The American and US Airways Merger is Finally Announced, Here’s How Not to Screw This Up

The day has finally come. Assuming the feds approve it, American and US Airways are now set to merge forming the real “new” American. You all know that I support this merger. Having come up in this industry under the very same America West team that will now run the largest airline in the world, I couldn’t be happier to see them with such an incredible opportunity. But just because I like the plan doesn’t mean I think it’s going to be all sunshine and rainbows.

No merger is easy, and this will not be an exception. The good news, however, is that this team has been there before. America West ran into all kinds of issues during its acquisition of US Airways and this team has no doubt learned from that. That being said, there are plenty of potential pitfalls ahead. They can start laying groundwork now, but once the deal closes in the next few months, here are just some of the things that need to be dealt with, listed in no particular order.

US Airways American Heritage Logo

Realize You are Not US Airways
I really don’t think this needs to be said, but there are plenty of skeptics who disagree. There are some who think that the US Airways management team is going to come in and run American like US Airways. That to me is a silly notion, and it would fail. This management team knows that it needs to quickly get into the mindset that it is now running one of the great global airlines. I really don’t think this is an issue – there has been plenty of time to plan for this – but it can’t hurt to repeat it.

Dial Back the External Marketing
American has been on a crazy marketing kick lately. The airline has put out a new brand image, new paint scheme, and new amenities. Some of these amenities are good and will remain while others aren’t and will disappear. But one thing is clear – these amenities are almost universally non-existent in the current fleet. Despite this fact, American has been pushing the whole “new American” thing pretty hard. (If I see that in another hashtag on Twitter from the @AmericanAir account, I’m going to be sick.)

All this is doing is setting expectations even more unrealistically high. It’s not the time to talk about that. Get the house in order first. Start rolling out the improvements, get the airlines on the same track, and then worry about marketing externally when you have critical mass. For now, focus marketing efforts in a different way.

Turn Internal Marketing to 11
A lot of current employees at American have been unhappy with their current management team. Meanwhile, in Arizona, a lot of US Airways folks are feeling very uneasy about their future prospects in Texas (if they’re even willing to make the move). American needs to focus all of its marketing efforts internally. Let people know what’s going on and make them feel comfortable. Make sure the current American folks know that this isn’t going to be a complete sweeping out of current people. They need to know that their work is valued and they should be part of the combined airline.

Meanwhile the team in Arizona needs to know what’s going on. Will they be forced to move? If so, what kind of incentive will US Airways provide to make it worthwhile? And this doesn’t even touch on the front line people who will naturally be concerned as well. They all need to be hear from management frequently, loudly, and clearly. And they need to be told the truth. I’ve already seen employee communications coming out of Tempe for the US Airways folks. That’s a good start.

Get Rid of the Old American
Sure, technically everyone who works at American today is part of the old American, but that’s not what I mean. There are key people – and processes – that epitomize the old American and those need to be swept out quickly. If these folks don’t see the writing on the wall, then the new management team needs to act. Number one on that list is, of course, Tom Horton, but they can’t officially sweep him out because he had to stay on as part of the deal as Non-Executive Chairman. But really, he needs to become Non-Existent Chairman. From the looks of this deal, he won’t be around much and it won’t be for very long.

But it’s not just Horton. There are others at the top who will remain nameless that need to go. At the same time, there are some really great VPs that the new management team needs to woo to keep them onboard. The culture of the new American will start at the top, so the people up there need to be in place sooner rather than later and they need to really focus on solidifying the new combined culture.

Work on Labor
This story has been beaten to death, so I won’t bother digging into it. The point is that there are a lot of labor groups that need to come together. While there’s very little that an airline can do to create a new seniority list, it can at least present an interest in working together and put forward a solid effort to being available to help conclude a deal in any way it can. That’s already been made pretty clear with the inclusion of unions in the process so far.

Protect the Brand Assets
As things churn forward, American needs to be sure to protect its brand assets. None is bigger than AAdvantage, one of the best frequent flier programs out there. The temptation is always there to devalue it, but American as a brand has been devalued for years, and people are going to be tempted to flee during the prospect of another tough merger. So if you’re American, you need to focus on the things that really have strong value, and AAdvantage is one of them. Use the program to bring people back to the airline.

Craft the Network
Of course there will be a focus on growing revenue, but a key piece of that is building a competitive network. That is undoubtedly going to mean cuts in some places, additions in others, and shifting of resources all around the network. I expect that we’ll see all the hubs remain in some form (that’s been officially stated), but they will end up looking different after the network has been rebuilt, and they might not all even look like hubs.

One of the big questions will be around what to do in Asia. There aren’t any easy solutions on that one, but something will have to be done so that American can serve the needs of its frequent fliers. (I’ll write about the network in more detail soon.)

Do Tech Right
I’ll end with one last note. We saw it with US Airways/America West and it’s been a bigger nightmare with United/Continental. Don’t rush the tech transition. Just make sure it’s done well. Take all the time you need. Just don’t mess it up.


This post is, of course, premature. The deal still needs to pass review with the feds before it can be officially completed. But the expectation is that the deal should go through with just a few minor divestitures, if any. (Maybe some slots at Washington/National.) In the meantime, the work can already begin behind the scenes to build the new airline. It’s going to be a long slog, as we all know, but in the end, it’s going to be a good thing.


