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.

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

  1. Sanjeev M says:

    I guess with the previous BK for US Airways and the current BK for AA, the layoff damage is already done. So a merger wouldn’t cause too many layoffs.

    Now what would the picture be if we include regionals? You can’t really ignore regionals because the whole point of a merger is to cover all regions. If its just mainline, the current AA or US would cover it with minimal problem. If regionals generate so much revenue per employee (not necessarily profit I know), then why would airlines be offloading them?

    • Jared says:

      They would probably only offload regionals where they have overlapping service, I would assume.

    • CF says:

      Sanjeev – Yeah, I think that’s right. US Airways did have layoffs in mind until American basically went in during bankruptcy and laid off even more people than US had originally proposed. So the fact that they have both been through a bankruptcy relatively recently (with AA still going) means that they are a lot leaner than you might otherwise expect in a merger.

      As for regionals, those people don’t work for US/AA so it’s hard to include them when you’re talking about layoffs. I mean, there’s a good chance that Eagle will face further layoffs either way since American has already decided to outsource more flying to other carriers. But that doesn’t mean there’s a net job loss. It means that Eagle loses out. Also with the change in scope at AA, there are going to be big changes in the regional world no matter what. Some growth for sure on the bigger end with I’d imagine shrinkage on the smaller end. But if we’re talking about US/AA, then it’s a non-factor.

  2. Sean S. says:

    I don’t see how they cannot. After all, part of the benefit of mergers is the subsequent overall reduction in capacity that occurs and buoys up pricing for everyone. As it stands now one could argue that the amount of capacity that AMR and US have independently cannot be sustained if they are looking to make a profit, and that further capacity rationalization will have to occur.

    Honestly merger’s help because thats what they do; they eliminate competition and result in an overall increase in capacity across the board. It’s hard to really see any true growth in capacity outside of the normal and natural growth of the industry. There simply isn’t a gamechanging market that has gone Open Skies, nor any revelation as far as technology to change the game in regards to fuel costs.

  3. Trent880 says:

    On a straight academic level, this makes sense. But what happens when the PHX hub is wound down, and CLT/PHL are ‘right-sized’? I don’t see how this merger transpires without a good reduction in employees, willingly or unwillingly, particularly among the unions that pushed so hard for this merger.

    • I think we differ on how we count. Airlines have a unique ability to quickly redeploy assets in profitable markets. A reduction in CLT could be offset by growth at MIA, PHX and LAX, or any other redeployment and rebalancing of capacity. There may be layoffs or buy outs, but net headcount may not change drastically (economies of scale would say some reduction, but realities of life may have an impact as well).

      Unions may push for a “net zero” change, but that does not mean that jobs won’t change over if one is shipped across country. However, the airline must do what it can to be profitable, and labor is a huge expense that can be controlled.

  4. Mike says:

    They will layoff to save money. Its always the back bone that gets down sized..soon they will be going to Mexico for maintenance….Its cheaper and no unions….Unions will have to figure out how to go global so these places dont leave. Where is Frank Lorenzo when you need him…..Always pay the CEO’s and dump the little guy……………..

  5. Jim says:

    Any time two companies merge, there are going to be layoffs, period.

    Any claim that they are going to keep all hubs open and maintain service on all routes currently served is a LIE.

    They are going to reduce flights at some of their hubs, eliminate superfluous routes, and consolidate management positions. Without that, there is no sense in merging.

    I don’t know if there will be “massive, widespread layoffs”, but there will certainly be layoffs.

    • agreed. UA and DL both spoke of “synergies,” and they have to come from somewhere, and labor is most likely. Even if assets are redeployed, there is usually collateral damage to labor. Reassigning corporate headcount still isn’t 1:1. Part of a merger is about scaling, use 2 dispatchers instead of 3, etc.

    • Jason H says:

      Actually, if this merger does go through, it won’t all about synergy and consolidation (of course there will be some, but much less than DL/NW or UA/CO), bit more of ‘old management is incompetent and we can do better with what we have’.

  6. It is my opinion that should a merger happen (hopefully NOT) that Cranky may be underestimating the opportunities of management to make cuts to become leaner so the bottom line looks good. Forget about customer inconvenience, etc. History has demonstrated that this frequently happens under the cloak of BK. Why would management miss a “Free Pass” to make, otherwise, painful and unpopular service and staff cuts. I think the Cranky may be a bit more optomistic on this possible merger.

