines name, and will be headquartered in Fort Worth, Texas. Charlotte Douglas International Airport, which is US Airways largest hub, will see more American Airlines takeoffs and landings than any airport except Dallas/Fort Worth.
Parker and other executives have said Charlottes airport will continue as a hub. But the merger ushers in whats likely to be years of uncertainty for Charlotte as the new carrier works to combine its routes and eliminate overlapping flights.
(See the merger website, www.newamericanarriving.com, here.)
Parker and Horton talked up the numbers of the combined airline during a conference call with analysts early Thursday. The combined company will have 250 international routes - none of which overlap - 900 domestic routes, only 12 of which do. The new company will offer US Airways flyers 130 new American Airlines-served cities while offering American flyers 62 new US Airways-served cities. Their combined frequent flyer program will have more than 100 million members.
Horton said the airline plans to keep its existing hubs. We recognize as market conditions change here, there will be some changes, he said. Its going to be built on the notion that were going to maintain and build on our previous hubs.
Early Thursday, employee groups were lining up in support of the merger, but noting that they expect to reap some of the rewards.
US Airways Flight Attendants have been instrumental in the overall success of our airline. Our hard work and sacrifices have helped turn US Airways into the thriving airline it is today, said the union representing US Airways flight attentdants, the Association of Flight Attendants-CWA, in an early morning message. As full partners in the worlds largest airline, we expect meaningful participation in its benefits.
Parker said in a letter to employees that he doesnt expect large job cuts. Unlike other transactions that are premised on excessive cost cuts, this merger is about the opportunities to grow revenues, which will also create more opportunities for employees as the combined airline flies more people to more places, he wrote.
Gary Hummel, president of the U.S. Airline Pilots Association union, said US Airways pilots are looking forward to the opportunity to start with a clean slate after a merger, following years of labor unrest at US Airways. This is a new day and we need to look to the future, not the past. We believe it (the merger) presents an opportunity for a more stable industry as well as a more stable career for our pilots. Our pilots will do all we can to insure the success of The New American Airlines, said Hummel, in a statement.
The merger caps off a decade of airline bankruptcies and intense industry consolidation that already has swallowed airline brands such as Continental, Northwest and AirTran. If the merger is approved by Americans bankruptcy judge and federal antitrust regulators, the domestic air travel market will be split among four major carriers, down from eight just five years ago. Analysts expect this to be the last major airline combination for the foreseeable future.
US Airways stockholders will get 28 percent of the combined companys equity, while American Airlines creditors will get 72 percent. The merger is structured as an all-stock deal, and will create a company with a value of more than $10 billion. The new companys board of directors will include Parker, Horton, two directors appointed by AMR and three by US Airways, and five directors appointed by AMRs creditors.
American Airlines was the largest domestic airline as recently as the middle of the last decade. Wracked by billions of dollars worth of losses, the company filed for bankruptcy protection in 2011.
American will now reclaim its No. 1 spot, but only by combining with US Airways, the smallest of the five major carriers.
Ahead lie months and years of reworking and consolidating routes and integrating complex airline systems ranging from baggage handling to reservations to flight dispatching. Fares could go up and service to some markets could be lost or expanded as the airline combines its networks of routes.
The merged airline also faces the task of combining work groups that have, in some cases, been waging years of bitter internal disputes and struggles with management.
Analysts at Fitch Ratings said Wednesday that the merger is an area of concern for hub airports, including Charlotte Douglas.
As seen in recent mergers, some hub airports will likely be strengthened through industry consolidation while others are weakened, they wrote. While geographic location and separation helps support a rationale for hubs, it is still fair to ask whether maintaining as many as six hub airports at the same level of operations will be necessary to maintain an efficient single network.
Parker has said the merger will bring more flights to Charlotte.
Any changes the new airline makes at Charlotte Douglas could have a big impact on the city. The hub airport is considered one of the regions biggest economic engines, accounting for more than $12.5 billion a year worth of economic impacts and some 60,000 jobs, both those at the airport and those in some way dependent on air service.
US Airways operates more than 600 daily flights from Charlotte Douglas, almost 90 percent of Charlottes daily flights. The company also has more than 7,100 US Airways employees and a crew training center based at the airport.
Last week, Charlotte Douglas aviation director Jerry Orr told the airports advisory committee he thinks being a hub for a major merged airline will mean greater opportunity for rapid growth and more international flights.
Overnight, US Airways would have the opportunity here to add international service, he said.
But Adie Tomer, a researcher with the Brookings Institution, believes Charlotte has a lot to be worried about. Of the major airline hubs, he said Charlotte has by far the highest percentage of connecting travelers just passing through the airport on their way to somewhere else. As a smaller city, Charlottes local traffic accounts for less than a quarter of the airports passengers.