89 Responses to The American and US Airways Merger is Finally Announced, Here’s How Not to Screw This Up

  1. Excellent post sir.

  2. Very good analysis. As someone who is in IT and has been through these types of things several times (although NOTHING as big as these mergers) I would like to comment on some of the issues as I see them, from an IT perspective.

    There are several reasons that M&As can go wrong in IT.

    First, IT issues are usually *really* visible, just by their nature. If the web site is a mess or reservation system goes down, EVERYONE knows about it and it is really hard to cover that up. If cultures clash that is not something that the average consumer sees immediately.

    Second, many of the problems that come from merging IT stuff is a legacy of the prior systems. Usually there are issues that have been worked around, maybe not much documentation, processes are not well though out, etc. Many times IT has its hands full just keeping the systems running day to day; there is no time allowed for fixing structural problems that don’t cause the users problems. It would be hard enough to merge two well documented and clean systems. Most of the time you are merging two wounded systems and expecting it to be better than either or the previous ones. Not gonna happen.

    I have sat through many tech presentations (dog and pony shows) for a new system to replace the whatever the current system is. Everything works by magic. Users are transfixed. THIS is what they want. It is all so simple and easy to use and any feature request they have of the vendor is shown to be quick and easy. Wow, why can’t our system do this? It must suck, they think.

    The new system will cost 1 million dollars, but it is worth every penny as it will be so much better.

    Usually the cost to convert the old system to the new is GREATER than the cost of the new software, sometimes substantially greater. Why? Because nothing is clean in the old system. Data has to be fixed, and things restructured even to get to the new system. And what do you know, after all the prep work needed to transfer to the new system is done, most of the shortcomings of the old system are fixed…..

    Seen it time and time again.

    Anyway, just my two cents worth.

  3. i couldn’t help but wonder if the AA/US pilots will be unified before the HP/US pilots. also, hope this gets the “new american” livery flushed.

    • Oh I’m sure that the AA/US unification will go quite quickly. The AA union will be the surviving one, and AFAIK AA’s pilots are generally happy with their union.

    • Alex Hill says:

      It sure looks to me like the new livery was developed jointly as part of the merger talks. (United also had their new livery in place at the time of the merger announcement, even though it was just slapping United’s name on Continental’s livery.) The waving flag on AA’s new tail looks like an homage to the current stylised flag that is US’s logo.

      AA probably just announced their new livery before the merger because they weren’t going to introduce their brand new flagship plane, the 777-300 — the only piece of the “new American” product improvements Cranky alluded to that isn’t currently vapourware — in an old livery that was slated to be deprecated a few weeks later.

  4. I would assume the new AA stays as a Oneworld airline due to UA being in Star Alliance, thus DOT would not approve if the New AA wanted to go to Star

    • I read on Reuters that US will be leaving star for oneworld.

    • Never Mind found quick little video on the merger made by AA staying in One World now when Does US leave Star for One world until the merger is allowed to be completed

      • CF says:

        Jeremy – US Airways won’t look to leave Star until the merger is completed. If it falls apart, they’ll just stick with the status quo.

        • Sanjeev M says:

          Brett, you had a post several years ago about how US Airways’ transatlantic network is highly dependent on Star connections on LH Group carriers (aka all of Europe). Now with an eventual transition to oneworld, is it really all about LHR again?

          I hope AAdvantage stays the same and some of the higher AA standards be kept for the new airline.

          In the routes department, what if AA did something outrageously interesting, say BOS/PHL-DOH on a 77W and a codeshare on QR? Now that would be a huge blow to Lufthansa at PHL. In general the international strategy is:

          1. Grow Latin America with LATAM
          2. Stop relying on BA and actually serve continental Europe (and IST/TLV).
          3. Feed QR at DOH before they cherry pick points in the US
          4. Start PHX-NRT, DFW-HKG and find a oneworld partner in China

          • CF says:

            Sanjeev – Yes, that was part of a US Airways media day post which is right here. It’s not all about London for the same reason that US Airways flies to many cities in Europe today. But you probably don’t need double daily Charlotte to Frankfurt flights. Instead, those airplanes would be better suited to London if they can get the slots, or to Madrid or Barcelona maybe where Iberia also can feed.

            Boston to Doha simply wouldn’t happen, but I would think that Philly to Doha might be a good 787 or A350 route down the line. The 777-300ER is just too much capacity I’d say.

          • MeanMeosh says:

            I personally would push for DFW-DOH before PHL or BOS. If you live in this part of the country, or for that matter anywhere outside of ORD or JFK, AA’s connections to India/SE Asia stink unless you like using BA via LHR. That’s not a terrible option, but LHR isn’t particularly fun to transit through. Adding DFW-DOH would have the added benefit of taking on EK, and providing a viable one-stop option that doesn’t include transiting through the cesspool that is DXB.

            I can dream, at least…

  5. It would be nice to see American back to its former glory. I personally hope they stop with painting the aircraft in the new livery and instead come up with a new better combined livery like they did with the US/HP merger. It was very well done and the only new paint job I liked off the bat. Also at 6’4″, I hope they will roll out a premium economy option instead of pax just having to pay for any isle or window seat in front of the wing. I know I complained about that before. But I really think it is a little too much nickel and diming IMHO.

    • Sanjeev M says:

      They are beginning to roll out a premium economy option on domestic routes. Now US Airways hasn’t really been interested in premium economy. AA just delivered a new 77W with E+. So yet to be seen what they want to do fleetwide.