    Let’s hope that AA survives intact and these bridges don’t have to be crossed. This is my opinion, as I believe that AA may still find a way to side step this merger threat. After all, many blogers, including Cranky, expected the demise of AA independence as a done deal long ago. I’m in Hortons corner.

    • You call it a “Free Pass” but the goal of management (if its a good team) isn’t to screw employees, but rather to be competitive and prosperous so as not to leave everyone out of work. Redundancies are a sad fact of the business world. Service and staff cuts may be unpopular, but may also be necessary. I would like to see management lead by example and not take huge bonuses at workers expense, but it doesn’t make their job and decisions any less valid.

      As for “customer inconvenience,” in mergers, its not always about staff so much about integration of two distinct groups, policies, procedures, and systems into one. Layoffs or headcount reductions don’t directly come to play here. As for capacity changes, its a business not a charity (unless your VX, then you should register as a non-profit to at least get some tax benefits)

      • Noah, your opinion regarding treatment of employees, in this case after a possible merger, is partially correct. However, in the AA-TWA business exercise (as an example) it is generally accepted that the TWA employees in this deal got the short end of the stick – BY FAR. Despite all the early promises and agreements, market and business decisions can and have caused MAJOR cuts to staff. As for service impacts, read: Just another excuse to continue less service and increase/invent more fees. The less competition, the better it gets for ANY business. As for management leading by example, don’t worry, management ALWAYS takes care of itself FIRST!

        • AA-TWA wasn’t a merger, it was an asset purchase of TWA’s assets and the employee’s agreements from the TWA bankruptcy estate.

          Then there is the whole piece that in hindsight AA-TWA was poorly timed due to the downturn after September 11, 2001.

  7. A merger always gives the ‘new’ airline a chance to shed routes/stations/jobs where it can and that will happen. You also can’t assume PHX/CLT/PHL will be reduced. Depending on overall costs, MIA could loose in favor of CLT for long haul to South America. Higher costs and higher paid workers in DFW could make PHX look better. And as was said, very few workers are willing to relocate a long distance, and if the airline worker isn’t that main job earner in the family, it’s not going to happen.

    • chris says:

      ummm…. if you think they will shift mia south american service to clt you’re nuts. the reason miami is such a huge jumping off point for south america isnt just because of connect traffic, its because of massive origin and destination traffic in all cabins including high priced biz and first. when it comes to south america, its as much about revenue premiums as it is minimizing costs.. the sole reason aa has its best system profits in latin america is due to its lock on the south america-miami powerhub.

  8. MeanMeosh says:

    Cranky – I think the issue you may be missing, as a couple of others have noted, is that while your mathematical analysis works on paper, the general idea of mergers in the first place is to eliminate redundancies and streamline operations so that the ending sum of both companies together is less than the sum of the two if they stayed separate. There will necessarily be some right sizing of the schedule, and probably some of the smaller hubs like PHX and CLT, if a merger occurs. After all, why go through the cost and hassle of a merger if you’re just going to plop the two companies together and move on down the road? Downsizing isn’t inherently bad, and I don’t know all the details of what has and hasn’t been said by Doug Parker in regards to the merger, but if he’s implying that no front-line layoffs will occur as a result, I just have a really hard time believing that. It may not be a massive layoff, but there will be some, and they aren’t all going to come from the ranks of middle management.

    Part of what you’re also seeing is the general feeling among the rank-and-file and current AA/US customers watching the show that management has a tendency to be less than truthful when it comes to mergers. Having been through a takeover myself, I can give you a laundry list of “commitments” made by leadership that ultimately turned out to be lies. Or I should say, “circumstances changed” and “we unfortunately have concluded that the commitments made by my predecessor can no longer be honored”. Just ask the folks in MEM how all those “commitments” made by DL have worked out. This isn’t to say that Doug Parker is a bad guy, or is lying when he’s talking about what will happen if the merger goes through, just that folks are naturally going to skeptical of the promises given the history of corporate mergers throughout history.

    • What promises did America West make before buying US? Were they kept? (I’m not sure which way this goes.)

      • MeanMeosh says:

        That I honestly don’t know. I didn’t follow the airline industry nearly as closely then as now. Though the crux of my comment wasn’t targeted at the previous HP/US experience, but with attitudes towards mergers in general.

