Layoffs Are Far From a Necessity in a US Airways and American Merger

There were certainly some, shall we say, spirited comments on my American/US Airways merger post last week, but there were a couple comments from someone posting as “Doug” that caught my eye. He predicted that big layoffs were going to happen if the merger comes to fruition. Here’s one of his comments:

Exactly Cranky, so why is Parker lying to everyone and saying there aren’t going to be layoffs when the merged airline is going to have around 30k more employees than UAL with the same revenue? That math is so simple and yet even you fail to acknowledge it. This is going to play out perfectly. Parker is going to win the job and then he’s going to get ousted in 2 years after he lays off thousands of people and probably makes a god awful mess of the whole thing. If he was smart he’d let Horton keep the job and take over after the layoffs ala DL.

Clearly Doug has no faith in Parker, but let’s forget about that. Can we expect layoffs in a merger regardless of who runs the show? Naturally, I decided to look into the numbers. So is Doug right? Yes and no. He’s right that the math is indeed simple. He’s wrong, however, in his assertion that a combined US Airways/American has 30,000 more employees with the same revenue as United and would therefore need to shed thousands.

In fact, the November 2012 airline employment numbers just came out via the federal government, so we can dig in quite easily to see how the stats look. American had 61,457 full time equivalent (FTE) employees while US Airways had 30,383. That means combined, there were 91,840 compared to United’s 82,381, 11.4 percent more. So yeah, not even close to 30,000 employees more at the combined airline. It sounds like he was including regional airline employees but that’s really irrelevant to whether or not the combined airline would have layoffs. The numbers I’m using are mainline numbers.

What about that revenue piece? Do they have the same revenue? We now know fourth quarter revenue so it’s easy to look. Using mainline passenger revenue only, US Airways had $2.098 billion in the quarter while American had $4.440 billion for a combined total of $6.538 billion. Meanwhile, United had $5.913 billion in revenue. That means a combined US/AA would have 10.6 percent more revenue than United. In short, a combined US/AA appears to be in a very similar situation to United’s position today.

This doesn’t even take into account the general belief that US Airways would be able to extract more revenue from American after a merger, but even without that, it certainly doesn’t make it look like layoffs are a given from a high level. But let’s go beyond just these airlines and compare to other airlines as well.

There are a lot of ways to look at employee productivity, but a fairly simple one is revenue per employee. And I’m talking about mainline revenue per employee so you don’t get things skewed too much by regionals which deliver a lot of revenue without any employees. This metric does have its issues, and I’ll discuss below. But first, let’s look at the chart.

Revenue per Employee

The chart shows the amount of revenue that each airline produced per full time equivalent employee in the fourth quarter. Clearly airlines like Southwest and JetBlue look way better, but this isn’t an apples to apples comparison. After all, since this includes passenger revenues for mainline operations that means it doesn’t include ancillary fees which generally fall into “other” revenue. Southwest and JetBlue have a lot less of that revenue so more of the total is included here. And airlines that don’t have regional operations like Southwest and JetBlue will also be higher here.

But still, when you see Southwest having such a high revenue per employee, a lot of that is due to greater productivity. That is one of Southwest’s hallmarks. But the gap versus the legacy airlines is exaggerated. Instead, let’s focus on the legacy carriers.

Delta is by far the best when it comes to productivity. I would imagine some of that is due to having more scheduling flexibility with its employees. When it comes to front line labor, Delta is largely non-union and has more flexible work rules. Of course, some of the advantage is simply due to the fact that Delta is generating a revenue premium as compared to the rest of the industry. But some may also be due to various amounts of outsourcing. I’m not sure about that last point and that could make a difference.

Is anyone surprised to see US Airways lowest on the list? I’m not. This doesn’t mean the US Airways employees are less efficient. US Airways has been clear for years that with hubs in cities that can’t generate as much revenue as the hubs of the big three, it is at a disadvantage. So to see US Airways generate less revenue per employee isn’t a shock.

American, however, is a bit higher as it should be. The two combined would see revenues per employee similar to those of United. Naturally, United should see its revenue production go up as it gets over its merger pains. A combined US Airways/American would see the same if a new revenue team comes in.

So are layoffs inevitable in a merger? Nothing from the high level data shows that. Oh sure, there will be some duplication, especially in the management ranks. But a lot of that can be addressed via attrition or shifting jobs. (You can be sure a fair number of people in Tempe today won’t want to go to Ft Worth.) But that’s far different than massive, widespread layoffs.

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