    • I doubt they will change the scheme now. But they should go for it full-force. DL was very aggresive about repainting, and from a customer perspective, the “old, bk DL” quickly became the new mega-carrier. AA should do something similar and be as proactive as possible.

      As for E+/Main Cabin Extra, I think it is just a matter of time. DP knows he is running a service airline, but he is a guy who likes his fees and profits and will try anything for extra revenue, especially a proven value-add like more legroom.

      • CP says:

        Totally agree on the need to go full-force, and that Delta did that extremely well. I was amazed how quickly the NWA hubs lost all NWA signage, etc., and the plane-painting was lighting-fast, too. I recently rode in a RJ with America West-branded seats…

        • CF says:

          CP – Those America West branded seats disappeared two years ago. The problem was the Mesa fleet, without question. But a couple years ago is when they forced them to redo the interiors. It was ridiculous it lasted that long, but it couldn’t have been that recent of a flight for you.

  6. I agree with your assessment, Brett. I know this is trivial, but I would like to see more additions to the retro livery pool. It shows a sense of history that shouldn’t be ignored. Most travelers could care less, but employees are often loyal to their employer’s past. It would be nice to see an AirCal, TWA (maybe two liveries?) and maybe a Mohawk or Ozark livery flying around the country. Like you, I think this merger has the potential to create a truly outstanding airline. If past is prologue (look at the freight railroad industry as precedent) this should be the beginning of an era of boring profitability and investment in new product that can only benefit all interested parties. I sure hope it works out that way.

    • I found this snippet from the Dallas Morning News to be more than interesting given the recent speculation: “Both airlines already have started working with the U.S. Department of Justice and filed documents on Jan. 31, Parker said. In the meantime, Horton and Parker said they?ll start putting together integration planning teams and name an integration leader at their respective airlines.”

    • TC says:

      I remember after the DL/NW merger the FAA had a protocol for calling out flights based on the livery of the plane so that other pilots would know what to look for when looking for “traffic.” Having multiple liveries on American jets may cause confusion for other pilots if they are looking for an American jet and they see one painted in different colors like TWA.

  7. I wonder at this point if even AA/US know what they are going to do beyond picking who’s big shots in each company will do what for how much money.

    Keep seeing news items how AA unions/workers are happy about the merger. I bet so were AirCal’s, Renoair’s, TWA’s, PSA’s, Piedmont’s, etc’s unions/workers right before they lost their jobs in mergers.

    There’s still aways to go to find out what’s going to be happening here.

  8. yo says:

    Hopefully the AWA team can keep doing what they have done so well, taking an entitlement “me first” culture at US East and making it profitable. AA’s employees have been through a lot of bad management, the culture needs to be a participatory, “Can do” culture, not “what’s in it for me?” culture. As I told the USAirways people when AWA took them over…Never underestimate Doug Parker, those that do are always wrong.

    Now, can we get rid of that awful new AA livery?

  9. Bravenav says:

    Cranky, love the logo! I’m usually pretty good on my airline history and logos, but I confess I can’t identify all the ones in your collage (don’t know the ones at 3,5,6,&7) When Delta and NWA merged they published a nice “family tree” that showed their heritage (just google “delta family tree” to find). I’d be interested to see a similar illustration for the new AA.

    • CF says:

      Bravenav – I can walk through all these.

      In the middle, we have the AA, of course, with the old America West bug replacing the Eagle. That is surrounded by the old double globes of TWA.

      On top, we have the current US Airways flag. Here’s what follows in clockwise order.

      PSA – the famous west coast smile was acquired by USAir
      Lake Central – was merged into Allegheny
      Mohawk – was merged into Allegheny
      AirCal – this old logo was used b/c the last one was just the stylized name, acquired by American
      Reno Air – acquired by American
      Trans Caribbean – acquired by American
      Ozark – acquired by TWA, acquired by American
      Allegheny – became USAir and then US Airways
      Piedmont – merged into USAir

  10. Eric says:

    Great talking points Brett….hopefully we dont loose you to a consulting gig on the integration committee lol.

    I know you have been for this….Ive been on the fence but leaning to no. Note that since round I (NW/DL) the integration process has become more complicated and protracted (UA/CO). Allot can go right here….allot more can go wrong. Doug is a bright a capable executive; this deal is going to require brain surgery type skill and precision.

  11. JM says:

    I enjoyed Brett’s logo mash-up, as well!

    It’s interesting– I have had great experiences with US (most flights) and horrible AA flights (all of them) in recent years. The good or bad related to the attitudes of the employees I encountered.

    In addition to flushing the AA executives who need to go, I am also very hopeful that the merged airline will find a way to improve or dismiss those “bad attitude” AA employees who I’ve encountered (all of them on the Latin American division/Miami hub, incidentally).

    I say this with the full knowledge that there are some great AA employees, too. I happen to know a couple of them personally– but never wind up flying with them!

    Admittedly, I also think working for AA in the past decade or so has been no fun at all (I also remember the “bad old days” of USAir in the early 1990s).

    Here’s hoping that this merger works to bring together the best of both and results in improved customer service across the network!

    JM

  12. Ron says:

    Preempting your network post: with the number of major U.S. airlines (with substantial international service) shrinking to three, this will be the first time all major U.S. airlines serve Tel Aviv. Historically it had mostly been just one airline — TWA — but they stopped their service shortly before being acquired by American (having faced two years of competition from Continental, and with Tower Air having disappeared a year prior).

