AMR-US Airways Merger idea takes a few hits

Two respected analysts (William Swelbar and Aaron Gellman) in the airline industry have come out swinging at the AMR – US Airways merger in small but significant ways.  Each questions the value of such a merger to American Airlines in terms of synergies.

Synergies of a merger are important and should be talked about with respect to a merger in this industry but they aren’t everything about a merger.  They are, in short, the talking point that the world understands.

In the case of American Airlines and US Airways, many scoff because of US Airways exceptionally weak position in international markets.  That’s where the sexy and fairly profitable flying is today.  But the day to day bread and butter of a US airline remains in the domestic markets.

The domestic synergies between the two airlines amount to a savings in costs with respect to a combined infrastructure to serve such an airline (less labor needed to serve the two combined entities, less overhead since one reservations system is used, etc.) and they amount to opportunities generated with a larger network.  Curiously, no one ever seems to talk much about how US Airways has two hubs that slot into areas of the country where AA is at its weakest.

Not only are those areas where AA is at its weakest (the West Coast and Southeast), but they are where US Airways actually performs really well.  That ain’t nothing.

Furthermore, despite AA’s Corners Strategy, American Airlines is now far from a dominant Northeast airline in New York City or Washington D.C.  US Airways plays very well there.  They have their shuttle operation and excellent position in Washington DC.  While US Airways gave up market share in NYC to Delta in exchange for its position in Washington DC, if you combine US Airways operations in NYC with AA’s, it started to look good and respectable again.  That ain’t nothing either.

Swelbar talks about the labor conflicts at such a merged entity.  I would like to make an observation:  A conflict free merger with respect to labor is bar far the exception to the norm.  Delta and Northwest got it and that’s nice.  Southwest and Airtran are doing OK but that was a different situation really.  ContiUnited hasn’t had it so good.  Few airlines ever did have it very good with labor in a merger.  It’s a fact of life.  So, how, then, is it much of a disadvantage? US Airways has actually proved that a profitable airline can be run despite unions biting at each other left and right.  If anything, its been an advantage for US Airways.

But there is a benefit to such a merger and particularly so to American Airlines that gets ignored by both these academic analysts:  US Airways management takes over.  It is pretty much agreed that the American Airlines management and board of directors is dysfunctional and even in this merger they have not taken full advantage of the opportunity to come out the other side a lean, competitive company.  With the roadmaps for doing so set in the examples of Delta, Northwest, US Airways,  America West and United Airlines, you would think that there had been more slash and burn than there has been.

Finally, there is room for more consolidation and the ugly truth is that both these airlines need each other.  There is nobody else left to work with and there is, perhaps, just one opportunity to pull this off and save both airlines.  They need each other and the sad fact is that they need each other equally but for different reasons.  That’s OK but it’s time to acknowledge the elephant in the corner.

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