  9. CF – Do your US Airways numbers include their PSA and Piedmont regional airlines?

  10. Bravenav says:

    Two points–1)There are other ways for the combined airline to reduce its labor force without layoffs. There will be a natural reduction as some employees don’t want to work for the new entity in Texas as alluded to at the end of the blog. Also I’m sure the merged company will offer a little sweetener to those who want to retire a few years early. 2) Many of the legacy airlines’ employees are dedicated to the regional system, i.e. revenue management, planning, reservations, customer service, ground handling, etc., so it is right not to compare them with the LCC’s who don’t have this. Delta even insources a lot of maintenance so many of their employees are taking care of the needs of other mainline and international carriers.

  11. CF says:

    Lots of good discussion here. I focused on the data to show that the combined airline doesn’t look very bloated but I didn’t focus enough on how I do think things will change. So let me address that here because I think it responds to a lot of comments.

    First, the primary goal here was to nip in the bud the idea that there will be thousands and thousands of layoffs. This rumor that was posted on the blog the other day of 30,000 people laid off is absurd. I can see the possibility of very minor layoffs in some departments over time, but I really don’t expect it to be much if any. And here’s why.

    1) As Bravenav says, there are a lot of people in the management ranks who quit when a merger happens. The headquarters will be in DFW and a lot of people won’t want to make the move from Tempe. They will quit. On top of that, assuming US Airways leadership takes over, there should be people in DFW who will be fired. Might they mask that as a layoff of some sort? Possibly, though really it’s simply getting rid of the people who shouldn’t be there. That should settle the management side, but if not, they’ll offer buyouts and people will undoubtedly take it.

    2) There are many assumptions here that capacity is going to be cut, but I don’t see it. Right now, American has no airplane with fewer than 140 seats in the fleet. With new labor contracts already in place, there are smaller airplanes coming into the fleet that will help fill the void that is currently filled by a mix of big and small regionals. There should be opportunity to increase capacity, somewhat at the expense of regionals. But for AA/US labor, this is good news.

    But let’s say there are mainline capacity cuts, even though I don’t think that’s going to be the case. There is still reason to be optimistic that layoffs can be avoided. On the front line, let’s talk pilots since that’s always a favorite topic. There are a lot of pilots getting close to 65 years of age so they’ll be forced into retirement anyway. Seriously. Look at US Airways seniority on the east side. There are a TON of guys who will be forced out by federal law over the next few years.

    3) The bigger issue is likely to be in the airports, right? After all, most of us assume that flights will shift. We’ll see cuts in some places and growth elsewhere. Would I be surprised to see job cuts in Phoenix? No. But I would expect that there would be opportunities elsewhere in the company if those people wanted to move. They might not and decide to quit, but that doesn’t mean they’re laid off. It just means they don’t like the change in view.

    I do see this as a fairly unique situation and one that doesn’t require layoffs nearly as much as others might.

  12. TMO says:

    Thanks, Cranky, for a nice, compact, logical evaluation. It may be early in the game to “game” hypothetical changes at US and AA hubs. Given AA’s capital investment at DFW (even with DFW labor costs noted as higher – by some – , reducing and disposing of investment there may be tough short of major write offs/write downs. I’ll agree with another that PHX may have a “rosier” future, but don’t see CLT growing at Miami’s expense. Much of AA’s international pax revenue is based on pax for whom the MIA area is either a destination or a point of origin, and a comparison of the MIA vas. CLT labor and operations costs may show them as closer than some may think.

    Certainly, their will be “Cry Havoc!” among the employees and organizations of the regional affiliates of both carriers. With DL as an example, this sort of merger will arrive with all sorts of consequences, foreseen and unintended.

    My real questions center around the expenses involved in AA’s “rebranding” efforts, so far not much beyond marketing planning and advertsing, but just how what has been shown to date might fit in an AA/US “marriage”.

    • CF says:

      TMO – It’s hard to know how much of the rebranding would fit in a combined airline. I would think that if US were in charge, then those guys would want something more simple and easy to paint than what AA has created. (That tail is really complex.) See what they did with US Airways and America West, it wouldn’t surprise me to see the current US logo kept with a new paint job to go around it. But there’s no way to know.

  13. JayB says:

    It’s a cruel world out there. Hate to be so blunt, but personally, I don’t care how many airline jobs are lost with this or any other merger. Personally again, I don’t think too many airlines or their employees give a hoot about my travel, either.

    To me, these mergers have little to do with synergy and everything to do with eliminating/killing off competition. However it’s done, so be it. We’re very close to where just about every US route is a monopoly. Were it not for Southwest, we’d be there already. So, get on with it and let’s see how this 3 majors, Southwest, the wanna-be’s, and everyone else, whatever you want to call them, work or don’t work.