    Anyway, the new American will inherit US Airways’s Philadelphia–Tel Aviv route. It seems to be doing fine so I don’t see it them pulling out of Tel Aviv, but I expect the route to be moved to JFK in the first round of service realignment.

    • I ran into some rumor that AA had a judgement against them in Israel that could potentially cause problems. Does anyone know the details of that?

      • I seem to remember AA shut TLV due the high number of TWA workers who had been there for years and had high salaries. They just let them go and I believe the workers all sued AA. Could be something left over from that.

      • Ron says:

        Well, hopefully US Airways manage to acquire American without acquiring standing lawsuits in foreign countries, otherwise this could kill the PHL–TLV route that’s been working quite well.

        • Ron thanks for finding the airliners article. From what I got from it the lawsuit was due to firing people within the TWA bankruptcy, AA never intended to continue the flight. I’d be amazed if that managed to stick through both TWA’s and AA’s bankruptcy.

          That being said I’m sure US has looked at it and either knows it doesn’t apply, or they know it does and’ll get it put to bed soon.

  13. Cranky: Should the new owners dump the new “Trailways meets Cubana” look for their own design or where they perhaps a part of the new logo and livery?

    • CF says:

      Daryl-Atlanta – I still think we’ll see the livery change. If you saw the press conference, Horton kept talking about how it’s the new symbol of the new American, but Doug Parker said nothing. Horton also never really answered the question directly (though that happens a lot with AA in general). I’d bet that we see something change.

  14. Sean S. says:

    Honestly despite the promises my main concern for competition is the de-hubbing of CLT. It is hard to imagine that they will maintain CLT with MIA at the same capacity, and its easy to see how DL will swoop in and monopolize the routes entirely in the Southeast. As it is this region is effectively monopolized due to Delta’s presence, and its easy to see this merger making this significantly worse.

    • This one has been covered Ad Naseum. MIA is great for getting to Central and South America, its horrible for connecting passengers in the south.

      CLT has been built up under the current US management as much as their other hubs, and AFAIK its one of their most profitable hubs. Parker and Co aren’t stupid, they’ll keep it.

      • David M says:

        I agree with Nick. CLT seems safe. MIA’s location is terrible as a domestic hub, and MIA is expensive with that fancy new terminal to pay for. I could see MIA actually shrinking a bit, with Latin American routes that basically rely on connecting traffic at MIA moving up to better-positioned CLT, with MIA keeping the routes that have strong local demand.

        • PHL will lose a substantial amount of trans-atlantic routes. when US built up service to europe, it had to fly out of someplace in the US so CLT and PHL were the only options. it only makes sense that many of those PHL routes will migrate northward to JFK because the o&d market is probably 5-6x greater.

          i would think CLT will lose some of its carribbean flying thanks to MIA (and you might not see CLT to brazil for much longer) but most of the x-atl flights will stay at CLT because there are a lot of spokes that USAA can connect over CLT that will not have a connection to JFK. due to simple geography, MIA is not a threat for poaching european service from CLT or PHL.

          would not surprise me to see PHX reduced by up to 1/4 to 1/3. connection-wise, it seems fairly redundant to DFW and LAX. if nothing else, i don’t think it will get completely gutted mostly because of the doug parker HP connection but, without that, i think that might have been on the table because US has historically been pummeled when competing head to head at airports where WN already had a strong presence.

          • MeanMeosh says:

            Parker is in fact promising more service from PHX, not less:

            “The combined company is expected to maintain all hubs currently served by American Airlines and US Airways and expand service from those hubs to offer increased service to existing markets and service to new cities.”

            http://aviationblog.dallasnews.com/2013/02/12300.html/#more-12300

          • yo says:

            Now is a good time to come out swinging in PHX, beat Southwest back when they are vulnerable. Lots of room in PHX, not so much in LAX, and LAX has never been conquered as a hub. Doesn’t USAirways have the rights to a PHX-NRT flight as part of the slot swap with DL?

          • I agree – my home airport is essentially a WN hub and as the years go by by I am less and less enamored. WN used to be known for a fun atmosphere and very low fares. Now the fares are equal or higher to the legacies, with cattle car seating and no food other than snacks. PHX can fight off WN because there is no longer a WN competitive advantage. I fly them because I have to, not because I want to.

            As for the hubs, I think all of the east coast hubs are safe…PHL is a top 5 market without a significant secondary airport, CLT is a great airport with O&D traffic that is higher than one might expect – even post financial crisis, there is a lot of business in the area. I probably like MIA more than most here – a great gateway to Central and South America.

            The combined entity is very weak to Asia – a glaring hole. I wouldn’t be surprised to see more Asian flights from JFK, DFW and possibly PHL and MIA.

          • CF says:

            I’m working on a post about hubs for next week, but I would be shocked to see a lot of flights leave Philly for JFK. Philly is a good market and US Airways owns it. NYC is a bigger market, but American is a distant third.

          • George says:

            As for Parker promising more service at PHX-Anderson of DL promised more service at MEM-we all see how that went

          • I’m sure Parker also promised PIT would stay vital. That’s not to pick on Parker but the CEO is the absolute last person you should pay attention to post-merger when it comes to routes and service.

            Re: PHL intl routes, I just took a few minutes to look for overlap. First, i only looked at x-atlantic, not other intl destinations. Second, i only looked for their own service, not code shares.