Charlotte is easily the place most reliant on transferring passengers, said Tomer. It is the only major metro area in the country where over half of the passengers are not local.
A shift in traffic patterns years down the road could leave Charlotte with fewer flights if the new company decides it makes more sense to connect passengers somewhere else. European nonstop flights could shift to JFK International Airport in New York or to Philadelphia International Airport, and Latin American and Caribbean flights could move to Miami International Airport, for example.
Airport expansion under way
The airport has about $1 billion worth of expansion work planned or under way, including a new parking deck and a planned 12,000-foot runway. Most of the work will be paid for with airport bonds, backed by revenue Charlotte Douglas generates from fees the airlines pay to use the airport.
Other former airline hubs offer cautionary tales about what can happen after a merger. Pittsburgh, a former US Airways hub, lost hundreds of flights after the airlines merger with America West and a shift to other hubs. St. Louis, a former TWA hub, lost hundreds of flights after American acquired TWA in 2001.
And Cincinnati lost about half of its daily flights after Deltas merger with Northwest, as Delta made deeper and deeper cuts. That contributed to Chiquita Brand Internationals decision to leave the city and move to Charlotte, with more direct flights.
Still, most analysts say Charlotte will likely be safe as a hub. It does have some advantages that those other diminished hubs did not. They were already in decline, with flights being cut at the time of their mergers, while the number of US Airways flights is still growing at Charlotte Douglas, up 15 percent since 2008. Other advantages include its location in the Southeast as an alternative hub to Deltas operation in Atlanta and low operating costs.
Charlotte and Miami blanket the Delta mega hub in Atlanta, said travel industry analyst Henry Harteveldt. I think it will pose a very credible challenge to Delta.
Aviation consultant Robert Mann agreed. Charlotte works very well, he said. Its a very efficient operation. I have no doubt it would continue to be a big spot on the network.
The full impact of a merger on Charlotte likely wont be known for years to come, Tomer said: Its never snap-of-the-fingers, one year later everythings changed.
Impact on travelers
Fares are almost certain to go up. But how much is an open question.
A combination will reduce the number of competitors, which would suggest higher fares are in the offing. But US Airways and American have comparatively little overlap.
The merger will result in the loss of one airline brand name, but the net to the consumer will not be some octopus-like monopoly choking fares upward, wrote aviation consultant Mike Boyd, discussing the lack of extensive overlapping routes.
Rick Seaney, the CEO of consumer website FareCompare.com, disagreed with Boyd. A merger guarantees the two airlines will never compete in the future and competition is the main driver of cheaper airline ticket prices, he wrote in a research note.
Most industry analysts agree one of the main reasons airlines faced a string of bankruptcies was because many had overextended themselves, expanding to gain market share at the expense of profitability. Having fewer competitors has led to capacity discipline, the industrys term for adding fewer seats. That gives airlines more pricing power, since theres less supply in the marketplace, and has helped the industry return to profitability.
Frequent fliers could see some benefits, analysts say, as the larger airline would have more combined routes and destinations to offer. Travelers existing miles would be honored in the new airline. In past mergers, fully combining frequent flier programs has taken months or years.
It will be months, at minimum, before the airlines combine operations. Regulators still must give the merger their blessing, and could order the combined company to divest some of its routes to preserve competition.
And since American remains in Chapter 11 bankruptcy protection, a federal judge must sign off on the companys merger plan so it can exit bankruptcy.
Even once the merger gets all required approvals, fliers wont notice a difference immediately. The carriers will likely continue operating separately for more than a year while the companies work to integrate their operations and eventually apply for a single operating certificate from the FAA.
The airlines various systems will have to be combined, including everything from customer service to baggage handling, reservations to maintenance.
The scale of getting more than 100,000 workers used to different systems on the same page, in an operation as intricate as an airline, has created problems in past mergers.
US Airways caught heat in 2007, when it merged its reservation system with America West. Computer glitches led to long lines, angry passengers, and months of sub-par performance.
Such problems frequently dry up some of the financial benefits promised from a merger, at least until after theyre resolved. United Continental, two years into its own mega-merger, saw its profits cut in half last year as its on-time arrivals tanked, complaints rose, and its reservation system failed twice.
Another thorny area the merged carrier will have to deal with is labor, as US Airways and American work to integrate their unions. Thats been a stumbling block for US Airways, which hasnt been able to forge unified contracts for its pilots and flight attendants unions since the 2005 merger with America West.
Flight attendants and pilots from America West and US Airways still fly separately, with different work rules and pay rates. US Airways pilots union, the U.S. Airline Pilots Association, also has had bitter infighting over pilot seniority, which the union and company have been unable to resolve since the merger.