    Just me, but does anyone besides Southwest have any idea how they are going to grow airline traffic? Getting people off the highways into airliners? Getting people who have never flown, to fly? A marketing plan? Advertising? Super Bowl ads?

    Don’t see it. It would be great to see a Bob Crandall, a Herb Kelleher, a Fred Smith narrate a Super Bowl ad for airline industry and the airline worker, like that great spot narrated by the late-Paul Harvey extolling the farmer. Of course, just as there aren’t farmers, like our family and my relatives used to be, about whom Paul was romanticizing, I doubt there are any real airline people like the Crandalls, the Kellehers, and the Smiths, still out there, either.

    The future? Should be interesting. And Cranky, with your knowledge, your ability to look critically, and as I see it, so fairly at so many things in this industry, I can’t imagine there aren’t a dozen or so great business schools knocking on your door, trying to get you to share your expertise and see if we can’t get this industry to make something of itself, lest there’s nothing to look forward to but, shudder, shudder, re-regulation.

    • CF says:

      JayB – Southwest hasn’t grown for quite some time. In fact, my assumption is that it bought AirTran because it couldn’t figure out a way to profitably grow organically anymore. The reality is that for so many years, the airlines have just been trying to keep heads above water. With costs rising so fast (fuel), they had to cut capacity to get fares up. Will there be growth in the future? Sure, but I doubt we’ll see a ton unless there’s a new business model that opens up opportunity (as Allegiant did).

      With fewer players, the industry will be more stable and there is a chance that it could finally become a decent industry to run a business in. But if they get too comfortable and fares get too high, it will create a canopy for new low fare entrants to come in and succeed.

  14. Please don’t insult legitimate financial people with your limited knowledge of how mergers and acquisitions really work

    • Jason H says:

      If you are a legitimate financial person then, why don’t you educate us on how they really work then?

  15. mirabella says:

    I’m not sure what constitutes a “TON” of pilots (perhaps not too many, considering the girth of some of the more portly ones I’ve observed), but let’s focus on the data: The March 2013 permanent bid for US Airways pilots based in PHL, DCA and CLT includes 734 who are age 60 or older.

    • CF says:

      Thanks for the numbers, mirabella. Here’s something from a post from a couple years ago but I can’t imagine things have changed much:
      Year Number Cumulative
      2012 10 10
      2013 184 194
      2014 243 437
      2015 227 664
      2016 269 933
      2017 295 1228
      2018 308 1536
      2019 329 1865
      2020 306 2171
      2021 312 2483
      2022 263 2746
      2023 299 3045
      2024 239 3284
      2025 229 3513

      So by 2016, you have 933 retiring. If these numbers are still valid, then that means that about 18% of the pilot workforce going away. That’s about 23% of the East pilots.

    • 734 pilots over 60.. Hrm, are they going to go away with the 734s?

  16. reese says:

    My Personal Observation of THIS “possible/probable/impending” Merger is that MORE is Going On behind the scene than what is ACTUALLY being displayed. It has been No Secret that US was an advocate of Consolidation for several years and the Role of US in Star Alliance was diminished when Continental switched Alliances years ago. When United and Continental Merged, US had No Alternative but to EXPLORE other options, including leaving STAR (willingly) and possibly switching Alliances like Continental did. US and American are a BETTER FIT Together than US/UAL or US/DL could have ever been. US and NWA would have been a good FIT as well. American wants to REGAIN its PROMINENT Role as “The Airline” like it was back in the Days of Robert Crandall and Merging with USAirways is the ONLY Means to Achieve It. Both Carriers serve MANY Customers and many destinations and TOGETHER can Be “The Airline” under the framework of The NEW American………and I certainly HOPE it Happens.

  17. Sean S. says:

    My biggest concern from a consumer perspective is the impact on CLT operations. As a SC resident our options are limited as is due to Delta near strangulation on the market in most of the SE, minus So. Fla. CLT has mostly been a relief valve for pricing due to the fact that it often competes with CAE/GSP and other smaller airports for business, and results in significant downward pressure on domestic flights. If that hub is dismantled, it will result in significant capacity reduction in the region and will guarantee almost complete dominance by Delta of multiple states.

    • CF says:

      Sean S – I could see Charlotte losing some operations, primarily to the Caribbean and Latin America, but I would expect the domestic system to remain largely intact. Miami is a great (if not insanely expensive) airport for Latin travel because that’s where all the people are, as chris said above. But Miami is a terrible place for intra-south travel. Charlotte is the only real alternative to Atlanta, and there is room for both.

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