            These are the common destinations: DUB, MAD, LHR, MAN, CDG, FCO

            US has the following service from PHL that AA does not have from JFK: AMS, BRU, FRA, MUC and TLV from PHL

            AA has the following service from JFK that US does not have from PHL: BCN, MXP, ZRH

            Personally, I don’t see a combined USAA having service from PHL to European capitals like AMS, BRU, FRA and MUC but not from JFK. A combined USAA is not going to run away from LH/Star in NY like AA and US on key routes like FRA and even MUC. A combined USAA is not going to run away from DL/Sky to places like AMS and even BRU for the same reason. So, if this is rationale is sound, USAA will have to either (1) ratchet up x-atl service significantly at JFK (and, if so, where will the planes come from?) or (2) reallocate some of this service from PHL or elsewhere.

          • yo says:

            As for WN historically pummeling US…in the old US days yes, but in the last few years US has beaten the snot out of WN in PHL. WN has also retreated on some of their routes where they went head to head with US. Southwest is in a quandary now, no more fuel hedges, their employee operating cost is way too high, no baggage charges is lost revenue, acquiring Air Tran was a mistake, and they have lots of planes coming and no place to go. They can go to Hawaii, but their 737’s can only make it from California and Washington and Oregon nonstop. Now is the time to hit Southwest where it hurts, using your cost advantages and FF alliances.

          • CF says:

            Bill – Thanks for pulling up the European overlap. There’s no doubt that we should see London, Madrid, and Barcelona from both hubs because it connects to oneworld hubs on the other side. Paris probably makes sense from both as well, although since Open Skies still does NYC to Paris, it might not be necessary to capture the high yield business traveler. So you really only have a couple of cities with overlap. I’m guessing that Manchester and Dublin and Rome probably aren’t that important from NYC and there is competition. Not the same down in Philly. Meanwhile, a business destination like Milan or a government destination like Brussels might do better from NYC than Philly.

          • yo – the distinction i made to address your point was “where WN already had a strong presence” which was certainly not the case at PHL, in which WN attempted to invade a fortress hub with poor results.

            nevertheless, i read a detailed analysis showing that USAA is not really going to have much of cost advantage after akk because of the deals that Doug cut with AA unions to get the deal done AND the raises that existing US personnel will be getting as a result.

            http://finance.fortune.cnn.com/2013/02/14/american-usairways-winners/

      • I agree with Cranky. Parker is a smart guy who wants to be profitable over prestigious. PHL may have a smaller O/D but it is a virtual monopoly unlike JFK which is fiercely competitive. Both will exist and compliment each other, likely with JFK relying on more o/d and PHL relying on the connecting pax. There will likely be fleet rationalization to adjust frequencies and capacities.

  15. One thought I had on the get rid of the old American was in regards to IT. Maya Liberman (I may have butchered her last name, but she was in charge of AAdvantage and is now CIO or somewhere high in IT.) Should stay, from what I’ve heard she is quite good and probably is responsible for lots of progress at AA. Although, DL’s IT merger is nice and done, I’m curious if AA/US has put any feelers out to poach/hire the folks who lead that transition. The DL/NW IT merger seemed to be exceptionally smooth.

    One other question that perhaps the MBAs can answer: US passed a poison pill for tax loss purposes as part of this. What is that about?

    • MeanMeosh says:

      I’m not an MBA, but am a tax accountant so can attempt to address your question. It’s horribly complex, but the basic idea is that the “poison pill” helps to lock in the value of net operating loss carryforwards, because it thwarts the ability of minority shareholders from gaining enough stock to trigger a “change in control” in IRS lingo. Under IRS rules, a change in control of as little as 5 percent can render a net operating loss carryforward essentially useless. Basically, the scenario here would be someone like Carl Icahn having a beef with Doug Parker, so he runs out and buys up 8 percent or whatever of US stock. Since US probably has something like a quadrillion dollar carryforward, you want to make it as hard as possible for a minority shareholder to be able to acquire that 5%. This is a gross oversimplification, but in a nutshell, that’s what they’re trying to do.

      Northwestern law review actually has a very in-depth treatise on this if you’re looking for a sleep aid sometime:

      http://www.law.northwestern.edu/lawreview/v106/n2/927/LR106n2Siegal.pdf

      • MeanMeosh, thanks for the explanation. I didn’t realize that 5% of a public company would trigger IRS change in control rules for tax losses.

        That being said I figured AA’s carry forward losses would be more valuable than US’s. I should dig into the exact details of who is buying who sometime.

        • MeanMeosh says:

          Back when I worked in Big Accounting, we had an entire group that did nothing but consult on structuring deals like this to get around the loss carryforward rules. Without knowing the specifics, it’s hard to say how they plan to get around the limitations, but I’m sure the CPAs and lawyers figured something out.

          • another tax geek here – US had almost $2b in NOL c/f at 12/31/11. Assuming they use about 1/4 of that for 2012 profits (although not sure how much of their book profit is tax profit) but, rest assured, as the acquirer, US will structure the deal (along with their lawyers and, to a lesser extent, their accountants) to preserve their NOL c/f. poison pill is to prevent minor ownership changes from screwing up the NOL utilization but this is neither minor nor unintended so it can be planned for accordingly.

  16. One thing that I don’t see in your comments (with which I do agree) is a focus on customer service – seems like a no brainer to refocus on the customer experience as a novel and unique focus long missing from the industry as a whole. Word of mouth positive advertising costs nothing and is very powerful!

  17. MeanMeosh says:

    I have expressed my misgivings about a US takeover of AA several times before, and I won’t rehash all of that here. However, I have two real significant concerns already based on what I’ve been reading:

    1) Doug Parker has already been promising that not only will all hubs stay intact, but that in fact service will INCREASE at the hubs. I hope this is just a quote taken out of context, because these are exactly the sort of promises made during mergers that make me cringe. The deck chairs are going to have to get reshuffled somehow, even if said reshuffling is relatively minor, yet the CEO is already out there publicly saying it’s not going to happen. http://aviationblog.dallasnews.com/2013/02/12300.html/#more-12300

    2) My main concern so far has been my feeling that labor, specifically the pilots’ unions, won’t be cooperative when it gets down to actually ironing out the dirty details. But now, we already have the IAM saying they’re not on board with the merger. Hopefully this is just posturing and they’ll get that in order quickly, but not a good sign nonetheless.

    As a customer, the IT integration is probably the most nerve wracking. Cranky, I hope they take your advice and take it slow. I already have half a mind to avoid flying AA for at least 6 months after the systems integration based on the UA/CO and HP/US debacles.

  18. Doug says:

    Congratulations to Doug “Flutie” Parker. Like the diminutive QB, he threw a hail Mary to save his team and connected, except in this case most of the other team was actually aiding him. Give him credit; he pushed all the right buttons and pulled all the right levers. However, he’s playing in the big leagues now, and while I hope he’s up for the task, I wasn’t impressed with his first live press conference on local TV this morning. He looked unsure, unprepared, stumbling at times, and generally was upstaged by Horton and looked to be visibly chafing at times when Horton augmented his remarks. He might grow into the role, but if he doesn’t rise to the occasion he’ll also be known as a one play wonder like the other Flutie. Even worse, if this deal turns out more UA/CO than DL/NW, after Horton and his team did the heavy lifting to position the company for growth, he’ll seem like a much bigger bust.

    Not only is Parker promising to maintain flying at all the hubs / focus cities at current levels (or higher) as noted, but he?s also promising a split HQ operation by maintaining a ?significant corporate presence? at Phoenix. UA is trying the same thing by leaving much of their IT staff in Houston, and we know how that is working out. It?s hard to see how this makes financial sense and goes completely against the reasons for merging companies. As one of his first major decisions, he came off with a resounding thud. If Parker is being truthful, it makes him look weak and indecisive.

    The merits of this merger still seem dubious at best to me. US Airways brings very little to the party outside of E. coast traffic, a lot of which could be obtained through a codeshare with JetBlue. As you correctly point out, the combined carrier still must plug a gaping Asia hole. I know the cheerleaders will talk about the ?expected? $1B in annual benefits that Parker cites, but we all know that?s just a SWAG. It is just as likely there will be ?dis-synergies?, as Smisek calls them, similar to UA/CO.

    Let?s face it, a big part of the merger was to pacify labor, but I believe labor strife is just as likely to continue after the initial honeymoon. Labor leaders justify their existence through conflict and union members are some of the most temperamental people I?ve ever met. It could even be worse than US/AW, but the one saving grace is that many of them will be retiring soon. It?s sad that many of the people who made this merger happen won?t have to stick around too long if it turns into a cluster.

    With all the labor sweeteners added (fully funded pension + 401k, pay raises, buyouts, equity), now including the $400M annual union payoff revealed today, AA’s costs won’t be nearly as low as they would have been if US Airways hadn’t intervened. As a result, they won’t have much of a competitive cost advantage, which is shocking considering they haven’t even exited bankruptcy yet. The only thing more stupid than waiting six years after their competitors completed bankruptcy to even file, is to fail to gain a significant cost advantage once they did file.

    All totaled, it leaves very little room for error and lots that can go wrong compared to the stand-alone plan given the significant costs and complexities of integration. Of course this is where Parker?s cheerleaders say he has the edge; after all, he?s already been through a merger, unlike Horton. But if you look at his performance on two of the major integration points during the US/AW merger, technology and labor, he had serious failures. I?m not sure how that track record is a mark in the plus column for Parker.

    Granted, I have my biases and have admitted them all along (unlike Cranky who has only now admitted his bias after shilling for his old teammates for months) but I?m less optimistic than many of you. However I wish Parker and his team well because AA is important to my city and I have many friends who work there, but this could turn out much more like US/AW or UA/CO than DL/NW. It seems like a much bigger gamble, and an unnecessary one at that, than the pundits are willing to admit. If it does go bad, I?m sure Cranky will be just as hard on Flutie as he was on Horton .

    • CF doesn’t hide the fact that he worked for HP, US, or UA. Thats mentioned several places on this site.

      Also, I’m getting exceptionally tired of people trotting out labor issues at US. If the unions gave the company a seniority agreement they could legally implement they would’ve. Just because the East pilots threw a hissy fit and caused a mess doesn’t make it Parker’s problem to resolve.

      • Actually, it’s somebody’s problem to solve. If not the CEO, who? On the bright side, he clearly learned from this lesson (which is all you can ask for, really) by pre-negotiating agreements with AA’s key unions in advance of an acquisition.

      • Doug says:

        Nick, get real; Brett spent an entire post (plus several responses to comments) trying to convince us he is unbiased on this blog. He now admits he has been pulling for this merger because of his previous association with AW.

        Also, I’m getting exceptionally tired of people making excuses for Parker. The truth is he didn’t want a labor agreement at US because it would have raised his labor costs significantly. That strategy might have worked as the fifth largest carrier but being CEO of the largest carrier requires actual leadership.

        • CF says:

          Doug – If you’re somehow surprised that I was previously associated with this team and think they’ll do a great job, then you clearly didn’t actually read the bias post you like to cite. I’ll go ahead and share a quote so you don’t have to be burdened with clicking the link.

          Am I biased against American Airlines? No, but I don?t believe in the current management team. I do, however, believe in the US Airways team. I grew up in this industry working under the leadership of Doug Parker and Scott Kirby during my America West days. I was proud to be a part of the effort to turn America West into a thriving low cost carrier, and I?ve watched closely from the outside as they have carefully put together an airline in US Airways that has done incredibly well for itself.

          If they take over American, you won?t see American become US Airways as the fear-mongers like to suggest. This team is too smart for that. With the assets of American, they will build something much better. I can only imagine what they can do to make it a globally competitive airline. I would think American?s oneworld partners, including British Airways, are privately thinking the same thing. It should make American loyalists happy to just think about the possibilities.

          I have hid absolutely nothing, but you should also be clear that just because I worked for a group of people doesn’t mean I’m biased toward them. After America West, I worked for United. I couldn’t imagine a less inspiring team. I wouldn’t have wished that management on anyone.

          I have a lot of faith in the US Airways team, but I don’t have to prove anything. These guys now have the opportunity to prove themselves. And if they fail, I’ll be the first to write about it.

          • Doug says:

            So why didn’t you just title that blog post “Why I’m hoping Parker takes over AA” instead of “Am I Biased Against AA?”? That would have been more straight forward. Instead you split hairs and tried to make the point that you aren’t biased against AA, but you really believe their management is inept and Parker would do a much better job. If you are talking about Arpey, I’ll agree with you, but all indications are that Horton and his team have performed quite well during the BK.

            So how long did you spend working with Horton and his team in order to determine they are inept?

  19. Kinda sad to see another huge american aviation brand fly into the sunset, So long US Airways

  20. Ellie Banda says:

    Dear Cranky, I am also former HP based at IAH sales and marketing 1990-1992. I have to say your column is by far the best analysis in the industry. I am now retired and have to admit as much as I love being retired, I can’t miss your commentaries. I have never been a fan of AA and really so glad to see this merger happen. It should mean the end of the mean spirited predatory acts of the past.
    Congratulations Cranky, another home run for you.

  21. S. Brown says:

    What does “what to do in Asia” mean?

  22. Tom says:

    At the end of the day the Airline Industry is a terrible business to be in. Big money losers… Just look at their stocks prices.

  23. who else noticed the other big M&A activity yesterday and found it amazing that American Airlines was worth only about $11 billion in market capitalization but a company that makes ketchup and french fries (Heinz/Ore Ida) was worth over $23 billion? the airline biz really is a terrible “business” in and of itself!

  24. CP says:

    Wholeheartedly agree with Cranky’s hope that Parker and the rest of the management team get that running a global powerhouse like the new AA is different, from a customer experience standpoint, than running US.

    I fly a lot of both airlines, and here are the differences that matter to me that I hope US ‘gets':
    1. Gate information: US has very poor and un-informative gate information displays, even at hubs. AA’s gate displays (while not quite as informative as DL’s or UA’s) are more informative: rotating images of standby lists, upgrade lists, meals offered on-board, etc. Having your upgrade list on the gate information monitor saves gate agents a lot of “what’s the status of my upgrade?” questions and saves passengers with that questions a wait in line.

    2. Mobile: AA doesn’t have the best apps for iPad/mobile phone…but it HAS apps. I’d perhaps broad this to “tech generally,” as the functionality and speed of AA’s kiosks and website far outpaces that of US.

    3. First class: AA’s domestic first service blows US’ out of the water, especially on mid-con routes–(substantive) meals on routes of ~2 hours, real glassware, seats with power, etc.

    4. Phone service: This is, admittedly, not an apples-to-apples comparison, since my status level is highest on AA and I’ve only been silver on US. But AA’s agents and speed of phone service far surpass US, especially during irregular operations.

    I could go on…but you get the picture. I can see the business merits for the merger, but if AA wants to be competitive with the other two biggies (especially DL, in my opinion), then it has to get a lot of this stuff right.

  25. Ozark says:

    I recall this Slogan for the TWA/AA Merger/Takeover;

    “Two Great Airlines, One Great Future” – Didn’t happen at all.

    Several reasons this didn’t work out;

    *APA (Ego)
    *APFA (Ego)
    *AMR/AA Management (Ego)
    *TWA Management (Ego)
    *IAM (Ego)
    *ALPA (Ego)
    *9/11/2001
    *Other factors played in to this too.

    As my late Airline Pilot Father once said, nothing goes as planned in a merger and people & airline destinations get screwed over as a result.

  26. shane says:

    With all of the talk about possible price increases and reduced competition, what do you thinkink about the DC market? It could be interesting for pricing for 2 reasons. First is that Dulles and National are both Star strongholds. While United ans US don’t codeshare much domestically, they tend to not compete on price in overlap markets. A lot of overlap cities have high prices for both carriers. With the new American having a 68% stake at National, could we see some real competition that forces United to lower domestic prices from Dulles (right noe it seems that United Dulles pricing is designed to encourage international connections and discourage domestic o&d.

    Another interesting price pressure is he eventual requirement to divest National slots. Besides US having the majority slots, American has a lot of overlap: LaGuardia, Dallas, St. Louis, Raleigh, etc (off the top of my head, sort for innacuracies).

    • DCA won’t be a Star stronghold for long, the combined USAA will be in Oneworld.

      You raise a really good point that UA and US do not really compete in this area (thanks to the Star tieup). The metro DC area might be one of the extremely rare exceptions in which customers actually benefit from having one fewer competitor because the two largest “competitors” in this market were not competing against each other at all.

      At least we now know they will compete tooth and nail in this market, especially with one airline dominating each of the three airports in this market (UACO at IAD, USAA at DCA and WNFL at BWI), instead of the UACOUS Star cabal that has cooperated with, instead of competing against, each other.

  27. TexasFlyer says:

    Cranky, I don’t understand why you’re so biased against Tom Horton. Why is he to blame for the mess that he inherited from Gerard Arpey?

    He didn’t create the bitter labor relations, Don Carty and Arpey are responsbile for that.

    He’s not responsible for the TWA merger.

    He didn’t postpone the inevitable chapter 13 restructuring.

    All things considered, he did a pretty good job of leading AA through the restructuring. The creditors have been made whole, the layoffs were well managed, and even with the labor strife, the whole process was no more disruptive than it was for UA and DL when they went through bankruptcy.

    So back again to my questions, why do you think he’s such a terrible CEO and why do you blame him for AA woes?

    • CF says:

      TexasFlyer – The horse that gets you through bankruptcy should never be the horse that sticks with you on the other side. Horton has seemingly done a fine job of slashing and burning, as required in bankruptcy, but we won’t really know if he did enough until we see what comes out on the other side. I actually worry that he didn’t do enough, keeping all those aircraft orders and possibly not doing enough with Eagle, for example. But that’s not the issue.

      Bankruptcy is a terrible time for any airline. And whomever takes you through it is not the person who should lead you afterwards. Horton’s vision for the future is full of bells and whistles with a lot of growth. I don’t think that’s the right vision for this airline (or for the industry, for that matter).

      • Doug says:

        “I actually worry that they didn’t do enough…” Are you kidding? Putting the aircraft orders and regional carriers aside since both Horton and your hero parker have said they are going to deal with those later, Parker was the reason wasn’t able to lower their labor costs more, including his $400M annual payoff to labor to get them on board. Are you going to blame that on Horton too? No, you aren’t biased at all.

        • CF says:

          Doug – You can’t simply say you’ll deal with aircraft orders and regional carriers later if you’re old American. If you’re part of the US Airways management team, you can’t do anything until the deal is done, so that is the right response, but if you’re on the American management team, you should have already dealt with that. And I’m not talking about regionals in general. I’m talking about the wholly-owned subsidiary that is also part of the bankruptcy. Carving that out and saying everything else is great is just silly.

          Look, you clearly are going to spit vitriol at me regardless of what I say, so I’ve decided I won’t bother responding any further. Have fun sounding off.

          • Doug says:

            Brett, since you chose to ignore my point that it was Parker that drove up the merged carrier’s operating costs with his labor sweeteners, thus creating a much more difficult path forward for the new AA, I’ll address your other points.

            Please explain why Horton should have cancelled some of the aircraft orders? I assume you are saying that because US Airways has a lot of planes on order as well. So Horton cancelling orders only makes sense if he’s planning on merging with US Airways, but that wasn’t HIS plan; that was Parker’s plan. It wasn’t Horton’s responsibility to prepare AA’s fleet for Parker’s plan.

            Regarding Eagle, they had been working on it and they might have been even farther along if they hadn’t been sidetracked by all the merger negotiations. Did you expect them to be finished with Eagle at this point? Sorry, but your criticisms are just don’t seem fair.

            Also, while I might agree that AA should appoint a new CEO post bankruptcy, that’s different than replacing the CEO because they are incompetent, which is what you have been saying about Horton all along.

            Finally, it seems like you are so used to being coddled by fanboys on this site that you feel anyone who challenges you is spitting vitriol. You might want to try addressing the points of disagreement in a factual manner and perhaps you won’t act so defensive.

    • Doug says:

      Texasflyer, this is exactly my point with Brett.

    • TexasFlier – Horton didn’t create the labor problems at AA but be didn’t help them either. Most airlines get a consensual agreements with their unions, AA had the courts impose a contract on its pilots. He could’ve had a more cooperative stance, but he followed AA’s beaten path and went confrontational.

      • Doug says:

        Sorry Nick but your wrong. Horton tried for ten months to get consensual agreements, even offering the pilots 13% and other groups 4% of the emerging carrier (with much trepidation from some on the UCC and the bond holders), but the unions were intransigent as usual, even more this time because they were hell bent on getting a new management team (and even bigger pay raises) via merger. Abrogating the contracts was the last resort for Horton, not his first move.

        • Tony says:

          Doug,
          Were you Horton’s personal assistant or maid maybe personal trainer even chauffer?
          Out of everyone on this board you seem to be the least reasonable and the only one who seems to be here just because you have an ax to grind.
          And trying to convince the rest of us that this airline stands no chance – especially with Parker is just nonsense and the educated and informed on here know there is no way to know that right now and that root for that just makes you a dick. The probable truth is these are all uninformed opinions by someone who is just pissy and somehow has been or will be negatively effected by this deal. That is a shame, but don’t you want to go post somewhere where people might care what you have to say?
          That would be somewhere else.

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